End-2018 Outlook: Assessing The Fallout From Trade Tensions, Rising Geopolitical Risks, and EM Vulnerabilities

Emerging Markets Research
End-2018 Outlook: Assessing the Fallout from Trade Tensions,

Rising Geopolitical Risks, and EM Vulnerabilities
September 2018
Latin America Economic and Policy Research

Ben RamseyAC
(1-212) 834-4308
benjamin.h.ramsey@jpmorgan.com
J.P. Morgan Securities LLC
See end pages for analyst certification and important disclosures, including investment banking relationships.
Charts are taken from presentations from Global equities, economics, rates, FX, commodities, US fixed income and EM research groups.
Agenda
Page
Tail risks are becoming the base case scenario as markets are reacting to trade tensions and
1 1
sanctions
2 US growth continues to be revised up as other regions are revised down 10
3 EM vulnerabilities remain in the spotlight 24
4 Implications of Trump trade policies for US-China and supply chain links 35
Tail risks are becoming the base case scenario as markets are reacting to trade tensions and sanctions
End-2018 Outlook and Risks

Key Points
 US exceptionalism should hold in 2H18. Global (ex-US) growth slowdown that started in the Euro area and Latin America rotated
to Asia in June. Relative US cyclical outperformance with 3Q US GDP revised up to 3.5% compared to European 3Q GDP growth at
2.5%, with China’s 3Q GDP growth revised down to 6.0%.
 We view current imbalances in the US economy as ample, but not glaring. High-frequency indicators show little sign of the US
economy tipping into recession just yet, but risks rise to >50% by 2020, according to our recession model.
 Fears that tail risks will become the base scenario are driving market volatility. Trade tensions, sanctions, and the special
investigation are beginning to take a toll on confidence. Politically driven FX market volatility has intensified and will likely remain
high into the upcoming US midterm elections.
 End of easy money means the FICC bear market will broaden into 2019, with only tactical rallies likely. Our forecast for 10-
year US Treasury yields is 3.20% at year-end. We expect two more Fed hikes this year and four next year. We have pushed back
the first ECB hike to September 2019 and the whole rate path by one quarter as European reflation has been delayed. We are
forecasting one hike from the BoE this year and two in 2019, the first ECB hike in September 2019, and the BoJ to raise the 10Y
yield target in July 2019.
 EM vulnerabilities remain high for certain countries while contagion concerns are rising. EM market technicals have turned
more supportive with EM FX longs pared back to their lowest level since December 2016, EM rates positions now firmly neutral,
while UW corporate positions are at their lowest level of the year.
 Wildcards and volatility generators: (1) trade conflicts morph into an economically significant trade war between US and China;
(2) EM contagion risks spread, triggered by Turkey, impacting Europe and EM; (3) US politics becomes more complicated (Mueller
investigation/impeachment risk, midterm elections); (4) Italy over-eases fiscal policy, triggering ratings downgrades and a funding
crisis; (5) liquidity risk turns a minor macro event into a major financial one.
1
America First? Divergence in performance of US equities vs. rest of the world is

unprecedented
Returns across asset classes; as of 6 September 2018 COB, %
YTD 1m
Brent Crude 14.4%
2.5%
S&P 500 7.6%
0.7%
JPM USD Index 4.2%
1.4%
US HY 1.9%
0.3%
Euro HY -0.3%
-0.4%
-0.6%
Euro HG -0.4%
US Treasuries -0.9%
0.7%
EM Local Markets (Local Currency) -1.2%
-1.5%
US HG -2.0%
0.3%
EM Corporates (Hard Currency) -2.5%
-0.7%
European Equities -4.0%
-4.4%
EM Sovereigns (Hard Currency) -4.7%
-1.4%
EM FX -6.2%
-3.4%
Japanese Equities (Topix) -6.9%
-3.1%
Gold -8.4%
-0.9%
EM Local Markets (USD) -12.0%
-7.0%
-12.1%
EM Equities -5.7%
JPM Base Metals Index -15.2%
-4.1%
-20% -15% -10% -5% 0% 5% 10% 15% 20%
Source: J.P. Morgan 2

Neither trade wars nor impeachment chatter has dented Trump’s approval rating
President Trump’s approval rating (%) versus S&P 500 and President Trump’s approval rating is between Nixon’s 25% and
NFIB Small Business Confidence Clinton’s 60% level when their sagas began
Both indexed to 100 at Nov 2016 election Number of daily news stories mentioning Trump impeachment versus average Trump approval
rating across polls
Source: J.P. Morgan Source: J.P. Morgan, Gallup, Bloomberg, Real Clear Politics
3
Market reactions to political and trade tension headlines have become more frequent and
prominent in recent weeks
Average Z-score of # of news stories with key trade

Events around major trade tension headline spikes
confrontation topics
Headline Spikes Daily Trade Related News Stories News story
5 Duration
Date Event Frequency
(z-score) (days)
4
Tariffs on Solar Panels/Washing Machines
23-Jan 1.7 n/a
3 announced & implemented
2
01-Mar Steel & Aluminum Tariffs Announced 4.8 6
1
Report on China IP practices released; S&A
22-Mar 3.5 2
0 Implemented
-1 US publishes $50bn tariff list on Chinese goods,

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 04-Apr 4.4 3
verbal tit-for-tat
Source: J.P. Morgan, Bloomberg; Note: Stories referencing “tariffs”, “trade war”, or “NAFTA”
24-May Investigation on auto imports ordered 1.4 n/a

Political betting odds of Trump finishing his first term have
seen their largest 2-day fall yet
80 Steel & Aluminum Exemptions on EU, CA, MX
31-May 2.7 2
exports
75 May 9 - Comey Firing
70 $200-400bn US counter-retaliatory tariffs on
19-Jun 2.9 1
65 China floated
60
55 05-Jul US-China 34bn tariffs and retaliation implemented 3.4 1
Odds of Trump
50 Finishing 1st Term
45 11-Jul US publishes $200bn tariff list on Chinese goods 2.8 2
40
Apr-17
Oct-17
Apr-18
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
May-18
Jun-18
Jul-18
Aug-18
Source: J.P. Morgan. Note: Duration is the number of days the news story frequency
exceeded 2.5-sigma above the mean
Source: predictwise.com 4
Market reaction to major trade tension headlines have been generally short-lived to date,
with EM and commodities most impacted
Average market reaction to major trade tension headline spikes

Price reaction (z-score) Directional reaction (Diffusion)
1d 3d 1w 2w 1d 3d 1w 2w
Relative Safe Haven FX (TWI)
USD 0.2 0.0 0.0 0.1 0% 22% 0% 33%
EUR 0.5 0.5 0.7 0.7 67% 89% 67% 78%
JPY 0.0 -0.2 -0.2 -0.3 0% 0% 0% -33%
CHF 0.3 0.4 0.5 0.2 44% 0% 22% 11%
Gold -0.4 -0.2 -0.5 -0.5 -22% 0% -22% -33%
High Beta FX (TWI)
AUD -0.3 0.0 0.1 0.2 -44% -22% 22% 33%
NZD 0.5 0.2 0.3 0.3 44% 22% 44% 33%
CAD -0.4 -0.5 -0.2 0.0 0% -22% 0% -33%
MXN 0.4 0.6 0.6 0.6 44% 44% 44% 56%
CNY -1.0 -0.6 -0.8 -0.9 -89% -22% -22% -33%
CNH (vs $) -1.2 -0.4 -0.7 -0.9 -89% -44% -44% -78%
KRW -1.2 -0.7 -0.3 -0.3 -89% -44% -22% -11%
TWD -0.3 -0.1 -0.2 0.0 -67% 0% -22% -11%
Growth Assets
MSCI World -0.8 -0.3 -0.3 -0.6 -44% -22% -22% 11%
S&P -0.3 -0.1 -0.2 0.0 -67% 0% -22% -11%
Nikkei -0.3 -0.4 -0.3 -0.3 0% -22% -22% -33%
Shanghai Comp -0.5 -0.7 -0.8 -0.9 -44% -22% 0% -33%
MSCI EM -0.9 -0.8 -0.7 -0.7 -67% -44% -44% -33%
Commodities Index -1.1 -0.7 -0.8 -0.7 -67% -44% -67% -78%
Crude -0.8 -0.3 -0.3 -0.6 -44% -22% -22% 11%
Volatility
VIX 0.5 0.0 0.3 1.0 33% 11% -11% -22%
VXY EM 0.5 0.2 0.4 0.4 11% -33% 33% 0%
VXY G10 0.1 -0.1 0.2 -0.1 11% 11% 11% -44%
Bond Yields
UST 2Y -0.4 -0.2 -0.1 -0.1 -11% -33% 11% -22%
UST 10Y -0.5 -0.2 -0.2 -0.1 -56% -33% 33% 0%
Source: J.P. Morgan, Bloomberg
5
US equity market impact of trade war policies estimated at ~ 5-7%
Trade-related news flow relative to the performance of the US market
104
102
100 INDU
98
S&P 500
96
94
92 'Trade War' News Index
90
16-Mar 31-Mar 15-Apr 30-Apr 15-May 30-May 14-Jun
Source: J.P. Morgan QDS
6
US shows flexibility in NAFTA talks, but Canada still not onboard

Ideal NAFTA negotiation timeline Worst case minimum timeline for bilateral
Date US Process Mexico Process Canada process Notes / Risks agreements
90 day notification of intent to
31-Aug-18 sign agreement ("in -principle Likely must be tri-partite, not bilateral Date US Process Mexico Process
agreement") 90 day notification period
NAFTA team notifies 28-Aug-18 before start of new bilateral
60 day notification of final congress (Sep - Nov) that Major hurdle to stick to 11/30 negotiations begin
30-Sep-18
agreement text both countries reached an deadline
agreement 26-Nov-18 Negotiations begin
1-Oct-18 Quebec Elections
US Mid-term Elections to elect NAFTA team notifies
6-Nov-18 90-day notification of intent to
116th congress congress that both
29-Nov-18 Agreement Signed Agreement Signed Agreement Signed sign agreement ("in -principle
countries reached an
Failure to meet this deadline will agreement")
agreement (Nov - Dec)
Last day for President Pena result in AMLO formal involvement,
30-Nov-18
Nieto to sign bill potential renegotiation with Mexico 60-day notification of final
26-Dec-18
required agreement text
Within 60 days post-signing, 24-Feb-19 Agreement Signed Agreement Signed
3-Dec-18
required legislative changes due
30 days prior to implementation,
Mexican Senate needs
final legislation due Within 60 days post-signing,
constitutional majority in
Mexican Senate needs required legislative changes
the ordinary session (Feb
constitutional majority in due
- Apr) to pass bill
Congress during an
3-Jan-19 116th Congress convenes extraordinary session (Jan)
or wait to the next ordinary 30 days prior to
session (Feb - Apr) to pass implementation, final legislation
bill due
Implementing bill introduced in Implementing bill introduced in
Congress 27-Mar-19
Congress
After translated versions are
Latest date for Canadian tabling in 90-day maximum consideration
approved by the cabinet (a "several
6-Feb-19 parliament to match US April 4 25-Jun-19 in Congressional committees
month process"), treaty is tabled in
ratification and floor up/down votes
parliament
Alberta Elections window opens NAFTA implementation
1-Mar-19 NAFTA implementation bill can
(until May 31, 2019) 26-Jun-19 bill can be signed into
be signed into Law
90 day maximum consideration Law by AMLO
Probability of passage dependent on
3-Apr-19 in Congressional committees and
outcome of 11/6 Elections
floor up/down votes
21 Sitting day Window before
Technically the Canadian executive
introduction of implementing
NAFTA implementation bill does not require parliamentary
NAFTA implementation bill can legislation in Parliament. Governor
4-Apr-19 can be signed into Law by approval. Canadian refusal to pass
be signed into Law in Council authorizes ratification,
AMLO a proposed FTA is rare but can
and the government brings the
trigger a vote of no-confidence.
treaty into force
Deadline for Canadian Federal
21-Oct-19
Elections 7
Source: Mexican Congress, Congressional Research Service
Risk premium on USD/CAD around NAFTA hope and fear appear to be around +/- 2%
when controlling for rate spreads and other macro factors
Trade-related news flow relative to the performance of the US market
4%
Risk Premium on USD/CAD
3% In-principle agreement
deadline passed,
Oct'17 NAFTA US-China escalates
pullout threats
2%
1%
0%
-1%
-2%
In-principle
agreement hopes
-3%
Aug-16 Feb-17 Aug-17 Feb-18 Aug-18
Source: J.P. Morgan
8
EM FX has been the most vulnerable asset class
EM bilateral FX rate vs USD EM USD cross exchange rates

% change
YTD Since 1 Aug
EM Asia
CNY -4.7 -0.2
KRW -4.5 -0.2
TWD -3.3 -0.6
INR -11.0 -4.5
SGD -2.9 -1.1
IDR -9.2 -3.5
THB -0.8 1.3
MYR -2.4 -2.0
PHP -6.8 -0.9
Source: J.P. Morgan
EMEA EM
High yielding EM REERs are generally cheap versus their 30y range PLN -6.5 -1.8
following recent depreciation HUF -8.3 -2.7
Deviation of current REER (CPI-based) from 30y average. +ve means overvalued, -ve means undervalued
CZK -3.9 -1.2
25%
RON -2.6 -0.9
20%
15%
RUB -15.7 -8.5
10% TRY -42.4 -25.5
5% ZAR -19.7 -13.9
0% Latam
-5%
BRL -20.5 -9.7
-10%
MXN 1.0 -4.2
-15%
-20% ARS -52.1 -29.4
-25% COP -3.5 -6.8
-30% PEN -2.4 -1.4
SGD
TWD
PHP
ILS
CLP
COP
NOK
BRL
GBP
JPY
KRW
INR
RON
USD
NZD
AUD
CHF
HUF
PEN
PLN
IDR
EUR
CAD
MYR
MXN
ZAR
CNY
CZK
THB
RUB
TRY
SEK
CLP -11.1 -8.0

Source: J.P. Morgan Source: J.P. Morgan, Bloomberg. Data as of Sep 5, 2018
9
Agenda
Page
1 Tail risks are becoming the base case scenario as markets are reacting to trade tensions and sanctions 1
US growth continues to be revised up as other regions are revised down
Will US exceptionalism hold? US growth continues to be revised up as other regions are

revised down, adding to EM risks
DM vs EM Growth forecasts J.P. Morgan Growth Forecast Revision Indices

Real GDP %oya, except where noted (FRIs); 1y ago = 100
2018 (%q/q, saar)
102.0
2017 1Q 2Q 3Q 4Q 2018 2019 Potential EM FRI Euro FRI US FRI
Global 3.3 3.8 3.8 3.6 3.6 3.3 3.1 2.7
Developed markets 2.2 1.6 2.8 2.6 2.3 2.3 2.2 1.4
US 2.2 2.2 4.2 3.5 2.5 2.9 2.4 1.4 101.5
Euro area 2.5 1.6 1.5 2.0 2.5 2.1 2.2 1.3
Japan 1.7 -0.9 1.9 1.5 1.5 1.0 1.4 1.0
UK 1.7 0.9 1.5 2.0 2.3 1.4 1.8 1.7
Emerging markets 5.1 5.5 4.3 3.9 4.3 4.8 4.6 4.7
101.0
EM ex. CN 3.7 5.2 4.1 4.2 4.3 3.4 3.4 3.5
EM Asia 6.2 6.6 6.0 5.8 5.8 6.0 5.7 5.8
EM Asia ex. CN 4.9 6.2 5.2 5.5 5.3 5.1 4.9 4.9
China 6.9 6.9 6.7 6.0 6.3 6.6 6.2 6.8
India 6.7 7.3 7.6 7.1 7.0 7.3 7.3 7.3 100.5
EMEA EM 3.9 4.7 3.6 -1.5 0.5 2.7 1.9 2.6
Russia 1.5 2.8 3.2 0.0 1.3 1.6 1.4 1.3
Turkey 7.4 8.0 3.5 -9.6 -3.9 3.3 0.2 4.0
Latin America 1.7 0.5 0.7 2.4 2.5 1.3 2.2 2.0
Mexico 2.0 2.0 2.4 2.5 100.0
4.0 -0.6 1.3 2.5
Brazil 1.0 0.5 0.7 2.4 2.5 1.2 2.3 2.0
Argentina 2.9 4.7 -15.0 -9.0 -4.0 -2.2 0.3 2.5
EM-DM differential 2.9 3.8 1.8 1.8 2.4 2.5 2.4 3.3
99.5
EM ex. CN-DM Sep-17 Oct-17 Dec-17 Jan-18 Mar-18 May-18 Jun-18 Aug-18
1.5 3.6 1.2 1.6 2.0 1.1 1.2 2.1
differential
Source: J.P. Morgan. Latin America aggregate excludes Venezuela. Source: J.P. Morgan
10
Vulnerabilities in the backdrop: Synchronicity in global growth faded in 1H18, with the
divergence between DM and EM particularly striking
Global GDP, growth and breadth Relative breadth of global growth and the USD
Source: J.P. Morgan Source: J.P. Morgan, *USD projection assumes stable from current value
Global real GDP growth breadth EM real GDP growth breadth
Source: J.P. Morgan Source: J.P. Morgan
11
Unexpected US exceptionalism to persist with broad dollar strengthening even as US

yield spreads to the rest of the world narrowed, typical of risk averse periods
Unexpected US exceptionalism now to persist for a second

USD TWI vs. US 10-year yield spreads vs. rest of DM (bp)
quarter before re-converging
5
JPM
US EU Fcsts
4
0
Mar-13 Dec-13 Sep-14 Jun-15 Mar-16 Dec-16 Sep-17 Jun-18 Mar-19
Source: J.P. Morgan Source: J.P. Morgan, Bloomberg; Note: Solid boxes represent latest estimates/forecasts; dotted
lines and hollow boxes represent original forecasts as of end-May
Net weight on the dollar from our economic momentum
Leveraged funds continue to build out net long USD positions
framework*; %
$50 Net USD weight in economic momentum framework
120 USD TWI 130
$40 HF Net USD Positioning
125
$30
60 120
$20
115
$10 0
110
$0
-60 105
-$10
100
-$20
-120 95
6-Jan-15
6-Apr-15
6-Oct-15
6-Jan-16
6-Apr-16
6-Oct-16
6-Jan-17
6-Apr-17
6-Oct-17
6-Jan-18
6-Apr-18
6-Jul-15
6-Jul-16
6-Jul-17
6-Jul-18
2013 2014 2015 2016 2017 2018
12
Source: J.P. Morgan, Bloomberg Source: J.P. Morgan
Direct impact of US tariffs on global growth are relatively limited so far
Global trade and US tariff rate Business equipment spending, global ex China
% of global GDP %, boxed proposed tariffs %oya. Model fit based on different sentiment inputs
25 10
7
8
20
Global trade
Stable
6
5
-0.5 std
15 dev
(baseline)
4 Actual
US tariff rate
3
10
2
-1 std dev sentiment
shock from baseline
5 1 0
60 65 70 75 80 85 90 95 00 05 10 15 20 2014 2015 2016 2017 2018
13
Not yet a trade war: Assessing Global GDP impact of Trump tariffs
US proposed tariffs Global GDP impact of 10%-pts tariff increase

2017 nominal values %, over 1-2 years
Avg tariff rate

% of GDP % of Imports (previously
1.7%)
$58bn: already enacted* 0.3 1.9 2.0
$108bn: enacted plus $50bn on

0.6 3.7 2.5
China imports

2.6 17.4 3.6
China imports

4.5 29.7 6.5
China imports & all autos
*Steel, aluminum, washing machines, solar panels. Source: J.P. Morgan. Source: IMF, OECD, J.P. Morgan
14
Confidence is key, and the potential for a larger drag on business sentiment remains a
key risk
Global corporate profits and capex

%3m/12m %3m/3m, saar
16 15
Profits 10
8
-8
Capex proxy -5
-16 -10
01 03 05 07 09 11 13 15 17
Source: J.P. Morgan, MSCI
15
Measuring deregulation: Shift in business perception and decline in new federal

regulations apparent under Trump
Small business focus on regulation and taxes has tended to Federal Register page count has tended to track the US
correspond to major policy initiatives cycle of regulation and deregulation
National Federation of Independent Businesses survey asking small businesses to name their Number of pages published in Federal Register in thousands and as percentage change
single-biggest problem (% of respondents). Red (blue) shading indicates Republican year-on-year. Red (blue) shading indicates Republican (Democratic) Presidencies. 2017
(Democratic) Presidencies observation is H1 annualized.
Source: J.P. Morgan, National Federation of Independent Business Source: J.P. Morgan, Federal Register
16
The dark side of Trumponomics awakens by 2020, while US debt will approach 100% of
GDP by 2028E
Trump’s average budget deficits through 2020 would rival Obama’s, without the justification of a global
financial crisis
Average federal budget deficit over each presidency, with red
National debt as fraction of GDP
for Republicans and blue for Democrats
0%
%
Republican average
Kennedy (61-63)
Johnson (63-69)
Nixon (69-74)
Ford (74-77)
Carter (77-81)
Reagan (81-89)
Clinton (93-01)
Bush II (01-09)
Trump (17-20)
Democrat average
Bush I (89-93)
Obama (09-16)
120
CBO
-1% current-law
100 projection
WWII
-2%
80
-2.6% Great
-3% 60 Depression
-3.0%
40
-4%
Civil War WWI
20
-5% -4.8%
0
-5.7% 1790 1840 1890 1940 1990
-6%
Source: J.P. Morgan Source: CBO, J.P. Morgan
17
Probability of US recession risks in the near term (12 months) is relatively low, around
22% in our models, rising to >50% by 2020
 Near-term (12-month) recession risks look relatively low, around 22% in Longer term recession probabilities
our models 100% Probability of recession within:
 High-frequency economic data (e.g., sentiment, auto sales, jobless 4 years
claims) point to little imminent risk 80% 3 years
2 years
 Looking out three years, the risk of recession becomes more elevated 60% 1 year
 Low unemployment rates can, over time, contribute to late-cycle
symptoms (accelerating prices, lower profits, etc.) 40%
 Historically it has proven difficult for the Fed to “soft land” an overheating 20%
economy
 So far, contained price pressures have obviated the need for the Fed to 0%
2011 2012 2013 2014 2015 2016 2017 2018
step up the pace of tightening
Probabilities of US recession from near-term indicators
Probabilities of US recession from medium-term indicators
(12 months)
Level at 50%
Indicator Probability Current level Indicator 1 year 2 years 3 years 4 years
probability
Historical average unconditional probability 17%
Consumer sentiment 7% 74.0 64.6 Historical average unconditional probability 17% 33% 46% 57%
Nonmanufacturing sentiment 14% 62.5 52.8 Unemployment rate 43% 69% 83% 92%
Manufacturing sentiment 13% 64.3 50.4
Residential building permits 16% 1322 1105 Unemployment gap 38% 62% 78% 90%
Auto sales 30% 17.4 15.4 Compensation growth 33% 55% 71% 80%
Payrolls 23% 202 -33
Unemployment rate 22% 4.1 4.6 Prime-age male labor force participation 56% 82% 90% 96%
Initial claims 14% 231 262 Margin drawdown from 5-year peak 43% 62% 72% 79%
Senior loan officer opinion survey 3% -1.3 17.1
Durables and structures share of GDP 28% 44% 58% 72%
Composite probability from near-term indicators 12%
Background risk from medium-term indicators 46% Composite probability from medium-term indicators 46% 73% 88% 99%
Probability including background risk 24% Composite from near and medium-term indicators 24% 57% 76% 91%
Source for all charts: J.P. Morgan

18
Current US imbalances are ample but not glaring and concentrated in the government
and non-corporate sectors
US nonfinancial leverage heat map US asset prices getting high again

Percentiles of historical distribution Z-score (both axes)
Real house prices Real CRE prices
Liabilities / GDP Gap

Shiller S&P500 P/E ratio
Debt Growth Over 5

Debt / Income Gap
Net Debt / Income
Interest / Income
Debt / GDP Gap
4 4
Debt / Assets
Average
3 3
yrs
Sector
2 2
1 1
0 0
Total private nonfin. 16% 17% 16% 37% 1% 13% 12% 16% -1 -1
-2 -2
..Household 13% 16% 13% 20% 1% 23% 15% 14% -3 -3
55 60 65 70 75 80 85 90 95 00 05 10 15
..Total nonfin. bus. 58% 59% 56% 63% 68% 30% 17% 50%
Source: S&P, Federal Reserve, BLS, J.P. Morgan
....Corporate 69% 72% 74% 66% 47% 23% 25% 54% US equity prices and the business cycle
Cumulative return throughout the cycle; x-axis is % of expansion or recession completed
....Noncorporate 43% 53% 30% 43% 85% 85% 18% 51%
200%
Total government 51% 49% 47% 26% 97% 86% 36% 56% 160%
Current Cycle
..Federal gov. 75% 66% 77% 32% 95% 53% 28% 61% 120% (11 years)
Average
..State and local gov. 5% 8% 13% 15% 32% 22% 41% 19% 80%
40%
Source: BEA, Federal Reserve, J.P. Morgan. Expansions Recessions
Figures represent the percent of the time since 1980 that the indicated leverage metric has
been below its current level. "Gap" measures are calculated as difference from 10-year
0%
average. "Income" refers to disposable personal income for households, net operating surplus
0% 50% 100%
plus depreciation (similar to EBITDA) for corporate business, proprietors income and rental % of expansion or recession completed
income plus interest payments for noncorporate business (similar to EBIT), and current Source: J.P. Morgan
receipts for government. But when aggregated across multiple sectors, a comparable
EBIT-like measure of income is used: pre-tax personal income for households, net operating 19
surplus for corporate business, and the same measure as above for noncorporate business.
DM labor markets to keep tightening
DM policy, u-rates and core CPI

%, both scales
4.4
Policy rate
U-rate (inverted) 4.9
4
5.4
3 5.9
Core CPI (oya) 6.4
2 6.9
7.4
1 7.9
8.4
0 8.9
96 97 99 01 02 04 06 07 09 11 12 14 16 17 19
Source: J.P. Morgan
20
DM Phillips curves poised to steepen
Output gap and core inflation, developed G4 labor shortages surveys and
% of potential GDP %oya DM wages
3 2.1
Core inflation ST. dev from 2010-pres average %oya
2 1.9 3 4
1
0 1.7
-1 1.5 Labor shortages
-2 2
1.3
-3
-4 Output gap 1.1
3
-5 0.9
1
00 02 04 06 08 10 12 14 16 18
Source: J.P. Morgan
Core inflation forecast

%chg over 4 quarters; CPI 0
2
4Q17 4Q18 4Q19
JPM Model JPM Model JPM Model -1

Dev. Mkt 1.3 1.5 1.8 1.8 2.0 1.8
Wages
USA 1.7 2.0 2.4 2.3 2.5 2.5
-2 1
Euro area 0.9 1.2 1.3 1.5 1.6 1.7 86 91 96 01 06 11 16
Source: J.P. Morgan
Japan* 0.0 -0.2 0.3 0.0 1.0 0.2

So urce: J.P.M organ; * Japan 4Q19 excludes VAT hike (adds 1.9%pt)
21
US wage inflation is accelerating more slowly than expected
US underlying compensation per hour Actual vs. model-predicted compensation

growth
& ULC %
Actual
%oya 6
6 Underlying
compensation per 4
hour
2 Prediction from model

estimated 1988-2007
Underlying unit
4 0
labor costs
-2
88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Source: J.P. Morgan
2
Measures of US core inflation
%6m, saar
2.8
Core CPI
2.4
0
2.0
1.6
1.2
-2 0.8 Core PCE
97 02 07 12 17 0.4
Source: J.P. Morgan
10 12 14 16 18
Source: J.P. Morgan
22
G-4 CB balance sheet sheets winding down; Fed stepping up
G-4 central bank balance sheet G-4 central bank balance sheet
12m chg as of Dec, bn USD
2015 2016 2017 2018 2019 2020
Trillion USD 12m chg, tn USD Fed -11 -28 -13 -369 -467 -357
16 2.5
ECB 298 845 1413 231 -144 -136
Stock BoJ 635 958 509 543 216 118

14 2.0
BoE -1 -12 179 -24 4 -79
Total 921 1763 2087 381 -391 -455
12 1.5 Source: Fed, ECB, BoJ, BoE, J.P. Morgan.
Global policy rates

10 1.0 Percent per annum
4
Rest of world
8 0.5 3
2
6 0.0 US
Flow 1
4 -0.5 0
09 10 11 12 13 14 15 16 17 18 19 20 2013 2014 2015 2016 2017 2018 2019
Source: Fed, ECB, BoJ, BoE, J.P. Morgan. Source: J.P. Morgan
23
Agenda
Page
EM vulnerabilities remain in the spotlight
Emerging Markets: Worrying about known unknowns
EM private sector USD external debt Gross portfolio flows into EM

bn USD Bn USD, monthly flow (based on 17 large EM; April prelim based on 11)
5000 60
4200
Total EM 50
3400
2600
40
1800 ...ex China Debt
1000 30
200 Equity
00 02 04 06 08 10 12 14 16 18 20
Source: J.P. Morgan. Includes non-financial corporates and financial institutions
EM FX debt by sector and currency composition 10

% of GDP
50
0
40
USD EUR Other
30
-10
20
10
-20
0
Turkey…
Malaysia…
Hungary…
Poland…
Argentina gov't
Poland gov't
Colombia gov't
Hungary corps
Israel corps
Czech corps
Mexico corps
Malaysia corps
Poland corps
Hungary gov't
Turkey corps
Chile corps
Korea financials
Korea corps
Russia corps
Brazil corps
SA corps
-30
Jan 16 Jul 16 Jan 17 Jul 17 Jan 18
Source: IIF global debt monitor, J.P. Morgan. Excludes Hong Kong and Singapore Source: J.P. Morgan; IIF
24
EM vulnerabilities explain the EM FX sell-off
EM vulnerability metrics
CPI (%oya); All else (% of GDP). Latest. *Based on simple average of indicator ranks.
CPI CAB Fiscal External debt FX Reserves Rank*

Argentina 29.5 -5.3 -5.5 39.5 8.5 1
Turkey 15.8 -6.3 -2.9 52.8 9.4 2
South Africa 4.6 -3.3 -4.2 50.3 11.5 3
Romania 4.6 -3.5 -3.6 53.1 18.6 4
Colombia 3.1 -3.1 -2.7 39.3 14.0 5
Brazil 4.5 -0.5 -8.3 33.1 17.6 6
Indonesia 3.2 -2.3 -2.5 34.8 11.5 7
Mexico 4.8 -1.3 -2.5 38.0 14.1 8
India 4.2 -1.9 -6.5 20.4 15.4 9
Chile 2.7 -1.1 -0.9 63.8 12.8 10
Hungary 3.4 3.1 -2.1 79.9 18.7 11
Poland 2.0 -0.2 -1.9 70.3 20.5 12
Philippines 5.7 -0.6 -0.5 23.0 21.6 13
Peru 1.6 -1.3 -3.3 31.3 27.0 14
Czech Republic 2.3 0.3 1.1 90.6 62.2 15
Malaysia 0.8 3.7 -2.7 70.1 30.7 16
China 1.8 0.5 -4.1 14.4 24.6 17
Russia 2.5 2.7 0.0 32.1 22.7 18
Israel 1.3 2.7 -3.2 25.3 31.7 19
Thailand 1.5 10.5 -0.9 32.1 43.4 20
Taiwan 1.7 14.5 -1.6 32.0 78.3 21
Korea 1.5 4.5 2.0 27.6 24.5 22
Source: J.P. Morgan
25
EM central banks have fallen behind the curve, and end-2018 policy rates are expected to
be higher than previously forecast
EM central banks are playing catch-up as financial conditions

Implied vs. actual EM rate hikes YTD with USD index at 119.5
trump fundamentals in policymaking
bp change to end-2018 policy rate forecast (vs. June EMOS) bp
120
Czech Rep. 25
Implied by USD Implied by DM rates Actual
India 25 100
Romania 25
80
Russia 25
Mexico 50 60
Indonesia 75
40
Philippines 75
Turkey 125 20
600
Argentina
0
0 100 200 300 600400 EMX HY LY
26
Emerging Markets twin balances remain an issue in a handful of countries
2019E Emerging Markets Twin Balances
15
Taiwan
12
GCC
9
2019E Current Account (% of GDP)
Thailand
Malaysia Korea
3 Russia
Hungary
Czech Republic
China
Poland
0
Egypt Brazil
Peru Chile
Philippines Mexico
India
Indonesia
-3
Colombia
Argentina Turkey
South Africa
-6
-9 -6 -3 0 3
2019E Fiscal Balance (% of GDP)
Source: J.P. Morgan
27
Turkey’s external requirements are high and external debt maturing within 1 year or less
is $180bn
Total external financing needs for the year at $232bn External financing needs have risen across years
Current Account deficit (12m-sum, US$bn)
Turkey May-18
External debt maturing within the year (US$bn)
250
Current Account deficit (12m-sum, US$bn) 51 232
External debt maturing within the year (US$bn) 181 210

208 206 207
o.w. Public sector and CBRT 32 199 51
200
o.w. Financial Institutions 83 178 44 33
32 47
o.w. Non-financial institutions 66 64
Total external financing need (US$ bn) 232 48

150
Source: J.P. Morgan, CBRT. External debt maturing within the year is on a remaining maturity
basis irrespective of initial maturity across the public sector, financial institutions and
nonfinancial institutions.
External debt maturing within 1 year or less (US$mn) as of end 100

of May 2018 181
167 167 173
160
Entity Maturing External Debt (US$mn) 144
130
CBRT and General government 4,907
50
Banks 102,493
Trade 48,118
Other credits 25,088
0
Total 180,606 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 May-18
Source: CBRT Source: J.P. Morgan, CBRT. External debt maturing within the year is on a remaining maturity
basis irrespective of initial maturity across the public sector, financial institutions and
nonfinancial institutions
28
Direct economic linkages to Turkey are low for most countries, but potential impact on
cross-border FX funding stress is more important
Cross-border lending by foreign banks to Turkey.

Exports to Turkey as % of exporter GDP in 2017
Consolidated positions on an immediate counterparty basis
%of domestic GDP.
Source: J.P. Morgan, IMF, World Bank Source: J.P. Morgan, BIS, World Bank
29
Argentina: 2019 gross financing needs still estimated at US$11.3 billion under new
phasing of IMF financial assistance
2019 Fiscal Uses and Sources Argentina Multilateral REER
2019 Per ccy (% GDP) Index

Lcl ccy Hard ccy Total lcl Hard
(ARS bn) (USDbn) (USDbn) ccy ccy Total
A. Uses (1+2+3) 395.2 29.2 38.6 2.3 7.2 9.5
220
1. Primary Fiscal Deficit (0% of GDP) 0.0 0.0 0.0 0.0
2. Debt Amortization (a+b+c) 182.4 19.6 23.9 1.1 4.8 5.9
a. Private sector (exc USD-Letes) 102.6 6.9 9.3 0.6 1.7 2.3 200
International bonds (Global '19) 2.8 2.8 0.7 0.7
Domestic bonds 102.6 1.2 3.6 0.6 0.3 0.9
Bonar '24 1.2 180 ARS REER undervalued
ARGDUO '19 57.0
ARGCER '19 30.4
ARGBON '19 Badlar + 250 7.6 160
Other 7.6
Repo w/international banks 2.9 2.9 0.7 0.7
b. Multilateral+Bilateral 3.6 3.6 0.9 0.9
IADB + World Bank +CAF 1.7
140
Other 0.2
Paris Club 1.7
c. LETES 79.8 9.1 11.0 0.5 2.2 2.7 120
3. Interests 212.8 9.6 14.7 1.3 2.4 3.6
B. Sources (4) 0.0 4.6 4.6 0.0 1.1 1.1
4. Multilateral financing (4.1+4.2) 0.0 4.6 4.6 0.0 1.1 1.1 100
4.1 IADB + World Bank +CAF 4.4 ARS REER overrvalued
4.2 Other 0.2
C. Gross financing requirements (A-B) 395.2 24.6 34.0 2.3 6.1 8.4 80
D. IMF Financing as per original program (assumes
100% of drawdowns for budget support) 11.7 2.9
E. Market financing needs (C-D), assumes no
Letes and repo rollover 22.3 5.5 60
F. Repo rollover assumption 2.9
G. Letes rollover assumption (50%) 5.5
H. Market financing needs assuming F and G 13.9 40
I. Market financing needs assuming 100% Letes 97 01 05 09 13 17
rollover (gov't assumption) 11.3
Notes: Excludes intra-public sector debt services; avg FX assumption: 42 Source: J.P. Morgan
Source: J.P. Morgan
30
Argentina: Clients remain overweight sovereigns and FX
Argentina Sovereign Exposure History by Investor Type USD/ARS Exposures by Investor Category
8
6 Dedicated Crossover Trading
Dedicated Crossover Trading
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
-6
-8 -8
-10 -10
Aug10 Aug12 Aug14 Aug16 Aug18 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18
Source: J.P. Morgan August EM Client Survey Source: J.P. Morgan August EM Client Survey
31
Overall EM technical vulnerabilities are not a major risk, in our view, but risks vary
significantly across EM
EM Bond Technicals Vulnerability Matrix
AR BR CL CO CZ EG HU IN ID IL KR MY MX NG PE PL RO RU ZA TH TR
Foreign holdings: USD billion notional - 113 8 25 26 - 13 30 58 10 80 41 116 - 11 51 6 32 55 22 18
Foreign holdings: % of amount outstanding - 12% 12% 25% 40% - 21% 4% 38% 6% 15% 25% 32% - 40% 31% 18% 28% 40% 16% 16%
EM local bonds
Foreign ownership (%): 5y Z-score - -1.5 2.4 1.6 1.1 - -1.4 0.5 0.0 1.9 1.2 -2.0 -1.6 - -0.2 -1.6 -0.4 0.5 1.1 -0.1 -2.2
Dedicated foreign holdings (% of foreign holdings) - 25% 61% 73% 30% - 78% 8% 47% 0% 0% 28% 25% - 69% 28% 82% 60% 43% 57% 51%
Crossover foreign holdings (% of foreign holdings) - 0% 2% 0% 7% - 13% 0% 9% 22% 23% 27% 16% - 0% 28% 0% 8% 19% 22% 0%
Residual foreign holdings (% of foreign holdings) - 75% 37% 27% 63% - 10% 92% 44% 78% 77% 45% 59% - 31% 44% 18% 32% 39% 22% 49%
EM FX positioning: current score 2.2 -0.5 -0.6 -0.3 0.1 3.7 -1.8 1.9 2.1 -2.2 -3.4 0.8 1.9 2.0 0.6 0.2 -2.7 1.0 -0.2 -1.4 -0.7
EM FX positioning: 5y Z-score 0.6 -0.9 -0.5 -0.1 0.3 1.3 -0.2 -0.9 0.4 0.1 -1.0 0.4 -1.2 1.6 0.6 -0.5 -1.4 0.2 0.7 1.3 -0.6
EM rates positioning: current score -0.2 2.0 -1.7 0.1 -2.9 2.7 -1.1 1.0 2.8 -0.9 0.0 -0.9 2.4 0.4 1.2 -2.8 -2.1 0.7 1.7 -3.2 -1.9
EM rates positioning: 5y Z-score 0.0 -1.3 -0.9 -0.5 0.0 1.3 1.0 -0.9 0.5 0.0 1.4 1.0 -0.6 1.4 1.0 -2.5 -1.1 -0.3 0.7 0.3 -1.6
EM sovereign positioning: current score 5.0 -1.9 -3.6 -2.6 -3.4 2.6 -2.1 - 0.9 - -2.7 -4.7 -1.5 1.7 -3.5 -5.2 -1.8 -1.6 -0.8 -3.4 -0.8
EM sovereign positioning: 5y Z-score 1.2 -0.6 -0.7 -2.0 -1.5 1.8 -1.7 - -1.5 - 0.5 -0.7 -1.5 1.8 -1.4 -1.3 -1.3 -1.1 1.7 0.9 0.5
Source: J.P. Morgan, official sources.

Data is formatted by rows (large to small using red to green). If data is unavailable it is shown as “-“
Foreign holdings refer to non-resident holdings of EM local currency government bonds
EM FX, EM rates and EM positioning scores are from the JPMorgan EM Client Survey
AR = Argentina, BR = Brazil, CL = Chile, CO = Colombia, CZ = Czech Republic, EG = Egypt, HU = Hungary, IN = India, ID = Indonesia, IL = Israel, KR = Korea, MY = Malaysia, MX = Mexico, NG =
Nigeria, PE = Peru, PL = Poland, RO = Romania, RU = Russia, ZA = South Africa, TH = Thailand, TR = Turkey
32
Recent EM outflows have reduced risks of further unwinds, but EM positioning has not
been significantly reduced, and inflows to year-end are likely to be modest
Recent EM debt outflows have only partially reversed the Foreign holdings of EM local currency government bonds
inflows seen in Jan-Apr 2018 remain near all-time highs despite YTD outflows
USD billion
160 EM Equity Retail
EM Bond Retail Latin America EMEA EM EM Asia ex CN
140 800
-$17bn
120
100 -$11bn
700
80
60
40 600
20
0
500
Jan-17
Feb-17
Mar-17
Apr-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
Jun-18
Jul-18
Aug-18
May-17
May-18
Source: J.P. Morgan, EPFR Global

400
Cumulative inflows to EM bonds and equities YTD are now
+$19.4bn and +$18.5bn, respectively
USD billion 300
200 EM Equities
EM Bonds
150 63
97 51 200
100 84
50 32 32 51 100 116
82 19
8 31 35 34 50 47 40 100
0 14 -1 6 11 -1 18
-48 -49 -25 -27 -21
-50 -66
-100 0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
-150
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: J.P. Morgan, EPFR Global Source: J.P. Morgan, official sources
33
EM hard currency sovereign issuance in seasonal lull while EM corporate technicals track
significantly lower
EM hard currency sovereign issuance; USDbn EM hard currency corporate issuance; USDbn
(US$ bn) 2016 2017 2018YTD 2018F
US$bn 2016 2017 2018YTD 2018F
Gross issuance (a) 326 482 245 442
a Gross issuance (b + c) 145.8 178.9 115.9 157.8
Estimated cash flows (b = c+d) 204 257 170 267
b New issuance 130.1 156.0 107.9 149.8 Amortizations (c) 118 173 111 175
c Taps 15.6 23.0 8.0 8.0* Coupons (d) 86 83 59 92
Net issuance (e = a-c) 208 309 134 267
d Estimated cash flows (e + f) 74.8 93.7 63.5 89.6
Net financing (f = a-b = e-d) 122 225 75 175
e Amortizations 32.8 46.5 28.7 38.6
Tender/Buyback/Calls (g) 55 83 59 66
f Coupons 42.1 47.2 34.8 50.9
Net issuance after
g Buybacks 9.8 8.1 6.4 6.4* 153 226 76 201
tender/buyback/calls (j = e-g)
h Net issuance (a - e - g) 103.2 124.3 80.9 112.8
Net financing after
67 142 17 109
i Net financing (h - f) 61.1 77.1 46.1 61.8 tender/buyback/calls (k = f-g)
Source for all charts: J.P. Morgan, Bloomberg
34
Agenda
Page
Implications of Trump trade policies for US-China and supply chain links
Implications of Trade Wars: Assessing the Economic and Market Impact
 Geopolitics have raised tail risk but have historically driven more volatility than trend, but is the impact
becoming more durable?
 We take the risks of rising trade tensions seriously, if not literally, as only US$34 billion of tariffs (rising to
US$50 billion by Aug 23) have gone into effect so far with US$20 billion coming from non-Chinese companies.
If US actions and responses (trade and non-trade) are contained to the existing legal frameworks, such as
Sections 232 and 301, the economic impact would remain modest, totaling less than 0.1% of US GDP and
0.2% of China’s GDP.
 J.P. Morgan economists estimate a -0.25% impact on global GDP if we consider all of the trade sanctions
being discussed by US policymakers (US$450 billion tariffs on China and Section 232 on Autos).
 Attributing the trade-related news flow (positive or negative) to the performance of the US equity market, we
estimate the impact on US equities to be negative 5-7% (with a margin of error of +/-1%), which translates into
US$1.25 trillion of value destruction for US companies at the current US equity market capitalization. This is
about two-thirds of the value of the total fiscal stimulus.
 We estimate GBI-EM returns to be -3%pt lower (if global GDP falls -0.25%) or up to -6%pt in a stress case (if
global GDP falls by a larger -0.5%). For EM sovereigns, we estimate a +32bp impact on EMBIGD spreads, or
up to +65bp in a stress case.
 Risk premium on USD/CAD around NAFTA hope and fear appear to be around +/- 2% when controlling for rate
spreads and other macro factors.
 CNY depreciation faces limitations given China’s fragile balance of payments. We estimate that a 5% increase
in CNY depreciation expectations (proxied by the change in the year-ahead NDF rate) can induce US$375
billion in outflows.
35
China represents growing share of global machinery and electronics exports, while US is
a major destination for Chinese outward FDI
China’s share of global and US imports (2016), selected goods Global share of machinery and electronics exports
% %
Source: WITS, J.P. Morgan Source: WITS, J.P. Morgan
China ODI to the US by sector, 2017 China ODI to the US by sector, 2011
Source: AEI, J.P. Morgan Source: AEI, J.P. Morgan

36
Direct effects of the 301 impact are still small as a broad range of sectors have spillovers
to other countries
US imports in 2017 Top 10 industries with the largest US trade deficit

USD billion 2017, labels show contribution of CN to deficit by sector
AUTO 0.9%
TELE 82.2%
CLTH 37.2%
OFFC 90.7%
PETR -6.7%
COMM 3.8% Total
ELEC 63.8%
China
PHAR 0.2%
MNFR 111.2%
FNTR 57.1%
-20 0 20 40 60 80 100 120 140 160 180

Source: USTC. Note: 2-digit 9TC categories Source: CEIC
EM Asia export exposure to US for SITC 7&8 Decomposing “made in China”

% of GDP, 2017 %, Domestic and Foreign Value Added (DVA and FVA)
DVA USA Asia ex.China Europe RoW

10
7.0%
Direct Indirect
9.7%
5 DVA 67.9% FVA
12%
0
3.0%
MY TW TH KR SG CN ID
Source: National sources, J.P. Morgan calculations. Indirect is via China. Source: OECD, J.P. Morgan
37
$100bn increase in China’s imports from the US by 2020 is likely, but a $200bn increase
would be very challenging, if not impossible
Top 10 US exporting sectors to China, 2017
Top 10 US exporting sectors, 2017 Major China importing industries, 2017

US exports China US Total US China imports US share of
US Total China
Sectors (3-digit NAICS to share of Industrial domestic Sectors (4-digit HTS 4-digit HTS from total
exports imports (US$
classification) China total US capacity output classification) classification the US (US$ China
(US$bn) bn)
(US$bn) exports utilization (US$ bn) bn) imports
Transportation equipment 278.4 29.5 10.6 77.2 1,024.0 Integrated circuits 8542 260.9 5.3 2.0
Computer and electronics 208.0 17.1 8.2 70.1 423.0 Petroleum oils 2709 163.3 4.4 2.7
Chemicals 192.6 15.2 7.9 73.2 837.3 Iron ores 2601 76.4 0.0 0.0
Non-electrical machinery 133.7 9.3 7.0 72.7 387.6 Phones 8517 47.8 1.6 3.3
Petroleum products 84.0 1.2 1.4 78.4 518.7 Cars 8703 49.9 10.6 21.3
Other manufacturing 80.5 3.2 4.0 79.3 154.5 Liquid crystal devices 9013 37.1 0.4 1.1
Agricultural products 68.9 15.9 23.1 / 421.3 Soy beans 1201 39.6 12.4 31.2
Foods 64.0 3.3 5.2 81.6 1,000.0 Semiconductors 8541 28.2 0.6 2.2
Electrical equipment 59.5 3.3 5.5 76.8 122.5 Automatic data processor 8471 25.9 1.40 5.3
Primary metal 56.4 2.3 4.0 68.2 235.7 Motor vehicle parts 8708 27.1 2.3 8.5
Source: USITC, Federal Reserve Board, BEA, J.P. Morgan Source: General Administration of Customs of China, UNComtrade, USITC, J.P. Morgan
38
Growth and trade go hand in hand in EM Asia
World merchandise trade EM Asia GDP and global trade

Index, 2010 = 100, real terms sa % q/q saar, 8-qtr mma, both scales
Source: CPB world trade monitor, J.P. Morgan Source: CPB world trade monitor, national sources
39
Macro impact of US-China tariffs could reverberate to Asian supply chains
Exports to the US of high-end manufactures Trump administration tariffs: announced and potential
% of GDP, 2017
Direct Indirect Total

% Deviation FX that sustains Balassa- Average
EM Asia1 3.6 2.6 6.1 FX from long- NIIP at current Samuelson deviation (4)
China/HK 3.5 1.9 5.3 term PPP (1) level (2) framework (3) (of 1,2 and 3)
China 3.5 - 3.5
CNY 18.9 10.7 1.9 10.5
Hong Kong 0.9 18.3 19.2
HKD 2.8 25.6 14.2
North Asia 4.0 1.9 6.0 INR 7.2 -5.0 -0.6 0.5
Korea 3.5 1.6 5.1 IDR -1.5 -8.2 -1.1 -3.6
Taiwan 5.5 2.8 8.2 MYR -4.0 1.8 -15.8 -6.0
ASEAN-4 3.6 0.7 4.3 PHP -0.3 -8.0 -7.1 -5.1
Indonesia 1.1 0.1 1.1 SGD 3.8 -23.8 -10.0
Malaysia 10.9 1.2 12.1 KRW 7.5 -7.7 7.9 2.6
Singapore 2.9 1.3 4.2 TWD 0.4 -22.2 -19.3 -13.7
Thailand 4.8 1.2 5.9 THB 7.7 -17.1 13.8 1.4
Source: US Census Bureau, CSD, KCS, DoS, MoF, GAC. Negative sign in Cols 1-4 means currencies are cheap. Source: J.P. Morgan
1Indirect channel refers to EM Asia ex. CN
40
China’s monetary and FX response has been substantial, with potential large impacts on
other currencies; recent fiscal response is modest
Weight of CNY in other currencies Global nominal FX indices

% Index, Jan'18=100 China
35
103
101
30
99 DM
25 97
Global average EM ex CN
95
20 2-Jan 26-Feb 22-Apr 16-Jun
Source: J.P. Morgan
USDCNY and USDEUR

15
USDCNY USDEUR
6.90 1.26
10 6.80 1.24
USDEUR
6.70
1.22
6.60
5 1.20
6.50 USDCNY
1.18
6.40
6.30 1.16
0
JP EM Asia Latam US EM Euro Other EMEA 6.20 1.14
DM 2-Jan 26-Feb 22-Apr 16-Jun
41
China outlook: CNY depreciation has its limits as non-resident flows drove the reversal of
capital outflows while hot money outflows have increased
Portfolio investment flows China Capital flow breakdown
Source: J.P. Morgan Source: SAFE
42
Global Economic Outlook Summary
*Underline indicates beginning of J.P. Morgan forecast 43

Source: J.P. Morgan, as of 31 August 2018
2018 Forecasts and Strategy
Global forecasts by quarter

Rates Current Sep-18 Dec-18 Mar-19 Jun-19 Credit Current Dec-18
US (Fed funds) 1.92 2.15 2.40 2.65 2.90 US High Grade (bp over UST) JPM JULI 144 150
10-year yields 2.94 3.10 3.20 3.35 3.40 Euro High Grade (bp over Bunds) iBoxx HG 138 140
US High Yield (bp vs. UST) JPM HY 390 365
Euro area (Refi) 0.00 0.00 0.00 0.00 0.00
Euro High Yield (bp over Bunds) iBoxx HY 402 400
10-year yields 0.39 0.55 0.75 0.90 1.10
EMBIG Div (bp vs. UST) JPM EMBIG 372 400
United Kingdom (repo) 0.75 0.75 0.75 1.00 1.00
EM Corporates (bp vs. UST) JPM CEMBI 312 250
10-year yields 1.46 1.45 1.60 1.70 1.85
Equities Current Dec-18
Japan (overnight call rate) -0.10 -0.10 -0.10 -0.10 -0.10 S&P 500 2,876 3,000
10-year yields 0.11 0.15 0.15 0.20 0.20 MSCI Europe 1,550 1,720
EM Local (GBI-EM yield) 6.74 6.45 MSCI Eurozone 216 250
Currencies Current Sep-18 Dec-18 Mar-19 Jun-19 FTSE 100 7,266 7,900
JPM USD Index 121 122 123 123 123 Topix 1,684 2,050
MSCI EM ($) 1,018 1,230
EUR/USD 1.16 1.13 1.12 1.14 1.17
MSCI China 78 95
USD/JPY 111 109 107 106 105
MSCI Korea 685 790
GBP/USD 1.30 1.26 1.26 1.30 1.32
MSCI Taiwan 409 440
AUD/USD 0.71 0.73 0.73 0.72 0.70 MSCI India 1,361 1,500
USD/CNY 6.84 6.88 6.93 6.93 6.98 Brazil (Ibovespa) 76,416 76,900
USD/KRW 1123 1125 1120 1125 1130 Mexico (MEXBOL) 48,535 49,000
USD/MXN 19.25 19.50 19.50 19.25 19.00 MSCI South Africa 1,374 1,615
USD/BRL 4.06 4.10 3.90 3.85 3.80 US Europe Japan EM
USD/TRY 6.43 7.00 8.50 8.00 8.25 Energy 2.9% OW 8.6% N 3.4% N 7.1% N
USD/ZAR 15.14 15.50 16.00 16.50 16.50 Materials -0.9% N -3.9% N -14.8% OW -5.1% OW
Industrials 4.0% OW 0.9% OW -7.7% N -12.9% N
Commodities Current Sep-18 Dec-18 Mar-19 Jun-19
Discretionary 16.7% N -2.7% N -5.1% OW -23.4% OW
Brent ($/bbl, qtr avg.) 76.1 68.0 64.0 60.0 64.0
Staples -3.2% N -2.6% UW -0.3% UW -12.7% UW
WTI ($/bbl, qtr avg.) 67.2 60.0 57.0 48.0 58.0
Healthcare 12.8% N 3.8% UW 9.4% UW -3.9% N
Gold ($/oz, qtr avg.) 1,197 1,250 1,380 1,411 1,416
Financials 2.3% OW -7.9% N -10.0% OW -11.0% OW
Copper ($/ton, qtr avg.) 5,911 6,345 6,900 7,600 7,900 Technology 18.5% OW 8.2% OW -7.3% N -9.0% N
Aluminum ($/ton, qtr avg.) 2,008 2,100 2,275 2,290 2,320 Telecom -2.7% N -15.0% N 5.6% UW -15.0% UW
Iron ore (US$/dt, qtr avg.) 68 65 60 Utilities 6.1% UW 2.6% OW 5.4% UW -7.8% UW
Wheat (USc/bu, qtr avg.) 486 530 550 570 550 Real Estate 4.0% UW -1.2% UW -7.4% N -18.2% N
44
Soybeans (USc/bu, qtr avg.) 833 1,020 1,000 1,020 1,040 Overall 9.2% -1.5% -5.1% -10.4%
Source: J.P. Morgan; *Levels/returns/forecasts as of 7 Sep 2018
Disclosures
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increasing or decreasing.
45
Disclosures
J.P. Morgan Sovereign Research Ratings Distribution, as of July 2, 2018
Overweight Marketweight Underweight
Global Sovereign Research Universe 19% 63% 19%
IB clients* 70% 47% 60%
Note: The Sovereign Research Rating Distribution is at the issuer level. Please note that issuers with an NR or an NC designation are not included in the table above.
*Percentage of investment banking clients in each rating category.
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Completed 07 Sep 2018 06:24 PM EDT Disseminated 07 Sep 2018 06:24 PM EDT

End-2018 Outlook: Assessing The Fallout From Trade Tensions, Rising Geopolitical Risks, and EM Vulnerabilities

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End-2018 Outlook: Assessing The Fallout From Trade Tensions, Rising Geopolitical Risks, and EM Vulnerabilities

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Emerging Markets Research

End-2018 Outlook: Assessing the Fallout from Trade Tensions,

Latin America Economic and Policy Research

End-2018 Outlook and Risks

America First? Divergence in performance of US equities vs. rest of the world is

Returns across asset classes; as of 6 September 2018 COB, %

Source: J.P. Morgan 2

Average Z-score of # of news stories with key trade

-1 US publishes $50bn tariff list on Chinese goods,

24-May Investigation on auto imports ordered 1.4 n/a

Average market reaction to major trade tension headline spikes

US equity market impact of trade war policies estimated at ~ 5-7%

Trade-related news flow relative to the performance of the US market

92 'Trade War' News Index

Source: J.P. Morgan QDS

US shows flexibility in NAFTA talks, but Canada still not onboard

Trade-related news flow relative to the performance of the US market

Source: J.P. Morgan

EM FX has been the most vulnerable asset class

EM bilateral FX rate vs USD EM USD cross exchange rates

CLP -11.1 -8.0

Will US exceptionalism hold? US growth continues to be revised up as other regions are

DM vs EM Growth forecasts J.P. Morgan Growth Forecast Revision Indices

Global real GDP growth breadth EM real GDP growth breadth

Source: J.P. Morgan Source: J.P. Morgan

Unexpected US exceptionalism to persist with broad dollar strengthening even as US

Unexpected US exceptionalism now to persist for a second

2013 2014 2015 2016 2017 2018

Direct impact of US tariffs on global growth are relatively limited so far

US proposed tariffs Global GDP impact of 10%-pts tariff increase

Avg tariff rate

$58bn: already enacted* 0.3 1.9 2.0

$108bn: enacted plus $50bn on

$508bn: enacted plus $450bn on

$868bn: enacted plus $450bn on

Global corporate profits and capex

Source: J.P. Morgan, MSCI

Measuring deregulation: Shift in business perception and decline in new federal

Source: J.P. Morgan Source: CBO, J.P. Morgan

Source for all charts: J.P. Morgan

US nonfinancial leverage heat map US asset prices getting high again

Liabilities / GDP Gap

Debt Growth Over 5

Net Debt / Income

DM labor markets to keep tightening

DM policy, u-rates and core CPI

Core CPI (oya) 6.4

DM Phillips curves poised to steepen

Core inflation forecast

JPM Model JPM Model JPM Model -1

Japan* 0.0 -0.2 0.3 0.0 1.0 0.2

US wage inflation is accelerating more slowly than expected

US underlying compensation per hour Actual vs. model-predicted compensation

2 Prediction from model

G-4 CB balance sheet sheets winding down; Fed stepping up

Stock BoJ 635 958 509 543 216 118

Global policy rates

Emerging Markets: Worrying about known unknowns

EM private sector USD external debt Gross portfolio flows into EM

EM FX debt by sector and currency composition 10

EM vulnerabilities explain the EM FX sell-off

CPI CAB Fiscal External debt FX Reserves Rank*

EM central banks are playing catch-up as financial conditions