For professional investors* only.

Not for retail use or distribution

Q3 | 2012
As at 30 June 2012

GTTM: A guide to global financial markets EUROPE

Table of contents

EUROPE WORLD UNITED STATES JAPAN

EMERGING MARKETS FIXED INCOME OTHER ASSET CLASSES DEMOGRAPHICS

40

16
27 36

46
53 60

European Market Strategy Team Dan Morris Paola Toschi daniel.m.morris@jpmorgan.com maria.p.toschi@jpmorgan.com tom.cb.elliott@jpmorgan.com kerry.craig@jpmorgan.com

Home

Tom Elliott Kerry Craig

EUROPE

MSCI Europe Index at inflection points (local currency) Europe equity valuations Europe returns by style (EUR) Eurozone GDP and inflation Contribution to German GDP Eurozone unemployment, retail sales and confidence indicators Europes vicious circle Employment by age and sex European labour costs Government deficits by country Interbank lending rates and peripheral exposure Eurozone crisis impact on markets

3 4 5 6 7 8 9 10 11 12 13 14 15

TOC

Eurozone countries economic divergences

MSCI Europe Index at inflection points (local currency)

MSCI Europe Index
1.800

Earnings index
180

Europe

4 September 2000 1.623

1.600

16 July 2007 1.641

160

1.400

-58%
1.200

+143%

-56%

30 June 2012 1.034 140 18 February 2011 1.230

120

1.000

+72%

100

800

80

Earnings
600

12 March 2003 676

9 March 2009 714

60

TOC

Dec 99

Dec 00

Dec 01

Dec 02

Dec 03

Dec 04

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Note: Earnings index is derived from the forward P/E. Source: I/B/E/S, J.P. Morgan Asset Management.

Europe equity valuations

Forward P/E ratio MSCI Europe Index
28

Europe

24 20 16 12 8

One year earnings growth forecast: 12%

Average since 1999 14,9

30 June 2012 9,5

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

MSCI Europe Index dividend yield and ten-year EMU bond

8 % 6

Ten-year EMU bond yield

4

30 June 2012 4,1%

3,5%
2

Dividend yield

TOC

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

Note: The ten-year EMU bond yield is represented by the BofA Merrill Lynch Euro Government (7-10Y) index. 75% of the value of the index is comprised of bonds from France, Germany, Italy, Spain, Netherlands, and Belgium, Source: BofA Merrill Lynch, I/B/E/S, J.P. Morgan Asset Management.

Europe returns by style (EUR)

2004 Europe
MSCI Europe Small Cap 23,7% MSCI Europe Value 16,3% MSCI EMU 13,4%

2005
MSCI Europe Small Cap 37,6% MSCI Europe Value 28,9% MSCI Europe 26,7%

2006
MSCI Europe Small Cap 30,4% MSCI Europe Value 23,1% MSCI EMU 22,8%

2007
DJ Stoxx 50 9,6%

2008
MSCI Europe Growth -40,5% DJ Stoxx 50 -42,4%

2009
MSCI Europe Small Cap 60,3% MSCI Europe Value 34,6% MSCI Europe 32,5% MSCI Europe Growth 30,5% MSCI EMU 28,7%

2010
MSCI Europe Small Cap 30,4% MSCI Europe Growth 18,5% MSCI Europe 11,7% MSCI Europe Value 4,9% MSCI EMU 3,3%

2011
MSCI Europe Growth -6,3% MSCI Europe -7,5% MSCI Europe Value -8,7% MSCI EMU -14,1%

YTD
MSCI Europe Small Cap 10,5% MSCI Europe Growth 7,4% MSCI Europe 5,4%

Q2 2012
MSCI Europe Growth -2,3% MSCI Europe -2,5% MSCI Europe Value -2,8% MSCI Europe Small Cap -4,5% MSCI EMU -5,5%

MSCI EMU 8,5% MSCI Europe Growth 8,2% MSCI Europe 3,2% MSCI Europe Value -1,8% MSCI Europe Small Cap -7,2%

MSCI Europe -43,3%

MSCI Europe 12,6%

MSCI EMU 26,3% MSCI Europe Growth 24,3% DJ Stoxx 50 24,3%

MSCI Europe 20,2%

MSCI EMU -44,3% MSCI Europe Value -46,1% MSCI Europe Small Cap -51,6%

MSCI EMU 3,8% MSCI Europe Value 3,1%

DJ Stoxx 50 9,4% MSCI Europe Growth 8,9%

DJ Stoxx 50 18,0% MSCI Europe Growth 17,3%

DJ Stoxx 50 -14,1% MSCI Europe Small Cap -17,1%

DJ Stoxx 50 DJ Stoxx 50 25,6% -2,8%

DJ Stoxx 50 DJ Stoxx 50 0,7% -6,2%

TOC
Note: Total return indices. Source: J.P. Morgan Asset Management.

Eurozone GDP and inflation

Real GDP
change year on year

Inflation
Forecast GDP 2012: -0,4% 2013: 0,8%
change year on year Forecast headline CPI 2012: 2,4% 2013: 1,8%

Europe

%
4

%
4

Average 1,5%

Headline CPI May 2012 2,4%

3

-2

First quarter 2012 -0,1%

-4

Core CPI May 2012 1,6 %

0

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

TOC
Source: Eurostat, Bloomberg consensus forecast, J.P. Morgan Asset Management.

Contribution to German GDP

Europe Europe First quarter 2012
change quarter on quarter
1,2

Fourth quarter 2011

change quarter on quarter
1,2

Government Net exports

Household Fixed capital formation

%
1,0

% Inventories
1,0

0,8

0,8

0,6

0,6

0,4

0,4

Total
0,2

0,5%
0,2

Fixed capital formation

Inventories

Net exports Household

Government
0,0 0,0

-0,2

-0,2

Total
-0,4 -0,4

-0,2%

TOC
Source: Federal Statistics Office, J.P. Morgan Asset Management.

Eurozone unemployment, retail sales and confidence indicators

Unemployment
%

May 2012 11,1%

Confidence indicators

Europe

11
40

10
30

9
20

8
10

Services sector confidence June 2012 -7,4

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

Index level

Retail sales growth (y/y)

6
%

-10

4 2 0 -2 -4

-20

-30

Industrial confidence June 2012 -12,7

Consumer confidence June 2012 -19,8

-40

May 2012 -1,7%

Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

TOC

-6 Dec 99

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

Source: Eurostat, OECD, J.P. Morgan Asset Management.

Europes vicious circle

How do you solve one problem without making the others worse? Europe

High bank debt

eg Spain, Ireland

Low growth
eg Italy, Portugal

High sovereign debt

(deficit and/or debt to GDP)

eg Italy, Greece, Portugal

TOC

Employment by age and sex

European employment and retirement ages Europe Employment Retirement age effective (official) rates of 55 64 2011 (b) (a)
Japan Sweden Germany Netherlands Denmark US UK Austria Portugal Ireland France Italy Spain 70 (64) 66 (65) 62 (65) 62 (65) 64 (65) 66 (66) 64 (65) 59 (65) 67 (65) 63 (66) 59 (62) 61 (65) 62 (65) 62 (65) 65* 72 60 56 60 60* 57 42 48 50 41 38 45 39

Female employment rate 2011 (c)

60 72 68 70 70 62 65 67 60 55 60 47 52 45

Youth unemployment rate 2011 (d)

8 23 9 8 14 17 21 8 30 29 22 29 46 44

Total score (a + b + c - d)
187 187 181 180 180 171 165 160 145 139 138 117 113 102

TOC

Greece

Note: *2010 figure. Effective retirement age is the average retirement age for males over the period 2004 2009. Official retirement age listed in parenthesis, subject to variations between public and private sector, length of service etc. Youth unemployment is those aged less than 25 years. Source: OECD, Eurostat J.P. Morgan Asset Management.

10

European labour costs

Labour cost indices for Europe Europe
180 Greece, Ireland, Italy, Spain 170 UK US 160 Euro area Germany 150 Euro launch

140

130

120

110

TOC

100 Dez 90

Dez 92

Dez 94

Dez 96

Dez 98

Dez 00

Dez 02

Dez 04

Dez 06

Dez 08

Dez 10

Note: Greece, Ireland, Italy, and Spain labour cost index is average of each countrys index. Source: OECD, J.P. Morgan Asset Management.

11

Government deficits by country

% of GDP Europe
10 US India 8 Spain UK Ireland Greece* Japan

6 Deficit (% of GDP)

France Italy Portugal

Mexico 2011 (estimated) Brazil

2 China Maastricht treaty criteria Germany

2014 (estimated)

-2

20

40

60

80

100

120

140

160

TOC

180 220

200 240

Gross debt (% of GDP)

*The EU/IMF bailout package for Greece targets a debt to GDP ratio of 120% by 2020. Note: The debate on the euro crisis considers countrys gross debt levels. Source: IMF World Economic Outlook, J.P. Morgan Asset Management.

12

Interbank lending rates and peripheral exposure

Interbank short-term lending rates Europe
500
bps

Bank peripheral debt exposure

Location of banks France UK Eurozone US Q4 2010 Q4 2011

400

Switzerland

Germany

Q4 2010 Q4 2011

300

Country of issuance UK 200

Q4 2010
Italy Q4 2011 Spain Portugal

100 Q4 2010 US Q4 2011

Ireland Greece

TOC

0 Dez 07

Dez 08

Dez 09

Dez 10

Dez 11

100

200

300

400

500

600 700 USD bn

13

Note: For the eurozone, UK, and Switzerland the spread is the difference between the three month Libor/Euribor and the overnight index swap rate. The US is the spread between 3 month Libor and the 3 month Treasury bill. The spread can be interpreted as an indicator of the willingness of banks to lend to each other. Source: Bloomberg, J.P. Morgan Asset Management.

Last data December 2011. Source: BIS, J.P. Morgan Asset Management.

Eurozone crisis impact on markets

Ten-year bond yields Europe
8 % 7 Spain 6 Italy
900 3,0 850 950 3,5

US Treasuries and global equities

1.000 4,0

% Ten-year US Treasury yield (rhs)

4
2,5 800

EFSF
2,0

750

UK Germany Denmark
Dez 09 Dez 10 Dez 11

MSCI World Index (lhs)

TOC

1 Dez 08

700 Dec 09

Jun 10

Dec 10

Jun 11

Dec 11

1,5 Jun 12

Note: EFSF is the European Financial Stability Facility. The EFSF bond shown is the EUR 5 billion ten-year 3,375% note, issued in July 2011, to raise funds towards the EU/IMF EUR 78 billion bailout for Portugal. Source: J.P. Morgan Asset Management.

Note: MSCI World Index price return in local currency. Source: J.P. Morgan Asset Management.

14

Eurozone countries economic divergences

Manufacturing PMI Europe Unemployment

65

25

% 60

Spain Italy

France
55
20

Germany

50

45

15

40 Germany 35 Italy France 30 Spain

5 Dec 96 Dec 98 Dec 00 Dec 02 Dec 04 Dec 06 Dec 08 Dec 10 10

TOC

25 Dez 06

Dez 07

Dez 08

Dez 09

Dez 10

Dez 11

Latest data May 2012. Source: Markit, Eurostat, J.P. Morgan Asset Management.

15

WORLD

World stock market returns (EUR and local currency) World equity market cumulative returns (EUR) MSCI World Index by sector (EUR) Risk appetite and volatility Income: Dividend growth (EUR) Income: Reinvested dividends Income: Equities and bonds World economic data World economic momentum Credit and money supply growth

17 18 19 20 21 22 23 24 25 26

16

TOC

World stock market returns (EUR and local currency)

2004 World
EUR
16,9% MSCI EM 16,4%

2005
55,0% MSCI EM 35,8%

2006
20,2% MSCI Europe 19,6% 19,6% MSCI Asia ex Japan 28,6%

2007
26,7% MSCI Asia ex Japan 38,0%

2008
-23,0% Japan TOPIX -40,6%

2009
73,4% MSCI EM 62,8%

2010
28,3% MSCI Asia ex Japan 15,6%

2011
5,5% US S&P 500 2,1%

YTD
12,0% US S&P 500 9,5%

Q2 2012
2,0% US S&P 500 -2,8%

Local EUR

Local EUR

12,6% MSCI Europe 12,7% 9,2% MSCI Asia ex Japan 11,9% 8,1% Japan TOPIX 11,3%

45,3% Japan TOPIX 45,2% 41,9% MSCI Asia ex Japan 24,1% 26,7% MSCI Europe 25,5%

26,1% MSCI EM 33,5%

-33,7% US S&P 500 -37,0%

67,2% MSCI Asia ex Japan 67,2% 32,5% MSCI Europe 28,6%

27,5% MSCI EM 14,4%

-7,5% MSCI Europe -8,8% -9,6% Japan TOPIX -17,0% -14,3% MSCI Asia ex Japan -14,6%

8,5% MSCI Asia ex Japan 6,1%

-2,1% MSCI Asia ex Japan -5,3% -2,3% Japan TOPIX -9,7% -2,5% MSCI Europe -3,6%

Local EUR

18,6% MSCI EM 28,9%

3,2% MSCI Europe 6,5%

-43,3% MSCI Europe -38,5% -49,8% MSCI Asia ex Japan -47,7%

23,9% Japan TOPIX 1,0%

6,5% MSCI EM 5,1%

3,6% -4,9% US S&P 500 US S&P 500 15,8% 5,5%

22,5% 23,1% US S&P 500 US S&P 500 26,5% 15,1%

Local EUR

5,6% Japan TOPIX 7,0% 5,4% MSCI Europe 3,9%

Local

2,9% 20,9% US S&P 500 US S&P 500 10,9% 4,9%

-8,7% Japan TOPIX 3,0%

-14,5% Japan TOPIX -11,1%

-50,8% MSCI EM -45,7%

1,5% Japan TOPIX 7,6%

11,7% MSCI Europe 7,5%

-15,4% MSCI EM -12,5%

-4,3% MSCI EM -5,1%

TOC
Note: Total return indices. Source: J.P. Morgan Asset Management.

17

World equity market cumulative returns (EUR)

Five years to June 2012, log scale
MSCI Emerging Markets 4,0% p.a.
150

S&P 500 2,2% p.a. MSCI Europe ex UK -4,9% p.a.

FTSE 100 -1,6% p.a.

150

World

TOPIX Japan -4,2% p.a.

100

100

50 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

50

20 years to June 2012, log scale

800 MSCI Emerging Markets 8,2% p.a. FTSE 100 6,5% p.a. 400 MSCI Europe ex UK 7,8% p.a. TOPIX Japan -0,9% p.a. 400 S&P 500 7,8% p.a. 800

200

200 100

100

TOC

Dec 91

Dec 93

Dec 95

Dec 97

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

Note: Total return indices. On a log scale the distance between tick marks shows the same percentage change. Source: J.P. Morgan Asset Management.

18

MSCI World Index by sector (EUR)

World

Energy MSCI World weight % Q2 2012 return % YTD return %

10,6

Materials Industrials
6,8 10,9

Cons disc
10,8

Cons staples
11,0

Health
10,7

Financials
18,6

Info tech
12,6

Telecom services
4,2

Utilities
3,8

MSCI World
100,0

-2,9

-6,1

-1,7

-1,3

5,7

6,3

-2,5

-3,4

10,1

5,7

-0,2

-1,8

0,9

7,4

13,4

10,1

11,8

12,5

13,1

8,4

4,9

8,7

Dividend yield %
Historic P/E

3,1

2,7

2,8

2,0

3,0

2,7

3,5

1,3

5,8

4,7

2,9

9,5

11,9

14,0

16,2

17,4

15,8

12,0

14,9

15,9

21,4

13,7

Forward P/E

9,3

9,7

11,1

12,1

14,5

11,8

9,3

11,4

11,9

14,9

11,0

TOC
Note: Total return indices. Source: I/B/E/S, J.P. Morgan Asset Management.

19

Risk appetite and volatility

Credit Suisse Global Risk Appetite Indicator
6 Number of standard deviations Euphoria

World

4 2 0 -2 -4 -6 Dez 95 Distress 30 June 2012 -0,4

Dez 97

Dez 99

Dez 01

Dez 03

Dez 05

Dez 07

Dez 09

Dez 11

VIX and VDAX

100

VIX
80

VDAX Russian crisis Asian crisis Tech bubble Cheap money Gulf war 2

Credit crunch

Volatility

60 40 20

Eurozone debt crisis 21,5 17,1 30 June 2012

Dec 07 Dec 09 Dec 11

TOC

Dec 95

Dec 97

Dec 99

Dec 01

Dec 03

Dec 05

(Top) Note: The Credit Suisse Global Risk Appetite Indicator compares aggregated risk-adjusted returns across 64 markets (both equity and fixed income). It compares six month excess returns over cash with 12 month volatility for each asset. Source: Credit Suisse, J.P. Morgan Asset Management. (Bottom) Note: VDAX is the name given to the Deutsche Brse equivalent of the VIX, based on the DAX. Source: Bloomberg, Chicago Board Options Exchange, Deutsche Brse, J.P. Morgan Asset Management.

20

Income: Dividend growth (EUR)

MSCI AC World Index dividend growth World
250

Asia ex Japan Japan Europe ex UK US UK

200

Annualised change 6,8% 5,7% 5,1% 2,5% 1,0%

Payout ratio 31,2% 32.8% 46.2% 28,5% 42,9%

150

100

TOC

Dec 99

Dec 00

Dec 01

Dec 02

Dec 03

Dec 04

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Note: Regular dividends only. Source: J.P. Morgan Asset Management.

21

Income: Reinvested dividends

Total returns: Dividends and capital appreciation
Average annualised returns 25

Capital appreciation Dividends

World

20 15

10
5 0 -5 -10

13,9% 3,0% 4,7% 5,4% -5,3% 6,0%

13,6% 5,1% 4,4% 3,3% 0,2% 4,8%

16,0% 12,9% 4,2% 2,6% 5,2%

3,0% -2,9%

4,6%

1926 - 1929

1930s

1940s

1950s

1960s

1970s

1980s

1990s

2000s

1926 - 2011

REIT dividend yields

7
% 6,0% 5,9%

Equity dividend yields

7 Ten-year government bond yield
5,0% 4,2% 4,1% 3,5% %

5,7% 5,2%

6
5,1%

Ten-year government bond yield

4,3%

5
4 3 2 1

5 4 3 2 1 Sing. France Austlia Canada Japan Global 0 UK US

3,9%

3,7% 3,1% 2,9% 2,6% 2,2%

TOC

Austlia France

UK

Switz. Canada ACWI

Japan

US

(Top chart) Note: Total return index is S&P 500 until 1960s then the MSCI Europe Index. Source: Standard & Poors, Ibbotson, J.P. Morgan Asset Management. (Bottom left) Note: Yields shown are that of the appropriate FTSE NARIET REIT index, which excludes property development companies. Source: NARIET, J.P. Morgan Asset Management. (Bottom right) Note: Yields shown are than of the appropriate MSCI index. Source: MSCI, J.P. Morgan Asset Management.

22

Income: Equities and bonds

Sources of income World
Yields 9 % 8 7 6 5,4% 5 4,1% 4 3,3% 3 Eurozone CPI Inflation (May 2012) 1,6% 1,0% 1 0 Cash Bunds 9,1 European corporate 4,0 MSCI Europe EM debt 7,9 High yield 4,8 7,8%

Dividend yields compared to the government bond yields

5
Ratio

4 3 2 1

Europe Average 1,5x

0 Dez 05 4
Ratio

Dez 06

Dez 07

Dez 08

Dez 09

Dez 10

Dez 11

3 2 Average 1,3x

UK

1
0 Dez 05 4
Ratio

Dez 06

Dez 07

Dez 08

Dez 09

Dez 10

Dez 11

3 2 1 0 Dez 05 Average 1,6x

US

TOC

Duration

Dez 06

Dez 07

Dez 08

Dez 09

Dez 10

Dez 11

23

(Left) Note: European corporate is BarCap European Aggregate Credit Corporate Index, emerging market debt is the EMBI+, high yield is the BofA/Merrill Lynch High Yield Master II, MSCI Europe is the dividend yield. Inflation is year on year change in the eurozone CPI. Source: Tullett Prebon, Merrill Lynch, J.P. Morgan Asset Management. (Right) Note: Europe uses the MSCI Europe Index, US the S&P 500, and UK the FTSE 100. The government bond yield is the generic ten-year bond yield for that country. Source: J.P. Morgan Asset Management.

World economic data

G7 and selected countries World GDP estimate y/y% 2012 2013
Switzerland Japan China Netherlands Canada Germany Sweden United States Brazil United Kingdom France Italy India Greece 0,5 2,5 8,2 -0,8 2,1 0,9 0,6 2,2 2,8 0,2 0,3 -1,8 6,0 -5,2 -1,7 1,5 1,5 8,4 1,2 2,2 1,4 2,1 2,4 4,5 1,7 0,9 0,0 6,5 -0,9 -0,5

Inflation y/y% current (a)

-1,0 0,2 3,0 2,1 1,2 1,7 1,0 1,7 5,0 2,8 2,0 3,3 7,6 1,4 1,9

Unemployment % current (b)

3,0 4,4 4,1 6,2 7,3 6,8 8,1 8,2 5,8 8,2 9,6 9,8 9,8 22,6 24,4

Policy rate current

0,00 0,10 6,31 1,00 1,00 1,00 1,50 0,25 8,50 0,50 1,00 1,00 7,00 1,00 1,00

Misery index (a+b)

2,0 4,6 7,1 8,3 8,5 8,5 9,1 9,9 10,8 11,0 11,6 13,1 17,4 24,0 26,3

TOC

Spain

Note: The Misery Index was devised by US economist Arthur Okun to illustrate the combination of unemployment and inflation. A higher number indicates a worse economic climate, and vice versa. India GDP estimates from J.P Morgan. Source: Bloomberg, national statistical agencies, CIA, J.P. Morgan Asset Management.

24

World economic momentum

Economic surprise indices, US, eurozone and UK World Economic surprise indices, China and Latam

150

Eurozone US

150

Latin America China

100

UK
100

50

50
0

0
-50

-50
-100

-150

-100

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

TOC
Note: The Citigroup Economic Surprise Index is defined as the weighted historical standard deviations of data surprises (actual releases versus survey median). Source: Citigroup, J.P. Morgan Asset Management.

25

Credit and money supply growth

Broad money supply growth (y/y) World
12 % 8 4 US (M2)
10

Real credit growth (y/y)

%
8

UK US Eurozone

0 Dez 05
14 % 10 6 2

Dez 06

Dez 07

Dez 08

Dez 09

Dez 10

Dez 11

Eurozone (M3)

-2 Dez 05 18 % 14 10 6 2

Dez 06

Dez 07

Dez 08

Dez 09

Dez 10

Dez 11
-2

-4

UK (M4 adjusted)

-6 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

TOC

-2 Dez 05

Dez 06

Dez 07

Dez 08

Dez 09

Dez 10

Dez 11
Latest data is April 2012 for the US, and May 2012 for Europe and UK. Note: Year on year growth in outstanding loans, excluding mortgages less core inflation. Source: Federal Reserve, Bank of England, ECB, J.P. Morgan Asset Management.

26

Latest data is May 2012 for the US, and April 2012 for the UK and eurozone. Note: UK broad money supply is M4 until July 2010 then M4 adjusted (M4 excluding other intermediate financial corporations) onwards. Source: Federal Reserve, OECD, Bank of England, J.P. Morgan Asset Management.

UNITED STATES

US S&P 500 Index at inflection points (USD) US equity valuations US returns by style (USD) Market returns after consecutive down years S&P 500 Index (USD) US corporate balance sheet US GDP and inflation Contribution to US GDP Federal finances

28 29 30 31 32 33 34 35

27

TOC

US S&P 500 Index at inflection points (USD)

S&P 500 Index United States
1.600

27 March 2000 1.524

9 October 2007 1.565

Earnings index
160

30 June 2012 1.362 18 February 2011 1.343

140

1.400

-49%
1.200

+101%

-57%

+98%
120

1.000

100

800

80

9 October 2002 777

600

Earnings 9 March 2009 677

60

TOC

Dec 99

Dec 00

Dec 01

Dec 02

Dec 03

Dec 04

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Note: Earnings index is derived from the forward P/E. Source: I/B/E/S, J.P. Morgan Asset Management.

28

US equity valuations
Forward P/E ratio S&P 500 Index United States
25

31 January 2000 24,4

20

One year earnings growth forecast: 12%

Average since 1989 15,8

15

30 June 2012 11,8

10 Dec 89 Dec 91 Dec 93 Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

S&P 500 Index dividend yield and ten-year US Treasury yield

10 %

Ten-year US Treasury yield

8 6 4

Dividend yield
2

30 June 2012 2,1% 1,7%

TOC

Dec 89

Dec 91

Dec 93

Dec 95

Dec 97

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

Source: I/B/E/S, Tullett Prebon Information, J.P. Morgan Asset Management.

29

US returns by style (USD)

United States

2004
Russell 2000 18,3%

2005
S&P 400 Mid Cap 12,6%

2006
S&P 500 Value 20,8%

2007
Nasdaq 10,7%

2008
Russell 2000 -33,8%

2009
Nasdaq 45,3%

2010
Russell 2000 26,9%

2011
S&P 500 Growth 4,7%

YTD
Nasdaq 13,3%

Q2 2012
S&P 500 Growth -2,0%

S&P 400 Mid Cap 16,5%

S&P 500 Value 5,8%

Russell 2000 18,4%

S&P 500 Growth 9,1%

S&P 500 Growth -34,9%

S&P 400 Mid Cap 37,4%

S&P 400 Mid Cap 26,6%

S&P 500 2,1%

S&P 500 Growth 10,0%

S&P 500 -2,8%

S&P 500 Value 15,7%

S&P 500 4,9%

S&P 500 15,8%

S&P 400 Mid Cap 8,0%

S&P 400 Mid Cap -36,2%

S&P 500 Growth 31,6%

Nasdaq 18,0%

S&P 500 Value -0,5%

S&P 500 9,5%

Russell 2000 -3,5%

S&P 500 10,9%

Russell 2000 4,6%

S&P 500 Growth 11,0%

S&P 500 5,5%

S&P 500 -37,0%

Russell 2000 27,2%

S&P 500 Value 15,1%

Nasdaq -0,8%

S&P 500 Value 8,9%

S&P 500 Value -3,6%

Nasdaq 9,1%

S&P 500 Growth 4,0%

Nasdaq 10,4%

S&P 500 Value 2,0%

S&P 500 Value -39,2%

S&P 500 26,5%

S&P 500 15,1%

S&P 400 Mid Cap -1,7%

Russell 2000 8,5%

Nasdaq -4,8%

S&P 500 Growth 6,1%

Nasdaq 2,1%

S&P 400 Mid Cap 10,3%

Russell 2000 -1,6%

Nasdaq -40,5%

S&P 500 Value 21,2%

S&P 500 Growth 15,1%

Russell 2000 -4,2%

S&P 400 Mid Cap 7,9%

S&P 400 Mid Cap -4,9%

TOC
Note: Total return indices. Source: J.P. Morgan Asset Management.

30

Market returns after consecutive down years S&P 500 Index (USD)

United States

1933-1936 +190% 09/10/02 08/10/07 +121% 1975-1976 +66%

1942-1945 +122%

09/03/09 18/02/11 +107%

-17% 1940-1941 -65% 1929-1932

-38% 1973-1974

-47%

-55% 09/10/07 08/03/09

24/03/00 08/10/02

Great Depression

World War II

Oil crisis

Bubble burst

Credit crunch

TOC
Note: Total returns in USD. Source: Dimson, Marsh and Staunton ABN AMRO/LBS Global Investment Returns Yearbook 2008, J.P. Morgan Asset Management.

31

US corporate balance sheet

Cash balances United States
S&P 500 ex financials
1.600 12

Sales and profit margins

S&P 500 ex financials

USD bn
1.400

Cash and equivalents (lhs) % % total assets (rhs)

11

500 Index 450 400 350

Sales (lhs) Margin (rhs)

10 %

1.200

10

1.000

8 300
800 8

250
600 7

7 200

400

150
200 5

100 50 2000 5 2002 2004 2006 2008 2010 2012

4 2000 2002 2004 2006 2008 2010

TOC

Source: Computstat, J.P. Morgan Asset Management.

Note: Sales indexed to Q1 2000. Latest data Q4 2011. Source: Worldscope, J.P. Morgan Asset Management.

32

US GDP and inflation

Real GDP United States
change year on year
6

Inflation
Forecast GDP 2012: 2,2% 2013: 2,4% change year on year Forecast headline CPI 2012: 2,2% 2013: 2,0%

%
4

% First quarter 2012 2,0%

4

Average 2,1%
2

USD 685 bn of output lost

Headline CPI May 2012 1,7%

-2

USD 850 bn of output recovered

0

Core CPI May 2012 2,3%

-4

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

TOC
Source: BEA, Bloomberg consensus forecasts, J.P. Morgan Asset Management.

33

Contribution to US GDP
First quarter 2012 United States
change quarter on quarter annualised 5 % 4 3 2 1 0 Residential investment Business investment Household Total 1,9%
10.000

Components of GDP
First quarter nominal GDP, billions USD 2,3% Residential investment 10,9% Business investment
14.000

16.000

Net exports

Government Inventories

12.000

19,5% Government

Fourth quarter 2011

change quarter on quarter annualised 5 % 4 Household 3 2 1 Total Inventories 3,0% Residential investment Net exports

8.000

71,2% Household
6.000

Government
4.000

Business investment

2.000

- 3,9% Net exports

-2.000

TOC

0
Source: BEA, J.P. Morgan Asset Management.

34

Federal finances
Federal budget surplus/deficit United States
% of GDP, 1990 - 2022 4
%

US Treasuries ownership
Forecast 100 % 90 US Fed USD 1.667 bn* 17%

2
0 -2 -4 -6 -8 -10 -12 1990 1994 1998 2002 2006 2010
2011 actual
2012 estimate 2013 projection Baseline -8,7% -7,6% -3,8% Alt. -8,7% -7,8% -6,6%

80 CBO Baseline Alternative 2014 2018 2022 60 50 Forecast Other countries USD 2.479 bn 26% 40 30 20 10 China USD 1.146 bn 12% 0 Mrz 04 UK OPEC 3% 2% Japan USD 1.066 bn 11% 70 Other US domestic USD 2.779bn** 30%

Federal debt
% of GDP, 1990 - 2022 100 % 80 60 2022: 61,3% 40 20 1990 1994 1998 2002 2006 2010 2014 2018 2022 CBO Baseline Alternative 2011 actual: 67,7%

2022: 80,0%

TOC

Mrz 06

Mrz 08

Mrz 10

Mrz 12

35

(Left top and bottom) Note: The Federal Budget for 2012 is based on the March 2012 baseline scenario from the CBO. The alternative scenario is based on the CBOs alternative scenario for spending and President Obamas budget for revenues (assuming avoidance of the fiscal cliff). Years shown are fiscal years (Oct. 1 through Sep. 30). Top chart on the left displays federal surplus/deficit (revenues outlays). (Bottom left) US convention is to use net debt levels rather the gross debt. Source: US Treasury, BEA, CBO, J.P. Morgan Asset Management. (Right) *58% of assets on the Feds balance sheet. **Other includes US deposit institutions, households, state and local government etc. Data as at April 2012. Source: US Treasury, J.P. Morgan Asset Management.

JAPAN

Japan TOPIX Index at inflection points (JPY)

37

Japan equity valuations

Japan GDP and inflation

38
39

36

TOC

Japan TOPIX Index at inflection points (JPY)

TOPIX Index
2.000

Earnings index
26 February 2007 1.817
200

Japan

1.800

180

1.600

160

1.400

140

+135%
1.200

-60%

30 June 2012 770 21 February 2011 975

120

1.000

100

800

80

600

28 April 2003 773

+35% 13 March 2009 724 Earnings

40 60

400

TOC

Dec 99

Dec 00

Dec 01

Dec 02

Dec 03

Dec 04

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Note: Earnings index is derived from the forward P/E. Source: I/B/E/S, J.P. Morgan Asset Management.

37

Japan equity valuations

Forward P/E ratio Japan, Topix Index
80

Japan

31 March 1994 72,7

60

One year earnings growth forecast: 16% Average since 1989 30,2 30 June 2012 10,7

40

20

Dec 89

Dec 91

Dec 93

Dec 95

Dec 97

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

MSCI Japan Index dividend yield and ten-year JGB yield

10 % 8 6 4 2

Ten-year JGB yield

30 June 2012 2,6% Dividend yield 0,8%

Dec 91 Dec 93 Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

TOC

Dec 89

Note: Earnings growth forecast excludes negative earnings. Source: I/B/E/S, Tullett Prebon Information, J.P. Morgan Asset Management.

38

Japan GDP and inflation

Real GDP
change year on year

Inflation
change year on year
3

Japan

Forecast headline CPI 2012: 0,1% 2013: 0,1%

%
4

First quarter 2012 2,7% Average 0,8%

%
2

Headline CPI May 2012 0,2%

-2

-4
-1

-6

-8

Forecast GDP 2012: 2,5% 2013: 1,5%

-2

Core CPI May 2012 -0,6%

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

TOC
Source: Ministry of Internal Affairs and Communications, Economic & Social Research Institute, Bloomberg consensus forecasts, J.P. Morgan Asset Management.

39

EMERGING MARKETS

MSCI Asia ex Japan Index and emerging market valuations

41

Emerging market returns (EUR and local currency)

Emerging markets GDP growth and inflation China: Cyclical indicators

42
43 44

China: Monetary policy and housing

45

40

TOC

MSCI Asia ex Japan Index at inflection points (local)

Emerging Markets MSCI Asia ex Japan Index
800

Earnings index
1 November 2007 750 30 June 2012 560 21 April 2011 664
80

700

-60%

70

600

60

+250%
500

+122%

50

400

40

300

30

20 November 2008 299

200

Earnings 12 May 2003 218

20

TOC

Dec 01

Dec 02

Dec 03

Dec 04

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Note: Earnings index is derived from the forward P/E. Source: I/B/E/S, J.P. Morgan Asset Management.

41

Emerging market returns (EUR and local currency)

Emerging Markets 2004 EUR Local EUR Local EUR
29,6% EM Latin America 32,2% 29,3% EM EMEA 24,5%

2005
74,2% EM Europe 59,2% 73,3% EM Latin America 38,0% 59,9% EM EMEA 50,4% 55,0% Emerging Markets 35,8% 46,9% EM Asia 28,5%

2006
28,3% EM Latin America 37,6% 22,2% EM Europe 32,8%

2007
35,9% EM Latin America 35,6% 27,7% EM Asia 39,1% 26,1% Emerging Markets 33,5% 17,6% EM Europe 22,3%

2008
-37,2% World -38,3% -48,8% EM Latin America -37,7% -50,3% EM Asia -47,1% -50,8% Emerging Markets -45,7% -53,3% EM EMEA -48,6%

2009
97,8% EM Latin America 63,2% 80,4% EM Europe 73,6% 73,4% Emerging Markets 62,8% 68,8% EM Asia 68,1%

2010
32,4% EM EMEA 19,2%

2011
-1,8% World -5,0%

YTD
9,6% EM Europe 6,4%

Q2 2012
-0,2% World -4,0%

27,6% EM Asia 14,9% 27,5% Emerging Markets 14,4% 25,2% EM Europe 18,9% 22,9% EM Latin America 9,2% 20,1% World 10,6%

-14,4% EM Asia -14,2% -15,4% Emerging Markets -12,5% -16,4% EM Latin America -9,8% -17,5% EM EMEA -9,1%

8,9% EM EMEA 6,6%

-2,7% EM Asia -5,5%

Local
EUR Local EUR

26,6% EM Europe 25,8% 16,9% Emerging Markets 16,4% 7,0% EM Asia 8,0%

19,2% EM Asia 27,7% 18,6% Emerging Markets 28,9% 11,1% EM EMEA 25,8%

8,7% World 6,8%

-3,7% EM EMEA -2,2% -4,3% Emerging Markets -5,1% -5,8% EM Europe -3,9% -8,8% EM Latin America -6,3%

7,6% EM Asia 5,4% 6,5% Emerging Markets 5,1% 1,9% EM Latin America 3,4%

Local
EUR
TOC

16,1% EM EMEA 21,9%

62,9% EM EMEA 50,3%

Local

6,9% World 11,8%

26,8% World 16,3%

7,9% World 16,1%

-1,2% World 5,2%

-66,3% EM Europe -64,0%

26,7% World 26,5%

-20,8% EM Europe -16,4%

Note: Total return MSCI indices. EM EMEA is EM Europe plus Egypt, Morocco and South Africa. World is MSCI Developed Market (DM) World Index. Source: J.P. Morgan Asset Management.

42

Emerging markets GDP growth and inflation

Emerging Markets Brazil
GDP % 15
12 9 6 3 0 -3 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

India
Inflation % 18
15 12

GDP % 15 12 9 6 Average 7,3%

Inflation % 18 15 12 9 6

Average 3,6%

9 6 3 0 -3

3 0 -3 Dez 99

3 0 -3 Dez 01 Dez 03 Dez 05 Dez 07 Dez 09 Dez 11

China
GDP % 15
12 9 6 3 0 -3

Russia
Inflation % 18
Average 9,6%
15 12 9 6 3 0 -3 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11 6 3 0 -3 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

GDP % 15
12 9

Inflation % 18
15 12

Average 5,4%

9 6 3 0 -3

TOC

Dec 99

Note: Real GDP growth and inflation are year on year change. Source: (top left) IBGE, (top right) India Central Statistics Organisation, Press Information Bureau of India, (bottom left) National Bureau of Statistics, (bottom right) Federal Service of State Statistics, J.P. Morgan Asset Management.

43

China: Cyclical indicators

Emerging Markets Manufacturing PMIs
Index level, reading above 50 indicates expansion

Auto sales
Year-on-year growth of 12-month rolling sum 70 60 50 40 30 20 10 0 May 2012 50,4 -10 Dez 99 Dez 01 Dez 03 Dez 05 Dez 07 Dez 09 Dez 11

58

HSBC Mfg. PMI

56

May 2012 1,5%

54

52 NBS Mfg. PMI

Share of global nominal consumption

40 % 35 30

50

48 June 2012 48,2

25

20

US Consumption % of global EM Consumption % of global

TOC

46 Mai 09

Nov 09

Mai 10

Nov 10

Mai 11

Nov 11

Mai 12

15 1990

1994

1998

2002

2006

2010

(Left) Source: National Bureau of Statistics China, Markit, J.P. Morgan Asset Management. (Top right) Source: China Association of Automobile Manufacturers, J.P. Morgan Asset Management. (Bottom right) Source: J.P. Morgan Global Economics Research, J.P. Morgan Asset Management.

44

China: Monetary policy and housing

Emerging Markets Home prices
Indexed to 100 in January 2007 Jan 2012 271,1

Reserve requirement ratio

Minimum reserves requirement
24

280
230 180 130 80 2007 Beijing/Shanghai average NBS 70-city average Jan 2012 141,4

%
22

Large depository institutions

20

June 2012 20,0%

One-year working capital rate

18

2008

2009

2010

2011

2012

16

Chinese currency
Renminbi per USD
6.0 6.5 7.0 7.5 8.0

14

12

May 2010 June 2012: +7,0% June 2005 July 2008: +17,5% May 2012 6,35
10

June 2012 6,31%

TOC

8.5 Dec 02

Dec 04

Dec 06

Dec 08

Dec 10

4 Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

Source: (Top left) National Bureau of Statistics China, J.P. Morgan Asset Management. (Right) The Peoples Bank of China, J.P. Morgan Asset Management. (Bottom left) J.P. Morgan Asset Management.

45

FIXED INCOME

Fixed income returns International yield curves ECB and Bank of England policy and real rates US Fed and Bank of Japan policy and real rates Corporate bonds Emerging market sovereign debt and index weightings

47 48 49 50 51 52

46

TOC

Fixed income returns

Fixed income sector returns Fixed Income 2009
Euro Local Euro Local
52,6% US HY 57,5% 22,8% EM debt 25,9% 16,0% FI alloc. 17,5% 15,7% Euro corp 15,7% 8,1% IL 8,1% 4,3% Euro govt 4,3% 3,6% Global agg 6,9%

Government fixed income returns 2011

12,5% EM debt 9,2% 9,2% Global agg 5,6% 7,9% US HY 4,4% 5,0% FI alloc. 3,6% 3,4% Euro govt 3,4% 1,5% Euro corp 1,5% -2,3% IL -2,3%

2010
23,2% US HY 15,2% 18,8% EM debt 11,8% 12,9% Global agg 5,5% 8,4% FI alloc. 5,4% 4,7% Euro corp 4,7% 1,1% Euro govt 1,1% -0,4% IL -0,4%

YTD
9,5% US HY 7,1% 9,2% EM debt 6,9% 5,9% FI alloc. 5,0% 5,7% Euro corp 5,7% 5,0% IL 5,0% 4,0% Euro govt 4,0% 3,8% Global agg 1,5%

Q2 2012
7,7% EM debt 2,8% 6,8% US HY 1,8% 5,6% Global agg 0,6% 2,6% FI alloc. 0,6% 0,2% Euro govt 0,2% 0,0% Euro corp 0,0% -1,2% IL -1,2%

2009
Euro Local Euro Local Euro Local Euro Local Euro Local Euro Local
8,3% Italy 8,3%

2010
25,8% Japan 2,5%

2011
19,9% UK Gilts 16,8%

YTD
8,9% Italy 8,9%

Q2 2012
9,4% Japan 1,1%

Euro
Local Euro Local Euro

7,8% UK Gilts -1,0%

13,8% Global 4,2%

13,6% US 9,9%

5,1% UK Gilts 1,8%

8,1% US 3,0%

1,8% Germany 1,8%

13,5% US 6,1%

11,4% Japan 2,3%

4,0% US 1,7%

7,1% UK Gilts 3,9%

-1,3% Global 0,7%

11,5% UK Gilts 7,5%

10,8% Global 6,3%

2,7% Global 2,1%

6,3% Global 1,8%

Local
Euro Local Euro Local

-4,8% Japan 0,9%

6,4% Germany 6,4%

9,8% Germany 9,8%

1,9% Germany 1,9%

1,6% Germany 1,6%

-6,8% US -3,8%

-0,6% Italy -0,6%

-5,9% Italy -5,9%

-0,0% Japan 1,4%

-2,2% Italy -2,2%

TOC

47

(Left) Note: IL is Barclays Euro Govt All Markets Inflation-linked Index, Euro govt is Barclays Euro Aggregate Government Treasury Index, EM debt is the EMBI+, US HY is the Merrill Lynch High Yield Master II, Euro corp is the Barclays Euro Aggregate Credit Corporate Index, Global agg is the Barclays Global Aggregate Index. The F I allocation assumes the following weights; 15% in index linked, 35% in euro government bonds 15% in EM debt, 15% in high yield, 10% in euro corporates, and 10% in global bonds. Source: Barclays Capital, Bank of America Merrill Lynch, J.P. Morgan Asset Management. (Right) Source: JPMorgan Global Bond indices, J.P. Morgan Asset Management.

International yield curves

Ten-year yields Fixed Income
4

UK US Germany Japan

%
3

1
Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12

Government yield curves

% 3 UK 1,73% Germany 1,59% 1 Japan 0,84% 1 % 3

US 1,65%

TOC

0 3M 3 2Y 5Y 53 103 10Y 153

Maturity

0 203 253 303 30Y 353

Source: Tullet Prebon Information, Bloomberg, J.P. Morgan Asset Management.

48

ECB and Bank of England policy and real rates

European Central Bank Fixed Income
Forecast Repo rate 2012: 0,75% 2013: 0,75%

Bank of England
Forecast Base rate 2012: 0,50% 2013: 0,50%

%
6

Repo rate 30 June 2012 1,00%

Base rate 30 June 2012 0,50%

-2

Real interest rate May 2012 -0,58%

-2

Real interest rate May 2012 -1,71%

TOC

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 11

Note: Real interest rates are calculated using core CPI and repo rate. Source: ECB, Bloomberg consensus forecasts, J.P. Morgan Asset Management.

Note: Real interest rates are calculated using core CPI and base rate. Source: Bank of England, ONS, Bloomberg consensus forecasts, J.P. Morgan Asset Management.

49

US Fed and Bank of Japan policy and real rates

US Federal Reserve Bank Fixed Income
8

Bank of Japan
Forecast Fed Funds 2012: 0,25% 2013: 0,25%
2,0

Forecast Call rate 2012: 0,10% 2013: 0,10%

1,5

1,0
2

Real interest rate May 2012 0,69%

Fed Funds 30 June 2012 0,25%

0,5

-2

Real interest rate May 2012 -2,01%

Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

Call rate 30 June 2012 0,10%

0,0 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

TOC

Dec 99

Note: Real interest rates are calculated using core CPI and Fed Funds rate. Source: US Federal Reserve Bank, Bloomberg consensus forecasts, J.P. Morgan Asset Management.

Note: Real interest rates are calculated using core CPI and call rate. Source: Bank of Japan, Bloomberg consensus forecasts, J.P. Morgan Asset Management.

50

Corporate bonds
Investment grade and high yield bonds Fixed Income
Yield to maturity 24 %

US corporate high yield and default rate

bps over Treasuries
2.400 2.000 1.600

Spread over Treasuries (lhs): 644

Default rate (rhs): 1,1%

% 12
10 8 6
4

20
1.200

US corporate high yield 16

800

400 0 Dec 99 Dec 02 Dec 05 Dec 08 Dec 11

2 0

12

Global high yield by region

US investment grade 7,8% Asia 6% Italy 2% Germany 3% France 3% UK 4% Europe 26% United States 56% Latin America 6% Other 3%

4 Mortgages (MBS)

3,4% 2,5%

Other Europe 14%

Canada 2%

TOC

0 Dez 99

Dez 01

Dez 03

Dez 05

Dez 07

Dez 09

Dez 11
(Top) Source: Merrill Lynch, J.P. Morgan Asset Management. (Bottom) Note: BarCap Global High Yield Index in USD. Figures may not sum due to rounding. Source: BarCap, J.P. Morgan Asset Management.

Note: Investment grade based on Merrill Lynch Investment Grade, mortgages is the Barclays Capital Aggregate US MBS index, and corporate high yield is the Merrill Lynch High Yield Master Index II. Source: Merrill Lynch, BarCap, J.P. Morgan Asset Management.

51

Emerging market sovereign debt and index weightings

US and emerging market sovereign debt yields Fixed Income
Yield to maturity 16 %

EMBI+ weighting (USD denominated)

Africa 3% Indonesia 7% Other Latin America 10% Mexico 14% Latin America 51% Brazil 12%

Philippines 10%
Other Europe 5%

Asia 16%

12

Turkey 13% Emerging market sovereign (USD) Emerging market sovereign (local currency)

Europe 30%

Venezuela 10% Russia 14% Colombia 6%

EM external debt spreads and average credit rating

bps over Treasuries 1500 Ten-year US Treasury 1200 900 600 Fed funds rate 300 Emerging market crises 0 Sep 96 Sep 99 Sep 02 Sep 05 Sep 08 Sep 11 Rating (rhs) EMBI+ (lhs) Credit rating (inverted) CCC+ Developed market crises BB B+

BBBB+ BBB-

TOC

0 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

Note: Emerging Markets Sovereign is the EMBI+. The local currency is the JPMorgan GBI-EM Global. Source: US Federal Reserve, J.P. Morgan Asset Management.

52

(Top) Note: The EMBI+ track total returns on USD denominated debt. Figures may not sum due to rounding. Source: J.P. Morgan Asset Management. (Bottom) Note: EMBI+ is representative of the sovereign debt market. Source: J.P. Morgan Asset Management.

OTHER ASSET CLASSES

Currencies

54

Commodities
Oil, gas and gold Correlation of returns (EUR) Property Cumulative returns on US assets

55
56 57 58 59

53

TOC

Currencies
Other Asset Classes USD trade weighted index
150 140 +1,5sd USD REER 10 year moving average

EUR trade weighted index

130 120 110 100 +1.5sd

EUR REER 10 year moving average

130
120 110 100 90 -1,5sd 90

-1.5sd

80 Dez 80 Dez 84 Dez 88 Dez 92 Dez 96 Dez 00 Dez 04 Dez 08

80 Dez 80 Dez 84 Dez 88 Dez 92 Dez 96 Dez 00 Dez 04 Dez 08

GBP trade weighted index

110 +1,5sd 100 90 80 70 60 -1,5sd

Yen trade weighted index

150 140 130 120 110 100 GBP REER 10 year moving average +1,5sd

JPY REER 10 year moving average

90
80 -1,5sd

TOC

50 Dez 80 Dez 84 Dez 88 Dez 92 Dez 96 Dez 00 Dez 04 Dez 08

70 Dez 80 Dez 84 Dez 88 Dez 92 Dez 96 Dez 00 Dez 04 Dez 08

Note: REER is the real effective exchange rate of a currency against a basket of its main trading partners currencies. REER is rebased to 100 at December 1980 Source: J.P. Morgan Asset Management.

54

Commodities
Other Asset Classes Inflation adjusted commodity indices rebased to 1900 = 100
300 250 200 150 100 50 0 1900 Timber Copper Wheat Cotton 300 250 200 150 100 50 0 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Gold price (log scale)

1600
USD/oz

Commodity indices and Chinese steel production

Metals and agricultural indices

800 400

Inflation adjusted 31 January 1980 USD 1.908

400

Chinese steel production (rhs) Metals (lhs)

70 60 50 40
Chinese steel production (millions metric tons)

300

200
100 50

30 June 2012 USD 1.597

200 30 100 20

Agricultural products (lhs)

Dec 05 Dec 07 Dec 09 Dec 11

10

TOC

25 Dez 69

Dez 79

Dez 89

Dez 99

Dez 09

Dec 03

(Top) Note: Pfaffenzeller until 2003, IMF commodity prices indices thereafter. Nominal prices adjusted using US consumer price index. Source: Pfaffenzeller, IMF, J.P. Morgan Asset Management. (Bottom left) Note: On a log scale the distance between tick marks shows the same percentage change. Source: Bloomberg, J.P. Morgan Asset Management. (Bottom right) Source: Goldman Sachs, National Bureau of Statistics of China, J.P. Morgan Asset Management.

55

Oil and gas supply

Other Asset Classes Crude oil and Henry Hub LNG prices
USD/bbl
160

Middle east energy production & chokepoints

Percent of global liquid fuel production, 2010
USD/MMBtu
14

140

Brent 30 June 2012 12 USD 93

Suez Canal 2,1%

Syria 0,5% Iraq 2,8%

Kuwait 2,9%

Iran 4,9%

120 10 100 8 80

Libya 2,1%

Egypt 0,8%

Saudi Arabia 11,7% Strait of Hormuz 18,0% UAE 3,3%

60

WTI 6 30 June 2012 USD 85

4

Sudan 0,6%

40

20

Bab el-Mandeb 3,7% Major producers

Percent of global total, 2010

TOC

0 Dec 99

Natural gas 30 June 2012 USD 2,7

Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

Major consumers Percent of global total, 2010 22% India 4% 3% 3%

Saudi Arabia 12% China

0

5% US

Russia US

12% Iran

5% China 11% Russia 5% Saudi Arabia

11% Canada 4% Japan

Note: WTI is the West Texas Intermediate the US benchmark for oil prices, Brent is the European crude oil benchmark. Henry Hub is the standard US domestic benchmark. Source: J.P. Morgan Asset Management.

Note: Global liquid fuel production excludes liquefied natural gas (LNG). Source: EIA, J.P. Morgan Asset Management.

56

Correlation of returns (EUR)

Other Asset Classes

MSCI Europe MSCI Europe MSCI Japan S&P 500 1,00

MSCI Japan

S&P 500

MSCI EM

MSCI Asia ex Japan

MSCI World

Pan Europe bonds -0,18

EM debt

High yield bonds

0,46

0,79

0,79

0,68

0,93

0,47

0,55

1,00

0,47

0,56

0,62

0,59

-0,02

0,17

0,35

1,00

0,68

0,62

0,94

-0,21

0,30

0,41

MSCI EM MSCI Asia ex Japan MSCI World

1,00

0,94

0,84

-0,16

0,57

0,53

1,00

0,77

-0,12

0,44

0,47

1,00

-0.19

0,42

0,53

Pan Europe bonds

EM debt High yield bonds

Correlation of weekly returns over previous ten years

1,00

0,10

-0,03 0,56

1,00

TOC

1,00

Note: Pan Europe bonds is the Citigroup Europe World Government Bond Index (WGBI). Emerging market debt is the JPMorgan EMBI Global. High yield bonds is the JPMorgan Domestic High Yield. Ten year correlation values are calculated for period 12 July 2002 to 22 June 2012. Correlation measures the direction and degree of linear association between two variables. All indices are total return based on weekly return data in euros. Source: Bloomberg, J.P. Morgan Asset Management.

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Property
Other Asset Classes Residential property values to GDP ratio MSCI World Index (EUR) vs GPR250 Property Index (EUR)

6 Spain Ratio Japan (shifted 17 years) 5 UK Ireland 4 US

300 GPR250 Property Index MSCI World Index 250 30 June 2012 229

200

150

100

99

50

TOC

1977

1987

1997

2007

2017

2027

0 Dez 00

Dez 02

Dez 04

Dez 06

Dez 08

Dez 10

58

Note: Japan: Land Underlying Buildings and Structures; US: Household Real Estate Assets; UK: Residential Buildings; Spain: Residential Household Wealth; Ireland: Dwellings. Source: OECD, Japan Land and Water Bureau, Ministry of Land, Infrastructure and Transport, Cabinet Office (Government of Japan), US Federal Reserve, S&P/Case-Shiller, OFHEO, UK Office for National Statistics, Bank of Spain, Ireland Central Statistics Office, Permanent TSB/ESRI, J.P. Morgan Asset Management.

Note: Total return indices, rebased to 100 at 31 December 2000. Source: GPR250 Property Shares Index, J.P. Morgan Asset Management.

Cumulative returns on US assets

Other Asset Classes Total return of USD 1 in real terms, log scale
10.000

Annualised real returns 1899 2011 Equities 6,3% 2,2% 0,7% 2000 Q1 2012 -0,8% 5,8% -0,3% 1965 - 1982 1999 USD 1.136 Equities USD 952

1.000

Bonds Bills

100

1928 - 1942
10

Bonds USD 12

1905 - 1923

Bills USD 2
1

TOC

0 Dec 1899

Dec 1909

Dec 1919

Dec 1929

Dec 1939

Dec 1949

Dec 1959

Dec 1969

Dec 1979

Dec 1989

Dec 1999

Dec 2009

Note: J.P. Morgan estimate from 2010, equities are represented by S&P 500 Total Return, bonds by BarCap US Treasury 20+ Year Total Return Index, and bills by BarCap US Treasury Bills Total Return Index. Log scale accurately represents percentage changes in index levels. Source: Shiller, Siegel, J.P. Morgan Asset Management.

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DEMOGRAPHICS

Demographics, savings and current accounts

61

Population by age
Education

62
63

60

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Demographics, savings and current accounts

Lifecycle of individual savings Demographics
Higher 8 6 Net saving / dissaving 4 2 0 Japan Median age 44,8 years China Median age 35,5 years

Current account balance

% of GDP 5 %

-2 -4 -6 -8 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 0-4 5-9 US Median age 36,4 years

Age profile 65-69 69+

-5

Lower

Age group distribution

9 % 6

Japan US China

3 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64

TOC

Source: GS Global ECS Research, US Census Bureau, J.P. Morgan Asset Management.

61

65-69

0-4

5-9

Population by age
Percentage of population, by age cohort Demographics
Age 60
Nigeria India

Brazil

US

China

UK

Italy

Germany

Japan

50 80+

40 60-79

30 40-59

20 20-39

10 0-19

54%

39%

34%

27%

25%

23%

19%

18%

18%

TOC

Total fertility rate

5,4

2,6

2,2

2,1

1,5

1,9

1,4

1,4

1,4

Note: Based on mid-year 2012 population estimate, ordered by size of youngest age group. Total fertility rate is the average number of children born per woman over natural life time. Source: US Census Bureau, J.P. Morgan Asset Management.

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Education
PISA education survey: comparing performance of selected countries Demographics
Scores for 15 year olds

Rank
Top three 1 2 3 556 539 536

Reading
Shanghai-China Korea Finland 1 2 3 600 562 555

Maths
Shanghai-China Singapore Hong Kong-China 1 2 3 575 554 549

Science
Shanghai-China Finland Hong Kong-China

Selected others

8 17 20 22 25 53

520 500 497 496 494 412

Japan United States Germany France United Kingdom Brazil

9 16 22 28 31 57

529 513 497 492 487 386

Japan Germany France United Kingdom United States Brazil

5 13 16 23 27 53

539 520 514 502 498 405

Japan Germany United Kingdom United States France Brazil

Bottom three

63 64

370 362 314

Peru Azerbaijan

63 64

365 360 331

Peru Panama

63 64

373 369

Azerbaijan Peru

65

Kyrgyzstan

65

Kyrgyzstan

65

330

Kyrgyzstan

TOC
Source: OECD, Program for International Student Assessment (PISA), J.P. Morgan Asset Management.

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Meet the team

Dan Morris. executive director, is a strategist responsible for delivering market analysis and insight to clients in Europe, the Middle East, and Africa. Prior to joining J.P. Morgan Asset Management, Dan was the Senior Equity Strategist at Lombard Street Research and before that part of the Institutional Investor-ranked portfolio strategy team at Banc of America Securities in New York. Dan began his career covering Latin American equity markets at BT Alex. Brown and Dresdner Kleinwort Benson. He holds an MBA from the Wharton School and a Masters in International Relations from Johns Hopkins' School of Advanced International Studies. His undergraduate degree is in Mathematics from Pomona College and he is a CFA charterholder. daniel.m.morris@jpmorgan.com

Maria Paola Toschi. executive director, is a market strategist at J.P. Morgan Asset Management in the Milan Office, in charge of communications to domestic retail and institutional clients. She worked from 1986 to 2003 as a sell-side equity analyst in different Italian Banking Institutions and has spent the last eight years in Banca IMI, Intesa Sanpaolo Banking Group, mainly covering small-mid Industrial companies and following several IPOs. In 2003 she became responsible for the retail investment communications team dedicated to the Sanpaolo Retail and Private Banking network. She graduated in Economics at the Milan L. Bocconi University and has been a Member of the Italian Financial Analysts Association since 1989. She joined J.P. Morgan Asset Management Milan in November 2008. maria.p.toschi@jpmorgan.com

Tom Elliott. executive director, is a global strategist within the Investment Marketing Team at J.P. Morgan Asset Management, responsible for investment communications through the Guide to the Markets suite of products. An employee since 1995, he worked in the Global Multi-Asset Group (GMAG) until 2006 and before that he was head of the Investment Writing Team. Previously. he worked at Euromoney Publications as a feature writer for a year and prior to that he spent four years at Greig Middleton & Co. as a graduate trainee and securities analyst. Tom obtained a BA in History from Sussex University and an MSc in Economic History from the London School of Economics.

tom.cb.elliott@jpmorgan.com

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The full suite of the Guide to the Market publications can be accessed by visiting the Insight Portal: www.jpmorganassetmanagement.com/insight

64

J.P. Morgan Asset Management

FOR PROFESSIONAL* INVESTORS ONLY. NOT FOR RETAIL USE OR DISTRIBUTION. *Professional Investors corresponds to professional clients and eligible counter parties as defined within the European Union Directive 2004/39/EC on Markets in Financial Instruments (MiFID). Any forecasts, figures, opinions or investment techniques and strategies set out, unless otherwise stated, are J.P. Morgan Asset Managements own at date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. They may be subject to change without reference or notification to you. The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. You should also note that if you contact J.P. Morgan Asset Management by telephone those lines could be recorded and may be monitored for security and training purposes. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.

Issued by JPMorgan Asset Management (Europe) Socit responsabilit limite, European Bank & Business Centre, 6 route de Trves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S.Luxembourg B27900, corporate capital EUR 10.000.000. Issued in the United Kingdom by JPMorgan Asset Management (UK) which is authorised and regulated by the Financial Services Authority. Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

Unless otherwise stated, all data is as at 30/06/2012. Prepared by: Kerry Craig, Tom Elliott , Paola Toschi and Dan Morris

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