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JP Morgan Funds Management, Quarterly Perspectives Asia, 4Q 2013. Sep 30, 2013.

JP Morgan Funds Management, Quarterly Perspectives Asia, 4Q 2013. Sep 30, 2013.

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Published by Glenn Viklund
1 US equities: Pendulums don’t stop mid-swing
2 Emerging Markets: The importance of
differentiation
3 Asia’s challenges are cyclical, not structural
4 Has QE tapering tapered off the income theme?
1 US equities: Pendulums don’t stop mid-swing
2 Emerging Markets: The importance of
differentiation
3 Asia’s challenges are cyclical, not structural
4 Has QE tapering tapered off the income theme?

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Published by: Glenn Viklund on Oct 18, 2013
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02/06/2014

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J.P. Morgan Funds Management is pleased to present the latestedition o
Quarterly Perspectives 
.This piece highlights keythemes rom our 
Guide to the Markets 
 book and ofers criticalinsights or engaging in portolio discussions.
Both
Quarterly Perspectives 
and
Guide to the Markets 
are elements o our
Market Insights
program, which was developed to provide investors with away to address the markets and the economy based on logic rather than emotion,ultimately helping investors to make rational investment decisions.
This quarter’s themes
1
 US equities: Pendulums don’t stop mid-swing
2
 Emerging Markets: The importance o diferentiation
3
 Asia’s challenges are cyclical, not structural
4
 Has QE tapering tapered of the income theme?
Dr. David Kelly, CFA
Managing DirectorChie Global StrategistJ.P. Morgan Funds
Tai Hui
Managing DirectorChie Market Strategist AsiaJ.P. Morgan Funds
Geoff Lewis
Executive DirectorMarket Strategist AsiaJ.P. Morgan Funds
Yoshinori Shigemi
Executive DirectorMarket Strategist AsiaJ.P. Morgan Funds
Joseph S. Tanious, CFA
Executive DirectorGlobal Market StrategistJ.P. Morgan Funds
Grace Tam, CFA
Vice PresidentMarket Strategist AsiaJ.P. Morgan Funds
Ian Hui
AssociateMarket AnalystJ.P. Morgan Funds
Ben Luk
Market AnalystJ.P. Morgan Funds
Anthony Tsoi
Market AnalystJ.P. Morgan Funds
Anthony M. Wile
Market AnalystJ.P. Morgan Funds
MARKET
INSIGHTS
Quarterly Perspectives
Asia | 4Q 2013
MARKETINSIGHTSERIES
Market Insight Seriesat a glance
To download the PDF o the
Guide to the Markets - Asia ,
please visit us at:www.jpmorganam.com.hk/guide
 
42013 
 
As of September 30, 2013
GuidetotheMarkets
ASIA
 
 
2
Quarterly Perspectives
MARKET
INSIGHTS
Overview
The extraordinary performance of equities since the depths of the recession has caused manyinvestors to question the time left in this bull market.
• Corporate fundamentals, including record high prots and historically low leverage, point to a
healthy corporate landscape.
• Although equity valuations have approached long-term averages, stocks are not expensive andcontinue to be a more attractive option than high-grade xed income.• Real earnings yields are approaching long-term averages, but equity markets do not stop ataverage.
US equities: Pendulums don’t stop mid-swing
It’s all about the fundamentals
Many investors have watched the S&P 500 surpass previous peaks in 2013, with year-to-dateperformance exceeding 19%. As shown on page 41 of the
 Guide to the Markets - Asia
, whilereturns have been impressive, what may have gone unnoticed are improving fundamentals of US
corporations.
• Corporate fundamentals remain in excellent condition, with a historical high in rst quarter earningsper share and record lows in nancial leverage.• Estimates from Standard & Poor’s with 99% of companies reported indicate a second consecutiverecord high in earnings per share for the second quarter of 2013. This would indicate US companieshave never been more protable in the history of the S&P 500 than the rst two quarters of this
year.
• Elevated prot margins have helped earnings growth enormously over the past few years. However,revenue growth consistent with modest global GDP growth and the potential for additional leverageon corporate balance sheets make a bullish case for long-term investors in US equities.
 While margins havecontributed to earnings growth, revenue growthshould take the reins going forward.
  The S&P 500 is the most profitable it has ever beenin its history.
 Companies have room to take on additional leverage,which could boost returns.
United States: Source of Earnings, Corporate Profits and Leverage
50%
Margin Share of EPS GrowthRevenue Share of EPS Growth
S&P 500 Year-over-Year EPS Growth
Growth broken into revenue growth and margin expansion, quarterly
0%25%-50%-25%'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13
Adjusted After-Tax Corporate Profits (% of GDP)Total Leverage
        E      q      u         i        t         i      e      s
1200%220%240%
Includes inventory and capital consumption adjustments
8%10%12%
6/2013:10.1%
S&P 500, ratio of total debt to total equity, quarterly
 
100%120%140%160%
4%6%
Average: 6.3%9/2013:104%Average: 172%
 
41
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12
'65 '70 '75 '80 '85 '90 '95 '00 '05 '10
Source: FactSet, Standard & Poor’s, BEA, J.P. Morgan Asset Management “Guide to the Markets –Asia.”(Top) EPS based on operating earnings per share. 2Q13 figures are Standard & Poor’s estimates and based on company filings asof19/9/13.1Q 2009, 1Q2010 and 2Q2010 reflect -101%, 92% and 51% growth, respectively, in operating earnings and are cut off to maintain amorereasonable scale. Data reflect most recently available as of 30/9/13.
Guide to the Markets – Asia ,
page 41
 
3
4Q | 2013
United States: S&P 500 Index at Inflection Points
1,800
S&P 500 Index
Index
Sept. 30, 2013=
CharacteristicMar –2000Oct –2007Sept –2013
Index level1,5271,5651,682P/E ratio (fwd.)25.6x15.2x14.3xDividend yield1.1%1.8%2.2%
1,600
Mar. 24, 2000P/E (fwd.) = 25.6xIndex level: 1,527Oct. 9, 2007P/E (fwd.) = 15.2xIndex level: 1,565. .Index level: 1,682- ...
 
1,2001,400
   E   q   u    i   t    i   e   s
+106%+101%
1,000
-49%-57%+149%
800
Dec. 31, 1996P/E (fwd.) = 16.0xIndex level: 741Oct. 9, 2002P/E (fwd.) = 14.1xIndex level: 777Mar. 9, 2009P/E (fwd.) = 10.3xIndex level: 677
42
'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13
Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management “Guide to the Markets –Asia.”Latest forward P/E ratio as of 30/9/13.Data reflect most recently available as of 30/9/13.
P/E ratio remains attractivecompared with previous peaks.
Guide to the Markets – Asia ,
page 42
Averages: Somewhere in the middle
Not all valuation metrics are created equal. A company’s earnings yield, or instance, is the inverseo its P/E ratio. This provides a decent gauge as to how much a company is yielding in earnings toan investor or a given price – very similar to bond yields. As shown on page 42 o the
Guide to theMarkets - Asia
, the current P/E ratio is still below previous peaks in 2000 and 2007, despite being at arecord high index level. More importantly, the current 10-year US Treasury yield is significantly belowprior market peaks. This reflects that the valuation remains significantly skewed in avour towardsequities.• Markets may continue to outpace earnings growth through margin expansion, pushing real earningsyield below its historic average, or P/E ratios higher. However, bull markets do not stop at average. Inmost cases, averages are only hal way.• As bond yields rise, the equity market rally will be more dependent on earnings growth instead omultiple expansion.• While not a risk on the immediate horizon, investors need to remain wary o overpriced markets asdraw downs can be significant.
Investment implications
 With no impending recession in sight, modest earnings growth and strong corporateundamentals point to continued strength in equities.While many valuation metrics rest at their long-run averages, bull markets do not end ataverage valuations. Investors should be aware o the risks inherent in expensive markets, butrecognize equities may have room to push higher rom current levels.

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