Emerging Markets Outlook and Strategy

Emerging Markets Research Emerging Markets Strategy J.P.
Morgan Securities LLC

October 4, 2011
Emerging Markets Outlook and Strategy

EM sell-off likely has further to run Emerging markets debt came under severe stress across all asset classes in the third week of September, with EMBIG and CEMBI spreads widening by 94bp and 108bp since then. Spot EM FX for the countries in the GBI-EM suffered the sharpest correction and are now down 9.1% year-to-date, leaving the GBI-EM down by 4.2%. The EM sell-off was the most pronounced in absolute and in relative terms since the Lehman Brothers bankruptcy, followed by the largest weekly outflow on record from EM debt dedicated funds at US$3.4 billion last week. It is hard not to draw the comparisons to Lehman episode given both the indiscriminate nature and rapid pace of the sell-off, alongside the growing fears that the DM economies are sliding into a simultaneous recession. With the exception of the EMBIG, all EM fixed income asset classes are now posting negative returns year-to-date. Driven by near-term risk of greater outflows by foreigners With no safe havens left as a flight to quality and flight to liquidity take hold, EM remains susceptible to further outflowsparticularly for those countries with high levels of foreign-holdership. Until mid-September, our client surveys and inflow data reflected net additions of positions and net inflows up. As of midSeptember, the highest levels of foreign participation in local government bond markets were: Hungary (37%), Indonesia (33%), South Africa (30%), Poland (30%), Malaysia (27%), Peru (49%) and Mexico (26%). Given the poor liquidity in many markets, investors may have little choice but to reduce liquid carry trades. Higher bank capital requirements implemented since the 2008 crisis have contributed to reduced secondary market liquidity for EM sovereign and corporate bonds, which has increased market volatility. There is asymmetry in the size of the investor positions given the US$170 billion of inflows into EM debt since early 2009 versus current market conditions. We raise our year-end EMBIG and CEMBI targets to 425bp and 525bp, respectively, and stay underweight CEMBI versus EMBIG. But we maintain our conviction on the longer-term positive prospects for the asset class The current sell-off is testing the sponsorship of EM debt as an asset class, but it is not related to EM fundamentals or EM funding needs. The extent to which the inflow story reverses is the key pressure point for EM debt across all assets. We have revised EM growth down to 5.6% this year and 5.0% next year; risks of a hard landing remain low. The growth differential to DM countries continues to widen with GDP growth for developed economies forecast at only 1.3% this year and 0.8% next year. Total estimated EM sovereign and corporate issuance needs are net negative given the US$39.1 billion of cash flows from sovereign and corporate bonds for the remainder of the year. With EM FX reserves now US$2.2 trillion higher than October 2008 levels, totaling over US$8.1 trillion, EM central banks have scope to intervene in the event of extreme volatility and we expect a domestic backstop bid to materialize at higher local yield levels. We reduce directional risk in Asia including our long held overweight SGD trade, but hold short USD/CNY and short TWD/THB. In EMEA EM, South Africa and Hungary have the greatest potential for deeper outflows and more volatility: keep short exposure in HUF and short Hungary 5-year bonds. BRL and MXN were the worst performing currencies in Latin America due to hefty positioning by international investors, but the region likely offers the best opportunities to add duration in the coming weeks: receive 2-year (Jan 14s) in Brazil and 5-year TIIE in Mexico. ARS to adjust given the level of depreciation by trading partners: sell Dec 14 versus buy Mar 14 USD/ARS.
The certifying analyst(s) is indicated by the notation AC. See last page for analyst certification and important legal and regulatory disclosures.
Spreads and yieldsactual and forecast

Current Year Forecast ago End-Dec 11
EMBIG GBI-EM Global Div CEMBI Broad Fed funds 10-year bond
Source: J.P. Morgan
490 6.73 532 0.125 1.78
305 6.27 332 0.125 2.48
425 6.70 525 0.125 2.25
EMBI Global, GBI-EM, JPMHY, S&P 500

Return index, September 30, 2010 = 100
120 115 110 105 100 95 90 Sep-10 GBI-EM Global Div. (USD unhedged) Dec-10 Mar-11 Jun-11 Sep-11 EMBIG US HY S&P 500
Source: J.P. Morgan
This is an abbreviated version of EMOS. The next full edition which will include individual country sections will be published in Novemeber.
Joyce ChangAC
(1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities LLC
www.morganmarkets.com
J.P. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com
Emerging Markets Research Emerging Markets Outlook and Strategy October 4, 2011
Market Overview
Contagion hits EM: Brace for further fallout as market technicals and liquidity will drive performance near term
The current sell-off represents a stress test of the sponsorship of the EM debt asset class, not a deterioration of EM fundamentals or concerns over funding needs Potential for inflow reversal remains the key pressure point for EM debt across all assets EM growth revised down to 5.6% this year and 5.0% next year (from 6.1% and 6.0%, respectively, back in June) A total of seven EM central banks now expected to ease policy rates by year-end We raise our year-end EMBIG and CEMBI targets to 425bp and 525bp, respectively; stay underweight CEMBI versus EMBIG EM FX remains the most liquid adjustment valve to hedge bond positions, but central bank intervention is an offset: Korea, Brazil, Turkey, Russia, Poland and Peru among other countries have already intervened to curb extreme volatility Greater risk seen for local market bond positions, especially those with high levels of foreign participation Total estimated EM sovereign and corporate issuance needs of US$35.5 billion for the remainder of the year are net negative compared to US$39.1 billion of cash flows from sovereign and corporate bonds Stay cautious on duration positions in EM Asia as the domestic backstop bid will materialize only at higher local yield levels Reduce directional FX risk in EM Asia, including long-held overweight SGD trade, but hold short USD/CNY and short TWD/THB South Africa and Hungary are most vulnerable in the EMEA EM region: keep outright short trades in South Africa 10-year bonds and Hungary 5-year bonds and underweight HUF and ZAR BRL and MXN have been the worst performing currencies in Latin America due to hefty positioning by foreigners, but the region likely offers the best opportunities to add duration in coming weeks; receive 2-year (Jan 14s) in Brazil and 5-year TIIE in Mexico; in Argentina, sell Dec 14 versus buy Mar 14 USD/ARS
EM debt now feeling the pain

Emerging markets debt came under severe stress across all asset classes in the third week of September, with EMBIG and CEMBI spreads widening by 94bp and 108bp since then, while EM FX fell by 9.1% YTD, leaving the GBI-EM down by 4.2% YTD. The EM selloff was the most pronounced in absolute and in relative terms since the Lehman Brothers bankruptcy, followed by the largest weekly outflow on record from dedicated EM debt funds at US$3.4 billion last week. It is hard not to draw the comparisons to the Lehman episode given both the indiscriminate nature and rapid pace of the sell-off, as well as the growing fears that the developed economies are sliding into simultaneous recession. With the exception of the EMBIG, all EM fixed income asset classes are now posting negative returns year-to-date. In turn, EM equities fell by double digits (14.8%) in September (chart 1).
Chart 1: EM has declined along with other asset classes
% returns
Gold UST US High Grade Global Agg EMBIG US High Yield CEMBI Broad GBI-EM Global div ELMI+ Commodities S&P 500 EM equities -26.0 -30
* September 19 to September 23. Source: J.P.Morgan
-6.9 16.7 0.8 9.7 -0.1 6.8 -0.7 -2.8 3.1 -1.0 -0.3 -3.1 -2.3 -3.0 -3.5 -1.7 -5.1 -7.2 -8.9 -5.6 -9.3 5.5
Third week September* 2011 YTD
-12.6
-20
-10
10
20
Indiscriminate sell-off feels like 2008 all over again Although we had positioned into this sell-off underweight EM corporates and short EM FX, we were not nearly underweight enough. In particular, the outsized EM FX move in September will make it harder for (unhedged) EM investors to stay in the long duration trade. Spot EM FX for the countries in the GBI-EM is now down 4.2% YTD. With no safe havens left as a flight-to-quality and flight-to-liquidity takes hold, EM remains susceptible to
J.P. Morgan Securities LLC Trang NguyenAC (1-212) 834-2475 trang.m.nguyen@jpmorgan.com
further outflows, particularly for those countries with high levels of foreign holdership. The previous record for weekly redemptions from US and European mutual funds/ETFs occurred in October 2008 with US$1.97 billion of outflows. Driven by near-term risk of greater outflows by foreigners Foreign bond holdings also remain high in more liquid EM countries. Until mid-September, our client surveys and inflow data reflected net additions of positions and net inflows up. As of mid-September, the highest levels of foreign participation in local government bond markets ones which currently are vulnerablewere in: Hungary (37%), Indonesia (33%), South Africa (30%), Poland (30%), Malaysia (27%), Peru (49%) and Mexico (26%). Table 1 shows that foreign bond holdings increased in every major local currency market this year compared to end-2010, with the exception of Brazil.
Table 1: Foreign bonds holdings as a percentage of local government bonds outstanding
% (end of period) 2007 Turkey South Africa Poland Hungary Brazil Mexico Peru Indonesia Malaysia Thailand Korea
Source: J.P. Morgan
Chart 2: Crowded trades vulnerable to further reductions

Positioning based on the J.P.Morgan EM Client Survey from a scale of -10 (most underweight) to +10 (most overweight)
4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 BRL MXN ZAR COP IDR CLP PEN MYR KRW PLN RUB TRY
Source: J.P. Morgan
Mid-Sep Rates Position Mid-Sep FX Position 1-month FX move versus USD (rhs)
28% 21% 14% 7% 0% -7% -14%
Periods of poor price action are typically followed by slower flow momentum and outflows. Charts 3 and 4 show that market performance and flows have tended to move together, with flows lagging performance.
Chart 3: Local currency flows and GBI-EM Global Diversified performance often move together
270 GBI-EM GD Return 250 230 Local Flows ($bn, rhs) 210 190 170 150 130 110 90 70 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Source: EPFR Global and J.P. Morgan
2008 10% 16% 14% 22% n/a 12% 30% 17% 14% 2% 8%
2009 9% 15% 18% 20% 8% 12% 21% 19% 17% 2% 10%
2010 13% 23% 26% 23% 12% 19% 46% 31% 22% 6% 15%
Most recent 17% 27% 30% 37% 12% 26% 49% 33% 27% 8% 18%
13% 13% 20% 30% n/a 11% 30% 16% 15% 0.2% 12%
40 35 30 25 20 15 10 5 0 -5
While positions have recently been reduced somewhat in the most crowded tradesSouth Africa, Mexico and Brazil local currencythese positions remain exposed if investors are under pressure to continue de-risking. Given the poor liquidity in many markets, investors may have little choice but to reduce liquid carry trades further.
Chart 4: Hard currency fund flows and EMBIG ex-UST performance

140 130 120 110 100 90 80 70 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
EMBIG Credit Return (ex-UST) Hard Flows ($bn, rhs)
16 14 12 10 8 6 4 2 0 -2
J.P. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities Ltd. Luis OganesAC (1-212) 834-4326 luis.oganes@jpmorgan.com
J.P. Morgan Securities LLC Eric BeinsteinAC (1-212) 834-4211 eric.beinstein@jpmorgan.com
But 2011 cannot be compared to 2008 with respect to EM fundamental and default risks. In 2008, the global financial system was at a far more dangerous point and EM fundamentals and financing needs were much more vulnerable. Lehman actually defaulted and the global financial system was on the verge of fully freezing up. The rapid deterioration of the EM bank and corporate market, as well as hedge fund deleveraging, drove the dynamics in EM debt markets at that time. While politics in the developed economies are clearly lagging the economic realities, we expect that European authorities will step in and employ their resources to address their debt issues before reaching this point, partly because they have the benefit of hindsight from the Lehman default as to what might happen if they do not. Capital injections that would ease the markets concerns about European banks are also manageable compared to the US financial crisis in 2008in the range of EUR150-300 billion, according to both IMF and J.P. Morgan estimates. This compares to fears that total losses in the US banking system in 2008 had the potential to approach US$1 trillion. It may take more stress in markets before these capital injections occur, however. We note five key differences between 2008 and today, which make us comfortable that the extremes that spreads reached then will not occur in the current crisis. First, investors now understand that EM economies and EM financial assets do not automatically follow and underperform developed market trends. Before 2008, this had been the pattern of prior crises, and part of the sell-off then reflected the expectation by some that EM would once again act as a higher-beta asset class to developed market assets on the downside. Second, the gap between EM and DM sovereign metrics has widened since 2008 and credit ratings have converged. Over the past four years, the debt and fiscal burdens of advanced economies increased by 30.8%-pts and 5.5%-pts, respectively. The average debt ratio has soared to 93.5% of GDP for DM economies, while their average fiscal deficit has risen to 7.5% of GDP. EM debt ratios are well under half the level of developed countries: average debt to GDP for EM economies stands at only 34.9%, while the average fiscal deficit is 2.0% of GDP. Third, EM corporate refinancing risks and default risks were much greater in 2008. In the run up to 2008, EM banks and corporates had issued a record US$464 billion in syndicated loans, US$150 billion of Eurobonds and US$210 billion of equity. Over the past two years, EM corporates have raised US$350 billion international capital markets, much of which has been used towards refinancing debt. We estimate corporate Eurobond rollover needs for the remainder of the year at US$17.6 compared to estimated
4
cash flows of US$31 billion. The EM corporate high yield default rate is currently running at only 0.3% and will likely end the year below our forecast of 0.6%, compared to the peak default rate of 10.7% reached in 2009 (table 2).
Table 2: EM default rates declining since 2009
US 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: J.P. Morgan
EM 1.0% 7.3% 15.4% 6.3% 0.1% 0.0% 0.2% 0.0% 1.9% 10.7% 1.5% 0.3%
5.0% 9.1% 8.0% 3.3% 1.1% 2.8% 0.9% 0.4% 2.3% 10.3% 0.8% 1.2%
EM FX, rates and credit positions are now held by a more diversified group of global and local investors today than in 2008. The fourth key difference is that three years ago leveraged investors, such as banks and hedge funds represented nearly 50% of the market, held larger positions and employed more leverage than they do today. We believe that hedge funds have fallen to 20-25% of the market share. The ownership of EM assets now is in the hands of fund managers who remain vulnerable to outflows, but are unlikely to be indiscriminate forced sellers as the banks and hedge funds were three years ago when the funding of their leverage disappeared. The current EM debt universe is also much larger than in 2008 and domestic investors are an increasingly important share of the market. Domestic pension fund assets, which are largely invested in EM local bond markets, have increased assets under management from US$1.4 trillion in 2007 to US$1.9 trillion at present. Finally, a fifth key difference is that in October 2008 EM valuations looked rich compared to global credit. Now, the September 2011 sell-off puts the yields for the GBI-EM Global Diversified (6.73%) and EMBIG (6.53%) well above J.P. Morgans JULI investment grade index (4.37%) and comparable to yields for peripheral Europe, excluding Greece (5.83%). US High Yield debt remains cheap, boasting a 9.49% yield, and we favor US High Yield over EM corporates. In 2008, cheap valuations and strong government support for segments of the US investment grade market crowded out crossover interest and inflows into EM debt. Based on our client survey taken at the IMF/World Bank annual meetings, the key concern from investors about the outlook for emerging markets centered on valuations.
J.P. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly.s.huffman@jpmorgan.com
.While there is much less policy flexibility in DM versus EM economies in 2011 relative to 2008 Although current market conditions provide little comfort, the better fundamentals and low financing needs give EM countries more policy flexibility than DM countries this time around. In 2008, a key question was whether politiciansthen mostly in the UShad the willingness to respond to the crisis, while there was little doubt then about their ability. Today we worry about the ability to make decisions in Europe and the ability of both the US and Europe to respond, given that monetary options are mostly exhausted and fiscal policy is actually tightening rather than being loosened. In contrast, EM policymakers do have scope to ease policy rates since average EM inflation now is lower than in 2008 (6.4%oya now versus 7.8% when Lehman collapsed), although it exceeds targets in many cases. Moreover, EM FX reserves are now US$2.2 trillion higher than 2008 levels, providing EM countries room to maneuver and manage outsized volatility.
Table 3: Now versus then: EM macro indicators
US$ billion FX reserves (eop)* 2008 current 437 654 45 193 23 24 4 85 30 33 715 36 33 42 57 36 412 29 71 2,986 1946 201 52 256 92 36 111 292 49 344 35 32 3 137 45 11 929 36 50 73 93 47 496 41 93 4,773 3198 312 125 319 155 76 188 400 Current account balance* 2008 2011F -15 -56 7 -29 -3 -7 1 -16 -5 37 -24 -1 -11 2 -29 -25 102 -20 -41 493 405 -6 0 -29 39 4 -3 25 -2 -50 -2 -11 -2 -10 -4 25 -18 -8 4 4 -26 -7 99 -14 -70 453 325 21 8 -54 22 8 13 43
Table 3 shows that since 2008 FX reserves have increased the most in EM Asia (+US$1.79 trillion), followed Latin America (+US$217 billion) and EMEA EM (+US$214 billion). The table also shows that current account deficits have only widened significantly in a few countries (Brazil, Turkey and India).
Beware the asymmetry in investor positions versus market liquidity

Higher bank capital requirements implemented since the 2008 crisis have contributed to reduced secondary market liquidity for EM sovereign and corporate bonds, which has increased market volatility and likely increased the spread impact of the selling. There is asymmetry in the size of the investor positions, given the US$170 billion of inflows into EM debt since early 2009 versus liquidity in the current market conditions. We expect both US and European banks to continue reducing balance sheet into year-end. Chart 5 shows that inflows into EM debt have steadily increased since the asset class suffered US$3.2 billion of outflows for the full year in 2008, or US$23.6 billion from the peak just before the Lehman crisis.
Chart 5: EM inflows have reached nearly US$170 billion since early 2009
US$ billion
90 80 70 60 50 40 30 20 10 0 -10 2007 2009 2011 39.3 2008 2010 46.3 42.1 80.3
Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela EMEA EM Czech Republic Hungary Israel Poland Romania Russia South Africa Turkey EM Asia China Korea Indonesia India Malaysia Philippines Thailand Taiwan
-3.2
Jan Feb Mar Apr May Jun

Source: EPFR Global, Bloomberg and J.P. Morgan
Jul
Aug Sep Oct Nov Dec
* Aggregates for listed countries only. FX reserves for EM total US$ 8.1 trillion. Source: J.P. Morgan
Yet it is important to note that this past weeks reading of outflows is less alarmist than the headlines given the size of the asset class now versus 2008. Last weeks outflows represent only 2.3% of the EM debt assets under management (AUM). By comparison, the US$1.97 billion weekly outflow at the end of October 2008 represented 4.0% of the EM debt AUM at the time (chart 6). Inflows into EM weekly debt now stands at US$39.3 billion YTD, down from a peak of US$42.6 billion earlier in the month. We now expect full-year inflows into EM debt in the US$30-40 billion range versus our previous forecast of US$40-50 billion.
J.P. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly.s.huffman@jpmorgan.com
Chart 6: This weeks outflows were largest in magnitude, but smaller than October 2008 in relative terms
3% 2% 1% 0% -1% -2% -3% -4% -4.0% -2.3% Weekly Flows % AUM EPFR fund universe (rhs, US$bn) 160 140 120 100 80 60 40 20
although they have been relatively flat since April. While Japanese EM funds saw redemptions of US$159 million last week, EM FX overlay funds (primarily BRL) saw larger outflows of US$508 million, although AUM declined by US$2 billion over the week and US$8.3 billion since end-August largely due to lower valuations. In October 2008, Japanese investment trusts had only US$22.5 billion invested in EM bond funds, while EM FX overlay funds did not exist. Table 5 shows that AUM in Japanese ITs now stand at US$58.7 billion for EM bond funds and US$42.9 billion for EM FX overlay funds.
Table 5: Universe of EM funds tracked weekly by EPFR has grown three times, while EM ETFs have grown fivefold
Oct-29-08 Weekly Flows (US$ billion) Weekly Flows as a % of AUM AUM tracked by EPFR (US$ billion) Size of EM ETFs (US$ billion) Size of Japanese EM ITs (US$ billion) Size of Japanese EM FX Overlay Funds (US$ billion)
Source: J.P. Morgan, EPFR, Bloomberg
0 -5% Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11
Sep-28-11 -3.2 -2.3% 133.8 11.3 58.7 42.9
Total assets benchmarked against the external EMBIG, local currency GBI-EM and ELMI, and the corporate CEMBI stood at US$417 billion as of September 2011 compared to US$233 billion tracked against it as of June 2008. Assets benchmarked against the EMBIG amount to more than 50% of the size of the outstanding EM sovereign debt market. The GBI-EM has nearly four times the assets under management now compared to October 2008, while the CEMBI was only launched at the end of 2008. Last weeks outflows for hard currency and blend funds, which saw US$1.0 billion and US$500 million withdrawn, respectively, represent only 0.6% of the EMBIG and CEMBI assets under management tracked against the J.P. Morgan family of indices.
Table 4: AUM benchmarked against J.P. Morgan indices have almost doubled since pre-Lehman
US$ million EM Indices Local Market Debt (GBI-EM) External Debt (EMBIG) Corporate External Debt (CEMBI) Local currency money Market (ELMI+) Total AUM managed against EM indices Total EM Assets Survey Responses (3 month)
Source: J.P. Morgan
-2.0 -4.0% 46.1 1.8 22.5
Jun-08 35,865 181,174 16,300 233,339 665,760
Sep-11 133,328 226,352 29,494 27,947 417,121 808,186
Technicals point to more selling pressure as investors will likely increase cash holdings given the uncertain global environment and fears about increased redemptions after Septembers sell-off. Cash holdings as reported in our monthly client survey (taken on September 15), which tracked 183 responses from investors managing US$731 billion in EM debt assets, have increased at the margin this year and are currently running at 4.1%, compared to an average of 4.3% in the past six months and down from the 4.9% peak in March. The current cash level is slightly higher than just before the Lehman sell-off but below the 6.7% cash holdings that investors held in January 2009 during the peak of the crisis (chart 7).
Chart 7: Current cash balances have declined compared to earlier this year, but are running marginally higher than Lehman
7.0% 6.5% 6.0% 5.5% Cash % Oct-08 6-month Moving Average Sep-11
Beyond the assets that are managed against the J.P. Morgan family of indices, the universe of EM funds tracked weekly by EPFR has grown three times, while EM ETFs have grown fivefold. EM bond exchange traded funds (ETFs) have grown from US$1.8 billion in October 2008 to US$11.3 billion at present. We estimate that US$3.2 billion of inflows went to ETFs in 2010 and US$3.1 billion went to ETFs year-to-date. Outflows of US$4 billion from Japanese retail investors have also attracted attention,
5.0% 4.5% 4.0% 3.5% 3.0% Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 3.9% 4.3%
Source: J.P. Morgan
J.P. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly.s.huffman@jpmorgan.com J.P. Morgan Securities Ltd. Jonny GouldenAC (44-20) 7325-9582 jonathan.m.goulden@jpmorgan.com
J.P. Morgan Securities LLC Warren MarAC (1-212) 834-4274 warren.j.mar@jpmorgan.com
A review of the recent fund flow trends in the US High Yield bond market is helpful for context of the large outflow experienced in EM fixed income last week, given the increased importance of crossover flows into EM debt over the past few years. Twice this summer, during the months of June and August, US HY funds had a week or two of sharp outflows, but these were not sustained and were partly reversed in subsequent weeks. From mid-May to end-August, yields widened from 6.73% to 8.6% for US High Yield making the market more attractive, and in September there were inflows each week despite a negative market environment. In both the June and August episodes, there was one large weekly outflow over US$3 billion and then much smaller outflows afterwards. The US HY pattern suggests there is a group of investors with little appetite for negative volatility who sell quickly, but then the wider spreads help slow and then reverse the outflow trend.
Total sovereign financing requirements for the countries in the EMBIG for the remainder of the year are net negative and the remaining planned sovereign issuance of US$15.5 billion is entirely discretionary. According to our estimated issuance plans for 2011, remaining needs for 4Q11 are US$7.4 billion in Emerging Europe, US$4.5 billion in the Middle East and Africa, US$2 billion in Latin America and US$1.5 billion in EM Asia (see table 6 on the following page). However, we characterize these entire amounts as discretionary as sovereigns could easily rely on savings or alternative domestic funding sources if external capital markets remain closed for the rest of the year. The EMBIG has become more correlated to the moves in commodity prices since January, while the correlation of the EMBIG to US equities has begun to decline (chart 9). Commodities declined across the board in September due to increasing concerns about slowing global growth. The S&P GSCI Industrial Metals index was the worst performer in September (-20%), implying increasing concerns of a slowdown in Chinese demand. In turn, the GSCI Agriculture declined 20%, followed by gold (-11%) and Brent (-11%), bringing the latter to its lowest level since February 2011. We believe that fears of a hard landing in China are exaggerated. Chinas services PMI posted a solid gain in September, rising 1.6 points to 51.9. The activity index rose even more strongly to 53.0, consistent with official data pointing to moderate growth in the economy. We believe that demand from Asia coupled with ongoing supply issues in the North Sea and OPEC production cuts will support global oil prices, but risk are now biased to the downside.
Chart 9: EMBIG returns have become more correlated to moves in commodity prices
3-month moving correlations versus EMBIG
80%
WTI S&P500 Commodities*
EM sovereign and corporate credit unlikely to follow 2008 extreme moves

EMBIG spreads have widened and positions reduced, but not enough yet to warrant an outright overweight while the global backdrop still remains uncertain. This past months moves remain modest compared to 2008 when EMBIG spreads widened by 567bp during the Lehman episode. Contrary to the local market index, spread compression in the EMBIG took time to reach pre-crisis levelsalmost a year and a half. For much of the past year, it has been difficult for EM sovereign investors to add risk into a market where spread widening had clearly lagged other markets. With EMBIG spreads now at 480bp, they have widened 53% since mid-May compared with 55% now for US High Yield and 68% for US High Grade, so EMBIG spreads are no longer a large outlier in terms of movement.
Chart 8: Current EMBIG sell-off is modest compared to 2008
EMBIG spreads (bp)
1000 900 800 700 600 500 400 300 200 Jan-08
Source: J.P. Morgan
60% 40% 20% 0%
+632bp
+184bp +128bp
-20% -40% Jan-08
Jan-09
Jan-10
Jan-11
Jan-09
Jan-10
Jan-11
* J.P. Morgan Commodities Index. Source: J.P. Morgan
J.P. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly.s.huffman@jpmorgan.com J.P. Morgan Securities Ltd. Jonny GouldenAC (44-20) 7325-9582 jonathan.m.goulden@jpmorgan.com
Table 6: Remaining sovereign borrowing requirements are fully discretionary

Gross Issuance Forecast Fiji Indonesia Malaysia Philippines Sri Lanka Brazil Chile Colombia Dominican Republic El Salvador Jamaica Mexico Panama Peru Trinidad and Tobago Uruguay Venezuela Belarus Croatia Czech Republic Georgia Hungary Latvia Lithuania Macedonia Montenegro Poland Romania Russia Serbia Turkey Ukraine Angola Bahrain Israel Lebanon Nigeria Senegal South Africa Tanzania United Arab Emirates Zambia Asia Emerging Europe Latin America Middle East and Africa Total
Source: J.P. Morgan
Gross Issuance YTD 250 2,500 2,000 2,749 1,000 788 1,343 2,000 500 654 400 3,000 500 514 4,200 800 2,587 500 5,685 500 750 256 4,994 2,177 3,176 1,000 3,349 3,440 2,465 500 500 750 500 8,499 29,214 13,899 4,715 56,327
Remaining 1,500 1,212 500 300 413 2,100 500 723 1,151 2,560 500 1,000 1,000 500 1,000 500 1,500 7,447 2,012 4,500 15,459
250 4,000 2,000 2,749 1,000 2,000 1,343 2,000 500 654 400 3,000 500 500 300 514 4,200 800 3,000 2,100 500 5,685 500 750 500 256 4,994 2,900 3,176 1,000 4,500 6,000 500 1,000 1,000 2,465 500 500 750 500 1,500 500 9,999 36,661 15,911 9,215 71,786
EM corporate spreads moved above 500bp in September, suggesting that we have entered into a feedback loop whereby outflows and market performance are moving into a trading pattern that more closely resembles 4Q08. Although we believe that lower default expectations will prevent us from breaching 1,000bp on the CEMBI Broad, it is not inconceivable given constrained liquiditythat investment grade (currently trading at 369bp) and high yield spreads (currently trading at 917bp) retrace as much half of their 2008 highs of 798bp and 2,257bp, respectively. Based on these assumptions, we revise our year-end spread for the CEMBI Broad to 525bp (implying IG and HY spreads peak around 380bp and 975bp, respectively). Corporate spreads could initially overshoot before retracing by year-end to our forecasted 525bp level.
Chart 10: CEMBI sell-off may have further to go and is well below 2008 volatility
CEMBI-Broad IG versus CEMBI-Broad HY (SOT avg life, bp) 2500 Investment Grade component
2000 1500 1000 500 0 Dec-07 Jun-08
Source: J.P. Morgan
High Yield component CEMBI-Broad
Dec-08 Jun-09
Dec-09 Jun-10
Dec-10 Jun-11
EM FX weakness has been acute the third week of September; relative to the month around the Lehman crisis, the currency component of the GBI-EM GD index has fallen more half as much (12% versus 20%). There is significant variation when viewed on an individual currency basis. Chart 11 on the following page shows the peak-to-trough move for several EM currencies in late 2008 around the Lehman crisis versus the depreciation from recent highs to date. Chart 12 shows that IDR and TRY stands out as only selling off less than one-third of the move during the Lehman episode; BRL, ZAR, and KRW have depreciated by just under 40% relative to the Lehman sell-off, and SGD, MYR and THB have moved nearly 80% as much as they did in 2008 (though the moves were small in both episodes). Relative to its long-term relationship with the euro that we identified in Septembers EMOS, EM FX is currently 1.5 standard deviations too low, while it reached approximately 3 standard deviations below the level suggested by the euro in late 2008.
J.P. Morgan Securities Ltd. Michael MarreseAC (44-20) 7777-4627 michael.marrese@jpmorgan.com
Chart 11: EM FX depreciation versus USD around Lehman crisis and 2011
(%)
BRL 0 -5 -10 -15 -20 -25 -30 -35 -40
2008 moves are peak-to-trough versus USD during Aug-Dec; 2011 moves are peak-to-trough versus USD August to October 3 Source: J.P.Morgan
ZAR KRW TRY MXN
IDR
RUB
INR
SGD MRY THB
spread countries, their equity and funding markets have been under tremendous strain, and most European banks are unable to access unsecured term-financing.
Chart 13: European bank and sovereign spreads now trade well beyond 2008 levels
5-year CDS spread (bp) 400 iTraxx Europe Senior Financials
350 300 250 200 150 100 50 0 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 iTraxx Europe SovX Western Europe
2008
2011
Chart 12: EM FX depreciation as a percentage of 2008

(%)
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 IDR TRY KRW BRL ZAR MXN INR RUB SGD MYR THB
2008 moves are peak-to-trough versus USD during Aug-Dec; 2011 moves are peak-to-trough versus USD August to October 3 Source: J.P.Morgan
Source: J.P.Morgan
Any decisive rally in financial markets remains dependent on clear policy actions in Europe
Market focus will remain centered on whether European policymakers, the EFSF and the ECB announce clear mechanisms to support bank recapitalization and increase the EFSFs firepower. Euro area sovereign risks have contaminated banks as secondary market bond yields for both sovereigns and banks have widened markedly (chart 13). Initially, risks focused on Greece, then on Ireland and Portugal, and more recently on Belgium, Spain and Italy (collectively know as the six high-spread Euro area). The IMF estimates that nearly half of the outstanding EUR6.5 trillion of Euro area government debt is high-yielding1. Since European banks hold a large amount of the high-yielding government bonds of high-
Leverage of the enhanced EUR440 billion EFSF for bank recapitalization as well as national directives that banks increase their capitaleither privately or via individual country injections of capitalare necessary to restore market confidence. The enhanced EFSF will be able to buy sovereign Euro area bonds in the secondary markets and make sovereign loans to fund bank recapitalization, even in non-IMF program countries, as well as offer precautionary credit lines. The EFSF can be used to support banks in Greece, Ireland and Portugal in the context of the current EU/ECB/IMF programs for those countries. We also believe that precautionary credit lines could be provided for Italy to help backstop any direct state recapitalization of Italian banks, should private sources of recapitalization prove insufficient. Alongside the use of EFSF resources, we would expect countries firmly in the core of the Euro area, such as Germany, France, the Netherlands, Austria and Finland, to use national resources to backstop their banks. Capital injections that would ease the markets concerns about European banks are manageablein the range of EUR150-300 billion according to most estimates, including the IMF and J.P. Morgan (see EBA Stress Test Results Analysis: Must do much better, July 18, 2011, and Euro-TARP: up to EUR150 billion to ease the funding crisis, September 25, 2011). Our European bank credit and equity analysts estimate a EUR150-170 billion capital shortfall by applying more punitive stresses on sovereign
1. See Global Financial Stability Report: Grappling with Crisis Legacies, IMF, September 11, 2011 (Summary Version, pp. 16-28).
J.P. Morgan Securities Ltd. Michael MarreseAC (44-20) 7777-4627 michael.marrese@jpmorgan.com
debt as well as some nominal adjustments to expected loan losses in some jurisdictions2. The following haircuts on government debt are utilized by our equity analysts: Greece 60%, Portugal and Ireland 40%, and Spain and Italy 20%. Using those haircuts implies a capital shortfall among all European banks of EUR148 billion, with the country breakdown shown in table 7.
Table 7: J.P. Morgans estimate of mark-to-market losses to holdings of high-spread European debt at EUR148 billion
EUR14.8 billion for German listed banks; EUR13.9 billion for listed French banks; EUR7.1 billion for listed domestic UK banks; EUR2.3 billion for listed Spanish banks; EUR10.5 billion for listed Italian banks; EUR6.5 billion for listed EMEA EM banks; and EUR90 billion for smaller listed European banks
Source: J.P. Morgan
follow the lead of Spain, which requires that all financial institutions meet required 8-10% levels of core capital. This Spanish exercise determined that 101 of 114 financial institutions met the new minimal capital requirements as of March 2011 and that 13 needed to raise their core capital. For these 13 banks, 11 banks filled the capital shortfall through injections from parent banks, M&A activity, IPO financing and mergers and consolidation. Two small banks are still searching for investors, while the FROB (Spains capital injecting backstop) took over four banks (for a total capital contribution of EUR7.56 billion). During Spains clearly articulated strategy to improve the metrics of its banking system, Spanish banks increased provisions by EUR105 billion (more than 10% of GDP or the equivalent of 50% of total core capital) and conducted 16.9% average staff cuts plus 17.2% of branch office reductions among the merged former cajas (savings banks). It also remains to be seen whether proposals to leverage the EFSF to a higher headline figure will come to fruition given the constraints imposed under the ECB by-laws and Maastricht treaty as well as the need to avoid going back for additional parliamentary approvals. Proposals under discussion reportedly include: 1) using either the ECB (or another multilateral entity) to provide leverage to the EFSF so that the lending capacity is increased to EUR1 trillion or higher; 2) providing guarantees through the EFSF so that it assumes first loss in the event of default; and, 3) potentially transforming the EFSF into a bank with a capital injection from the ECB. Beyond measures to leverage the EFSF, the IMF behind the scenes may be examining ways to increase the size of their facilities from the current level of US$400 billion via some changes in provisioning and new bilateral loans. The mechanism for this capital increase would be national requests for new bilateral loans from surplus countries (Japan, China, Saudi Arabia, Qatar) to finance new facilities. For Spain, the debate is back on about whether an IMF Flexible Credit Line would make sense since Spain has stood out amongst the periphery for implementing reforms (with the exception of labor reforms). Official creditors assert that the new Spanish government that will take office after the November elections is likely to reinvigorate structural reforms and will be fully committed to fiscal consolidation. Political cohesion has also held in Spain relative to other countries in the periphery. Table 8 highlights the calendar of political events ahead in both the US and Europe.
The IMF comes up with higher losses for the EU banking system from sovereign credit risk exposure, estimating cumulative spillovers of EUR300 billion. The IMF marks-to-market the banks direct exposure to government bonds from the six high-spread countries at about EUR200 billion (note this is not a measure of stresstested capital needs of European banks). In addition, interbank linkages as measured by exposures to the banks in the high-spread Euro area constitute an additional EUR100 billion to the banks direct exposure to high-yield Euro area government bonds, implying that extra capital of EUR300 billion would allay market concerns. However, the lessons learned from the US TARP highlighted that the relative success was in large part because the available resources were far in excess of the capital which was eventually deployed and recapitalization was also forced on US banks. The EUR1.259 trillion exposure of core European banks to peripheral European geographies suggests a potential shortfall in available resources under certain tail scenarios. We remain skeptical that pan-European solutions for bank recapitalization will gain momentum since banks will need to be recapitalized on the basis of accounting standards and stress tests, with bank backstops under national supervisory authorities. Rather, our European credit research team believes that there is a far higher probability of euro-TARP emerging by stealth as a result of a single country taking the lead and thus applying peer pressure on other member states to follow suit3. It is possible that core countries might
2. See What Now For Tier I? European Bank Recapitalisation and Burden Sharing Outcomes, September 22, 2011. 3. See The Preferred Route in European Credit Outlook & Strategy, September 22, 2011
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J.P. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities LLC Luis OganesAC (1-212) 834-4326 luis.oganes@jpmorgan.com
J.P. Morgan Securities Ltd. Michael MarreseAC (44-20) 7777-4627 michael.marrese@jpmorgan.com JPMorgan Chase Bank N.A., Singapore David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com
Table 8: Headline noise to remain high: Heavy political calendar for US and Europe
Month October Day Date Country/region Germany Greece Greece Euro area Malta Euro area US Euro area UK France Slovakia US G20 Euro area Switzerland Euro area G-20 Euro area Euro area UK Greece Euro area US Spain US Euro area Euo area Greece Germany US Euro area UK Euro area Greece US Event German parliament vote on 2nd Greek bailout Fifth IMF review results Greek exchange offer to be finalized as of this date Eurogroup meeting (17 finance ministers) Possible vote on EFSF amendments Ecofin meeting (27 finance ministers) Congressional super committee hearing on the economic outlook ECB rate announcement BOE rate announcement Socialist PartyPresidential Primary 1 Scheduled to vote on EFSF, completing the voting process by the 17 European countries to ratify the amendments Deadline for House and Senate committees to submit recommendations to the super committee G20 finance ministers meeting EU Council Meeting (EU heads of state) Federal elections ECB rate announcement G-20 Cannes Summit Eurogroup meeting (17 finance ministers) Ecofin meeting (27 finance ministers) BOE rate announcement Greece local elections Peripheral Europe flash GDP (3Q10) Continuing resolution to fund the US government expires General elections (early) Deadline for the super committee to vote on a plan with the goal (not a requirement) of US$1.5 trillion in deficit reduction Eurogroup meeting (17 finance ministers) Ecofin meeting (27 finance ministers) Sixth IMF review begins German parliament vote on ESM ratification (tentative) Super committee must submit report and legislative language to the President and Congress ECB rate announcement BOE rate announcement EU Council Meeting (EU heads of state) Sixth IMF review results (expected) Deadline for the House and Senate to vote on the super committees bill
Mon Mon Mon Tue Tue Thu Thu Sun Tue Fri Fri-Sat Mon-Tue Sun November Thu Thu-Fri Mon Tue Thu Mon Tue Nov Sun Wed Tue Wed Wed December Fri Thu Thu Fri Thu Fri
Source: J.P. Morgan
3 3 3 4 4 6 6 9 11 14 14-15 17-18 23 3 3-4 7 8 10 14 15 18 20 23 29 30 30
2 8 8 9 15 23
Implications for EM growth and policy actions: Mounting risk for 1H12
We now expect EM growth to moderate to 5.0%oya in 2012 from 5.6% in 2011, even after several downward revisions across the three EM regions over the past week. J.P. Morgans latest growth forecast for the Euro area calls for a mild recession lasting from 4Q11 through 3Q12 and is conditional on the assumption that the regions policymakers move aggressively to support banks and sovereigns from the fallout of a Greek debt restructuring next year. Specifically, J.P. Morgan forecasts a contraction
in the Euro area of -0.5%oya in 2012 compared to an earlier prediction of 0.9% growth. These revisions take J.P. Morgans forecast to developed economies growth to only 0.8% next year, down from 1.3% this year. Although the US forecast still calls for growth at a 1% average over the next three quarters, our US economists concede that there is a 50% probability that the US also falls into recession. Taking into account the new Euro area forecast, the growing odds of a US recession, and ongoing market turbulence in the quarters ahead as European troubles get sorted out, we have lowered our GDP growth forecasts in many EM countries.
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J.P. Morgan Securities LLC Luis OganesAC (1-212) 834-4326 luis.oganes@jpmorgan.com J.P. Morgan Securities Ltd. Michael MarreseAC (44-20) 7777-4627 michael.marrese@jpmorgan.com
JPMorgan Chase Bank N.A., Singapore David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com
Table 9 shows the cumulative growth forecast revisions made since the end of June. While the new EM growth average of 5.0% is nearly a point below the end-June estimate, it is still above the 2.6% registered in 2009 when many EM countries fell into a brief recession in the aftermath of Lehman.
Table 9: EM Real GDP growth revised down along with developed markets
%oya, current forecast versus forecasts as of June 30, 2011 2011 Current Developed Markets Emerging Economies Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela Emerging Asia ex China / India China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand EMEA EM Bulgaria Czech Republic Egypt Hungary Israel Kazakhstan Nigeria Poland Romania Russia South Africa Turkey Ukraine GCC
Source: J.P. Morgan
2012 Current 0.8 5.0 3.2 3.0 3.4 4.0 3.7 2.7 2.5 4.5 3.0 6.7 3.5 8.5 4.0 8.5 5.2 4.0 1.5 4.0 1.5 3.8 1.5 3.0 2.4 1.0 3.0 0.5 2.9 3.5 7.1 2.7 0.8 3.0 2.5 2.7 3.0 3.8 End-June 2.7 6.0 3.9 4.8 3.8 4.5 4.0 3.5 3.8 5.5 3.0 7.6 5.1 9.1 4.6 8.7 6.7 4.7 4.8 5.5 5.0 4.6 4.8 4.6 4.0 3.5 3.4 2.9 4.0 6.5 7.8 4.0 4.0 5.0 3.8 4.3 5.0 5.1
End-June 1.9 6.1 4.6 7.0 4.0 6.5 4.9 4.5 4.5 6.6 3.5 7.5 4.8 9.3 5.2 7.9 6.3 4.2 4.0 4.7 4.7 5.6 3.6 4.7 3.5 3.0 2.5 2.8 4.5 7.0 8.7 4.2 2.0 4.5 3.7 5.6 4.5 5.8
1.3 5.6 4.1 7.5 3.3 6.5 5.3 -7.8 4.0 6.3 3.5 7.1 4.5 8.9 5.2 7.6 6.3 3.9 4.0 4.1 4.6 5.0 3.0 4.3 2.8 2.0 1.8 1.4 4.3 6.5 8.4 3.8 1.2 3.4 3.1 6.3 3.5 5.8
Recent downward revisions to J.P. Morgans Euro area growth forecasts have prompted us to cut our 2012 forecasts for the EMEA EM region further, after lowering our 2011 and 2012 forecasts sharply in August. In our latest round of adjustments, we reduced 2012 growth most sharply in Hungary (-0.8%-pt) and the Czech Republic (-0.6%-pt) due to their high trade exposure to the Euro area, while for Hungary this also incorporates the latest fiscal tightening measures. We have also cut growth considerably in Russia (-0.5%-pt) as a result of the local liquidity squeeze. Elsewhere, revisions were either modest: Romania (-0.2%-pt), Poland (-0.3%-pt), South Africa (-0.2%-pt), or not changed (Turkey and Israel). On a sequential basis, we believe the slowdown in EMEA EM will be most pronounced in 4Q11 and 1Q12. Latin Americas GDP growth forecast was cut further to 3.2%oya in 2012, with most countries expected to decelerate to a below-potential pace next year. The new regional average growth forecast of 3.2%oya for 2012 resulted from a second round of downward revisions since mid-year, and now stands well below the regions estimated potential growth pace of 3.7% and the IMFs latest projection of 4%. While the trade linkages of Latin America and Europe are not as significant as with the US, low growth or a recession in both will certainly hurt Latin American exports. Moreover, with commodities representing nearly 50% of Latin American exports (and well above that level in countries like Argentina, Brazil, Chile, Colombia, Peru and Venezuela), the possibility of further correction in commodity prices would unwind some of the terms-oftrade gains that have supported consumption and investment in the region in recent years. EM Asia stands out in our global forecasts as still anticipating a relatively solid growth outcome, both in 2011 and 2012. For 2011, our GDP projection of 7.1% critically assumes that both China and India will not see growth drop below a 7% pace through year-end. In China, growth decelerated sharply in the first half of the year, dropping from a lofty 12% at the end of last year, down to 7% in 2Q11. But, a broad array of activity indicators (IP, manufacturing PMIs, retail sales, and fixed investment) are consistent, in our view, with Chinese economic activity stabilizing, not further deteriorating. In India, our forecast anticipates a steady decline in growth, due to a steady diet of 12 RBI hikes, but to still be 7.1% in 4Q11. Manufacturing PMI fell to a 2-year low in India but services growth and agricultural growth remain robust. We retain our FY2012 growth forecasts of about 7.5%oya for now. Given that
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JPMorgan Chase Bank N.A., Singapore David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com JPMorgan Chase Bank N.A., HK Haibin ZhuAC (852) 2800-7039 haibin.zhu@jpmorgan.com
China and India together carry a nearly 70% weight in the EM Asia aggregate, it is hard to get the regional forecast to move dramatically unless our views on these two heavyweights change significantly. Indeed, our forecast for EM Asia to expand by 6.7% in 2012 again highlights their importance. In particular, the regional forecast is pushed higher by our expectation that Indian GDP growth will accelerate in 2012 to 8.5% (from 7.6% in 2011), thanks to the much-delayed arrival of the private investment cycle. Outside of India and China, persistent weakness in US and European growth, and the prospect of even weaker DM growth going forward, have taken its toll on our forecasts. For 2012, we expect GDP growth of 3.5% for EM Asia (ex. China and India), with our forecasts for each country below consensus expectations, some substantially so. We anticipate the biggest growth disappointments to be in Southeast Asia, where our forecast for Malaysia, Thailand, and Singapore are around 3%-pts or more below market consensus. A look at the components of our 2012 GDP forecasts for EM Asia sheds light on why we anticipate the region will hold up relatively well, while also highlighting the sources of downside risk. Since 2008, external demand has not been a net positive for Asian GDP growth. Indeed, in 2010 and in our 2011 projection, net external demand contributed zero; in other words, from a GDP accounting point of view, all of the regions 9.2% growth in 2010 and our expectation of 7.1% growth this year, is being generated by domestic demand. For 2012, our 6.7% regional growth forecast assumes a -0.3%-pt drag from net external demand. If the European and US outlooks darken further, this drag would get larger. Note that in 2009, net external demand took off 1.2%-pts from EM Asias GDP growth, with China seeing an exceptionally large 3.9%-pts drag as its export growth slumped. Perhaps more importantly, our assumption that domestic demand growth stays resilient would also be at risk, especially for investment (including inventories), in a deeper DM slowdown scenario. Again using 2009 as a benchmark, gross domestic investment contributed a sturdy 3.5%-pts to regional GDP growth, but this was entirely due to Chinas massive fiscal and bank lending expansion. For EM Asia ex China and India, in 2009, investment was a large drag, taking away 3%-pts from GDP growth, while our forecast for 2012 is that it adds 0.8%-pt, pointing to a potential downside risk to our current 2012 forecasts.
China growth and demand for commodities to hold this year Our EM growth forecasts depend heavily on Chinas performance, since we estimate that approximately 36.5% of the contribution to global growth will come from China this year. Chinas share of global commodity demand also continues to grow. Our commodities group projects that 4Q 2011 Chinese petroleum demand will cross 10 million barrels per day for the first time ever and global petroleum demand will cross 90 million barrels power day for the first time ever. In 2008, a level of 86 million barrels per day for global petroleum demand was sufficient to exhaust the global oil productive capacity of the world at that time and force prices to a peak of $147 per bbl in July 2008.4 Our forecast for full-year 2011 GDP growth for China stands at 8.9%oya, while for 2012 we expect GDP growth of 8.5%. Chinas near-term growth indicators, including IP and manufacturing PMIs, suggest that the economy has continued to track a steady, moderate growth trend through August and September, despite growing uncertainty on the global economy. Our current estimates look for Chinas 3Q real GDP growth to be close to the 7.0%q/q (saar) growth rate recorded in 2Q, with our forecast anticipating a mild upturn to 8.5% in 4Q. Importantly, Chinese domestic demand is expected to be supported by the governments large affordable housing program, as well as solid overall employment growth and broad-based wage gains. On the policy front, our baseline scenario remains that Chinas central bank will pause from further interest rate moves for the rest of the year, adopting a wait-and-see approach for its monetary policy stance in the very near term. Looking further ahead, if the global economy and external demand conditions worsen notably from here, we believe the Chinese government may consider adopting some supportive measures, leaning first on fiscal policy, then followed by a moderate easing on liquidity conditions and the credit control measures, with the pre-condition that headline CPI is seen to have clearly peaked. Overall, the dominant concerns on DM demand uncertainty going ahead appear to hint at some moderate downside risks on the growth forecasts for China, especially going into 1H12. The real estate sector in China remains a major source of risk, although we think the likelihood of a housing market collapse is very small in the near term. Since last year, the government has taken a series of measures to
4. See Commodity Markets Outlook and Strategy: how to achieve escape velocity, September 26, 2011
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JPMorgan Chase Bank N.A., Singapore David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com
stabilize the housing market, and these measures seem to come into effect. The housing market is likely at the turning point: transaction volume has fallen in the past two quarters and prices are now flat. Looking forward, we expect the government to maintain current policy stance in the real estate market to avoid another re-acceleration in housing prices. From a domestic political perspective, top leaders have strong incentives to gain points by achieving the housing stabilization objectives. However, the cooldown in the housing market and the pressure on real estate developers are in line with the objectives of stabilization policies, and should not be over-interpreted as an indicator for a collapse. Demand remains strong, supported by the urbanization process, income growth, the fact that there are no alternative investment assetsthese structural factors remain unchanged by the stabilization policies. In addition, politically a collapse scenario in the housing market carries enormous risks, as promotions are still linked to growth, and property is still a key source of local government revenue. Importantly, policymakers have the ability to manage the property cycle (most measures are on the demand side and can be easily loosened in implementation, removed, or even reversed). Weaker FX gives EM policymakers time to cut rates Many EM policymakers have shown willingness to tolerate weaker currencies in response to the deteriorating global growth environment, but the next line of defense will likely be policy rate cuts particularly in Latin America and EMEA EM. While the speed of the recent drop in EM FX caught many policymakers by surprise, the FX intervention so far has been relatively timid and has not prevented a number of EM central banks from interrupting their tightening cycles by adopting an outright neutral or easing bias. Indeed, three EM central banksBrazil, Israel and Turkeysurprised markets by cutting policy rates preemptively over the past month despite their inflation and FX dynamics, and a total of seven EM central banks are expected to cut rates from now to year-end. Latin American central banks, which were the most aggressive hiking rates during the policy normalization process that started in early 2010, are expected to cut rates the most over the next three quarters. Our new forecasts now call for cumulative cuts by mid2012 of 150bp in Brazil, 175bp in Chile, and 50bp in both Mexico and Peru (table 10).
Table 10: EM central banks begin easing already this year

Current Forecast rate (%pa) next change Sep 11Dec 11Mar 12 Jun 12 Sep 12Dec 12 Developed 0.80 0.63 0.62 0.62 0.62 0.62 0.63 Emerging 5.93 5.93 5.80 5.72 5.73 5.75 5.90 Latin America 8.14 Brazil Chile Colombia Mexico Peru EMEA EM Czech Rep Hungary Israel Poland Romania Russia South Africa Turkey EM Asia China Korea Indonesia India Malaysia Philippines Taiwan Thailand 8.14 7.53 7.15 7.12 7.12 7.12
12.00 Oct-19-11 (-50bp)12.00 11.00 10.50 5.25 Nov-15-11 (-25bp) 5.25 4.75 4.00 4.50 On hold 4.50 4.50 4.50 4.50 0 Dec-2-11 (-25bp) 4.5 4.25 4.00 4.25 Dec 2011 (-25bp) 4.25 4.00 3.75 4.40 0.75 6.00 3.00 4.50 6.25 3.75 5.50 5.75 5.76 On hold 2Q 2012 (-25bp) Oct-24-11 (-25bp) 1Q 12 (-25bp) 1Q 12 (-25bp) 3Q 12 (+25bp) 4Q 11 (-50bp) Oct 12 (+25bp)
10.50 10.50 10.50 3.50 3.50 3.50 4.50 4.50 4.50 4.00 4.00 4.00 3.75 3.75 3.75 4.30 4.56 0.75 5.75 3.00 3.75 5.25 4.00 5.00 5.75 0.75 5.75 3.50 3.75 5.25 4.25 5.00 6.50
4.40 4.30 4.24 4.19 0.75 6.00 3.00 4.50 6.25 3.75 5.50 5.75 0.75 6.00 2.50 4.25 6.25 3.75 5.00 5.75 0.75 6.00 2.50 4.00 5.75 3.75 5.00 5.75 0.75 6.00 2.50 3.75 5.50 3.75 5.00 5.75
5.76 5.80 5.81 5.85 6.56 3.50 6.50 8.50 3.00 4.50 1.875 3.50
5.85 6.02
6.56 4Q 2012 (+25bp) 6.56 6.56 3.25 1Q 2012 (+25bp) 3.25 3.25 6.75 1Q 2012 (-25bp) 6.75 6.75 8.25 Oct-25-11 (+25bp) 8.25 8.50 3.00 On hold 3.00 3.00 4.50 On hold 4.50 4.50 1.8750 4Q 2012 (+12.5bp)1.875 1.875 3.50 2Q 2012 (+25bp) 3.50 3.50
6.56 6.56 6.81 3.75 3.75 4.00 6.50 6.50 6.50 8.50 8.50 8.50 3.00 3.00 3.00 4.50 4.50 4.50 1.875 1.875 2.00 3.75 3.75 3.75
Source: J.P. Morgan
Ongoing FX weakness raises the bar for rate cuts in some countries, owing to concerns about the passthrough to inflation and continued high exposure to foreign currency debt in CEE. This worry is most acute in Hungary where we are pushing back our forecast for a rate cut by a quarter to 2Q12, with risks of a further delay. In South Africa, the deteriorating inflation profile also raises risks of a 1-quarter delay in the rate cut to 1Q12. Near-term rate cuts are most likely in countries where FX rates have been either stable or appreciated. Indeed, the shekels rise over the past month contributed to the BoIs decision to deliver an earlier than anticipated rate cut on Monday. Although not our base case, the CNB would also likely cut rates if the CZK were to strengthen in coming months.
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J.P. Morgan Securities Ltd. Jonny GouldenAC (44-20) 7325-9582 jonathan.m.goulden@jpmorgan.com
The only central bank in EM Asia that we expect will continue to raise policy rates in the next three months is India, with our Bank of Korea rate hike call pushed back into 2012. Even though the market continues to price in rate cuts in India, the RBI is likely to stick to its script and deliver another rate hike at the end of this month. Indeed, if inflation and inflation expectations in India do not show substantial moderation in the coming months, the October rate hike may not mark the end of the cycle in India. Elsewhere in the region, the majority of the countries are expected to remain on hold, including China. The only in the country in EM Asia expected to lower rates is Indonesia, where a drop in headline inflation and a promise to keep subsidized fuel prices unchanged even in 2012 should give BI headroom for a 25bp cut early next year.
EMBIG: Momentum points to likely wider spreads in the short-term

Given the strong cashflows and low financing needs for EM sovereigns, we would see a large move wider on global market risk aversion as a potential re-entry point into EM sovereigns which we expect will be a more resilient part of EM fixed income. Spread widening and outflows (risk reduction) over the last few weeks have started to lay the conditions for re-entry points to the market that were previously lacking, but momentum suggests it is still too early to add despite our still positive EM growth forecast for the next year. We have revised our EMBIG spread forecast higher by 100bp since August but this has still not been enough to keep up with market moves. With EMBIG spreads having widened 107bp over the last month alone and meaningful outflows just starting to been seen in the weekly data, we see wider spreads possible in the short term but expect some retracement by year-end as investors come back to buy a market where fundamentals are still strong, supply is flat and positioning is not stretched. EMBIG spreads peaked at 891bp in October 2008 but we do not expect spreads to get close to that over the next three months, given markets are much more expectant of large sell-offs now (following the 2008/2009 experience) and technicals for EM sovereigns are steadier with less risk in trading hands and much lower leverage. We revise higher our year-end EMBIG spread target to 425bp (from 375bp).
We recommend overweights in defensive low-beta where value now looks outright attractive and high spread overweights with idiosyncratic reasons to tighten. Our EMBIG Model Portfolio recommendations are still defensively positioned with an overweight in Latin America versus EMEA EM, an underweight in quasisovereigns, and defensive low-beta Philippines and Colombia added last month as overweights. As spreads approach wider levels we look at two sources of value: 1) EMBIG bonds with yields above 15%; and, 2) previously very low spread bonds with strong fundamentals and technicals that have widened significantly. Table 11 shows that only Venezuela/PDVSA and Belarus have yields above 15% in the EMBIG and we remain overweight Venezuela / PDVSA given wide spreads that we feel do not price in the potential for political upside in the 2012 elections. We also highlight bonds, which markets previously considered safe (given very low spreads) and have sold-off significantly. Table 12 shows bonds which traded below 120bp on August 1 (before EM spreads started widening) and where spreads have widened over 50% since then. Not surprisingly, the majority are in Latin America, including Brazil, Colombia, Mexico and Panama, with the Philippines and South Africa standing out for Asia and EMEA EM. We remain overweight Colombia and the Philippines from these countries.
Table 11: Only Venezuela/PDVSA and Belarus have yields above 15% in the EMBIG
Issuer PDVSA PDVSA Belarus PDVSA Venezuela Venezuela Venezuela Belarus Venezuela Venezuela Venezuela Venezuela Venezuela Venezuela Venezuela Instrument VE PDVSA 8 1/2% due 17 VE PDVSA 12 3/4% due 22 BY Republic 8 3/4% due 15 VE PDVSA 5 1/4% due 17 VE Republic 12 3/4% due 22 VE Republic 11.95% due 31 VE Republic 9% due 23 BY Republic 8.95% due 18 VE Republic 8 1/4% due 24 VE Republic 9 1/4% due 28 VE Republic 7 3/4% due 19 VE Republic 7% due 18 VE Republic 9 1/4% due 27 VE Republic 9 3/8% due 34 VE Republic 7.65% due 25 Stripped YTM Stripped Spread 19.29 18.96 18.40 17.70 17.03 16.45 16.02 15.71 15.68 15.63 15.60 15.57 15.41 15.16 15.04 1,841 1,753 1,781 1,667 1,553 1,462 1,431 1,457 1,387 1,375 1,417 1,425 1,354 1,321 1,318
Source: J.P. Morgan
15
Table 12: Bonds that traded below 120bp on August 1 and where spreads have widened over 50% since then
Bond BR A bond BR Republic 10 1/4% due 13 BR Republic 10 1/2% due 14 BR Republic 7 7/8% due 15 BR Republic 6% due 17 BR Republic 4 7/8% due 21 BR Republic 5 5/8% due 41 BR Republic 5 7/8% due 19 BR Republic 8 7/8% due 19 CO Republic 10 3/4% due 13 CO Republic 8 1/4% due 14 CO Republic 7 3/8% due 19 CO Republic 7 3/8% due 17 MX UMS 6 3/8% due 13 MX UMS 8% due 22 MX UMS 5 7/8% due 14 MX UMS 5 7/8% due 02/14 MX UMS 6 5/8% due 15 PA Republic 5.2% due 20 PH Republic 9% due 13 PH Republic 8 1/4% due 14 PH Republic 4% due 21 ZA Republic 6 1/2% due 14
Source: J.P. Morgan
Initial Spread (bp) 28 24 57 89 98 104 107 109 109 50 103 114 118 56 74 79 96 108 115 89 115 117 120
Current Spread (bp) 117 97 115 177 197 218 237 200 210 87 188 221 221 118 164 197 198 195 218 157 197 229 183
% chg bp chg 321% 297% 101% 99% 102% 110% 121% 84% 92% 74% 81% 94% 88% 110% 123% 150% 106% 79% 90% 76% 70% 96% 52% 89 72 58 88 99 114 130 91 101 37 84 107 104 62 90 118 102 86 103 68 81 113 63
coming from retail and marginal crossover buyers now seen to be retreating more aggressively back to traditional benchmarks and EM sovereigns. While we have witnessed a significant growth in institutionally backed CEMBI funds in the last two years, AUM against the benchmark currently stands at just 7.5% (or US$30 billion) of the US$400+ billion market cap index. We revise our year-end targets for CEMBI Broad and corporate supply to 525bp (implying 380bp for IG and 975bp for HY) and US$175 billion, respectively. The change in our supply forecast, which implies around US$20 billion left to do this year, recognizes the current challenges facing issuers and the expectation that market access will be restricted to the better known quasi-sovereign and investment grade names that will return to the market as soon as conditions allow. Although the financing constraints imposed upon corporates at this juncture is far from ideal, EM refinancing pressures remain low with EM corporates having front loaded much of their financing needs into the 1H11 and built up sufficient liquidity through operations to meet the US$17.6 billion of Eurobond maturities (compared with coupon inflows of US$13.4 billion) estimated for the remainder of the year (table 13).
Table 13: Estimated EM corporate Eurobond cash flows for remainder 2011 and 2012
EM corporates: The virtuous cycle of a negative feedback loop

The extent of the reversal in the inflow story for EM corporates and not fundamentals will determine peak spreads for the asset class this crisis. We said as much in the note we published on Tuesday, September 28, 2011 entitled Putting Recent Market Moves in Context. In that report we warned that while default and refinancing risks are much lower in EM corporates, with only US$17.6 billion of Eurobond maturities, today versus 2008. For the remainder of the year compared to US$31 billion of cash flows combined, challenges presented by poor liquidity and weak sponsorship would likely continue to undermine valuations and see spreads overshoot to the downside in the near term. This view appears to be substantiated by the 73bp widening in CEMBI spreads in the third week of September and the coincidental EPFR data which pointed to acceleration in investment outflows from US and Western European-domiciled EM mutual funds over the same period. Retail investors may also continue to sell. On the institutional side, we get a sense from talking to dedicated EM money managers that they have been more tolerant of this sell-off. However, dedicated investors have not been large enough to counter the selling pressure
16
Eurobond Cash flows Total cash flows Investment grade High yield of which total maturities Investment grade High yield of which total coupons Investment grade High yield Total cash flows Asia Emerging Europe Latin America Middle East and Africa of which total maturities Asia Emerging Europe Latin America Middle East & Africa of which total coupons Asia Emerging Europe Latin America Middle East and Africa
Source: J.P. Morgan and Bond Radar
Remainder 2011 31,057 21,320 9,737 17,627 13,895 3,732 13,430 7,425 6,006 31,057 11,636 8,429 6,217 4,775 17,627 7,433 5,098 1,757 3,338 13,430 4,202 3,332 4,460 1,437
Forecast 2012 108,031 70,293 37,738 58,138 40,619 17,519 49,893 29,674 20,219 108,031 38,033 26,411 24,072 19,515 58,138 22,698 14,881 6,505 14,054 49,893 15,335 11,530 17,567 5,461
We do see clear value emerging in EM corporates; table 14 highlights the names that we believe already offer longer-term value. The list is broken into two buckets, the
Table 14a: EM corporates offering longer term value
Bonds with a yield greater than 15% Issue Asia Agile 10% due 16 Agile 8 7/8% due 17 Bakrie Telecom 11 1/2% due 15 BLT Finance 7 1/2% due 14 Country Garden 11 3/4% due 14 Country Garden 10 1/2% due 15 Country Garden 11 1/4% due 17 Country Garden 11 1/8% due 18 Evergrande 13% due 15 Hidili Industry 8 5/8% due 15 Kaisa Group Ltd 13 1/2% due 15 Lai Fung 9 1/8% due 14 Longfor 9 1/2% due 16 Lonking 8 1/2% due 16 PT Gajah Tunggal Step-up due 14 Road King 7 5/8% due 14 Road King 9 1/2% due 15 West China Cement 7 1/2% due 16 Latin America Cemex 9 1/2% due 16 Cemex 9 1/4% due 20 Cemex 9% due 18 Cemex FRN due 15 Marfrig Holding Europe 8 3/8% due 18 Marfrig Overseas 9 1/2% due 20 Maxtel 11% due 14 Minerva Overseas 10 7/8% due 19 PDVSA 12 3/4% due 22 PDVSA 4.9% due 14 PDVSA 5 1/4% due 17 PDVSA 5 1/8% due 16 PDVSA 5% due 15 PDVSA 8 1/2% due 17 TGNOAR Step-up due 12 Trump Ocean Club 9 1/2% due 14 Middle East and Africa Dubai Holding Com FRN due 12 Dubai Sukuk Centre FRN due 12
Source: J.P. Morgan
first including higher quality and rated names already trading at a yield between 7-8%, and lower rated names already trading at a yield above 15%.
Country China China Indonesia Indonesia China China China China China China China China China China Indonesia China China China
Sector Real Estate Real Estate TMT Transport Real Estate Real Estate Real Estate Real Estate Real Estate Metals & Mining Real Estate Real Estate Real Estate Industrial Industrial Infrastructure Infrastructure Industrial
Ratings Ba2/BB Ba2/BB NR/B NR/CCC Ba3/BBBa3/BBBa3/BBBa3/BBB2/BBB1/BBB2/B B1/B+ Ba3/BB Ba3/BB B3/NR Ba3/BBNR/BBBa3/BB-
Ask Price 81.50 78.00 70.00 43.00 90.00 85.00 84.00 84.00 74.00 70.00 71.00 88.00 84.00 81.00 83.00 72.00 71.00 77.00
YTW 15.34 14.81 24.51 47.95 16.15 15.83 15.67 15.25 24.94 19.63 26.55 15.06 14.45 14.20 16.41 22.33 20.54 14.92
SOT to worst 1,435 1,371 2,394 4,760 1,575 1,519 1,456 1,395 2,445 1,892 2,598 1,473 1,362 1,332 1,605 2,198 1,986 1,414
Mexico Mexico Mexico Mexico Brazil Brazil Mexico Brazil Venezuela Venezuela Venezuela Venezuela Venezuela Venezuela Argentina Panama
Industrial Industrial Industrial Industrial Consumer Consumer TMT Consumer Oil & Gas Oil & Gas Oil & Gas Oil & Gas Oil & Gas Oil & Gas Utilities Real Estate
NA/B NA/NA NA/B NA/B B1/B+ B1/B+ Caa1/CCC+ B2/B NA/NA NA/NA NA/B+ NA/NA NA/NA NA/B+ NA/NA B3/NA
76.25 69.00 72.00 66.50 67.00 68.00 70.00 81.00 73.50 69.00 57.50 58.00 61.50 66.50 55.00 77.00
16.47 16.00 16.26 18.18 16.84 16.62 25.17 14.99 18.89 18.61 17.59 18.14 19.01 19.18 29.83
1,545 1,428 1,499 1,749 1,550 1,491 2,471 1,336 1,704 1,818 1,649 1,716 1,830 1,819 2,964
UAE UAE
Real Estate Real Estate
B3/NR B3/B+
95.00 90.00
17.33 17.06
1,731 1,700
17
J.P. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly.s.huffman@jpmorgan.com
Table 14b: Bonds with a yield between 7-9%

Issue Asia Beijing Enterprises 6 3/8% due 41 Cikarang 9 1/4% due 15 Hutchison 6 5/8% due 15 Perp Indosat 7 3/8% due 20 Noble 6 3/4% due 20 PT Adaro 7 5/8% due 19 Emerging Europe Dev Bank of Kazakhstan 5 1/2% due 15 Lukoil 6 1/8% due 20 VEB Finance 6.902% due 20 Vimpelcom 8 3/8% due 13 Latin America Alestra 11 3/4% due 14 Auto Gil 8 1/4% due 21 Banco ABC 7 7/8% due 20 Banco Internac 8 1/2% due 70 Banco Panamericano 8 1/2% due 20 Bbva Bancomer 7 1/4% due 20 Bbva Bancomer 6 1/2% due 21 BCP 6 7/8% due 26 BCP Var 9 3/4% due 69 Braskem 7 1/8% due 41 Braskem 7 3/8% due 15 Perp Commex 7% due 18 Corp GEO 8 7/8% due 14 Cosan 8 1/4% due 15 Perp Digicel 8 1/4% due 17 Fibria Overseas 7 1/2% due 20 Fibria Overseas 6 3/4% due 21 Grupo Petrotemex 9 1/2% due 14 Homex 7 1/2% due 15 Hypermarcas 6 1/2% due 21 IFH Peru Ltd 8 5/8% due 19 Mabe 7 7/8% due 19 Magnes 7 7/8% due 20 Malls Intl Fin 8 1/2% due 16 Perp MICC 8% due 17 Nii Capital Corp 8 7/8% due 19 Nii Capital Corp 7 5/8% due 21 Odebrecht 7 1/2% due 15 Perp Unibanco 8.7% due 10 Perp Urbimm 8 1/2% due 16 Votorantim 7 1/4% due 41 YPF 10% due 28 Middle East and Africa DEWAAE 7 3/8% due 20
Source: J.P. Morgan
Country China Indonesia Hong Kong Indonesia Hong Kong Indonesia Kazakhstan Russia Russia Russia Mexico Chile Brazil Peru Brazil Mexico Mexico Peru Peru Brazil Brazil Mexico Mexico Brazil Jamaica Brazil Brazil Mexico Mexico Brazil Peru Mexico Brazil Brazil El Salvador Mexico Mexico Brazil Brazil Mexico Brazil Argentina UAE
Sector Diversified Utilities Diversified TMT Diversified Metals & Mining Financial Oil & Gas Financial TMT TMT Consumer Financial Financial Financial Financial Financial Financial Financial Industrial Industrial Consumer Real Estate Consumer TMT Pulp & Paper Pulp & Paper Industrial Real Estate Consumer Financial Consumer Industrial Consumer TMT TMT TMT Diversified Financial Real Estate Diversified Oil & Gas Utilities
Ratings Baa1/ABa2/BBNR/NR Ba1/BB Baa3/BBBBa1/NR Baa3/BBB Baa2/BBBNR/BBB Ba3/BB B1/B+ Ba1/NR Ba1/NR Ba3/NR Ba3/NR A3/NR A2/NR Baa3/NR NR/BB+ Baa3/BBBBaa3/BBBBa3/NR Ba3/BBBa2 /BB B1/NR Ba1/BB Ba1/BB NR/BB Ba3/BBBa2/BBBa3/BBNR/BBBB1/BBNR/BBB1/NR B2/B+ B2/B+ Baa3/BB+ Baa1/NR Ba3/B+ Baa3/BBB NR/NR Ba2/NR
Ask Price 91.72 103.00 89.50 102.50 91.00 101.00 96.00 93.88 100.00 102.50 112.00 100.00 93.50 101.50 106.00 99.38 94.50 98.00 114.00 93.50 96.50 97.00 101.00 96.00 96.00 95.35 91.50 104.00 99.00 93.25 105.00 102.25 99.00 102.00 100.00 106.00 103.00 98.50 100.10 102.00 96.00 112.50 97.00
YTW 7.04 8.19 7.46 6.91 8.26 7.42 6.60 7.05 6.90 6.67 7.03 8.25 8.98 8.25 7.53 7.35 7.32 7.09 7.42 7.68 7.73 7.94 8.49 8.70 9.14 8.27 8.05 7.91 7.80 7.50 7.54 7.50 8.04 8.02 8.00 7.64 7.10 7.69 7.14 7.62 7.59 8.59 7.84
SOT to worst 406 769 404 551 660 620 585 525 516 648 664 670 728 654 583 564 546 488 579 469 431 656 808 527 795 655 620 752 711 562 640 587 634 725 703 639 558 426 715 728 461 626 605
Local market bonds remain vulnerable to further position reduction; stay max short EM FX
We recommend bearish positions in several local bond markets, particularly where foreign holdings are high relative to recent periods and where positions are long. EMEA EM, in general, and South Africa and Hungary, in particular, stand out as being most susceptible to outflows (South Africa) and underperformance (Hungary); we recommend being short 10-year bonds in the former and
5-year bonds in the latter. We are cautious on EM Asian local bonds as well, as foreigners selling is likely to remain the dominant factor in the near term. One key differentiating factor in Asia, though, is strong domestic support for many local markets, and we would expect this backstop bid to materialize at higher yield levels. The best opportunities to add duration may be in Latin America in the coming weeks. If FX rates and general market volatility stabilize, the slow growth and low-for-long policy of the
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J.P. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly.s.huffman@jpmorgan.com
Table 15: Top local markets trades

Trade TWD/THB 2-month NDF USD/CNY 3-month NDF Long TRY/ZAR Short ZAR 10-year (R208) Short HUF 5-year (16/c) Long USD/CLP Long USD/COP Short CAD/MXN Long MXN/COP Long USD/ARS Sell Dec 14/Buy Mar 14 NDF Receive Brazil Jan 14s Receive Chile 2-year Swap Receive Mexico 5-year TIIE swaps Receive Colombia 2-year IBR
Source: J.P. Morgan
Entry date 8-Aug-11 12-Jul-11 20-Sep-11 13-Sep-11 3-Oct-11 13-Sep-11 13-Sep-11 27-Sep-11 27-Sep-11 13-Sep-11 13-Sep-11 13-Sep-11 13-Sep-11 13-Sep-11
Latest 1.0288 6.396 4.35 8.30% 7.41% 526 1961 14.66 140.5 4.5085/4.6994 10.72% 4.62% 5.85% 4.90%
Entry 1.0340 6.466 4.29 7.31% 7.54% 475.3 1821 13.12 141.1 4.205 10.94% 4.49% 5.56% 4.75%
Target 1.0065 6.350 4.50 8.40% 8.00% 550 2000 12.50 155.0 10.50% 3.91% 5.15% 4.25%
Stop 1.0510 6.530 4.20 7.70% 7.20% 460 1765 15.55 130.0 11.10% 4.83% 5.75% 5.00%
Fed and other central banks should push some investors back into the market. This is particularly the case for Brazil, where the onset of an easing cycle and relatively low vulnerability to foreigner selling should make the market attractive if risk sentiment improves. In aggregate, for real money investors, we recommend neutral duration allocations in Asia and neutral duration allocations in Latin America, with an emphasis on linkers. We are short duration, meanwhile, in EMEA EM. Our top trades across EM local markets are highlighted in the table 15. We also update our currency and GBI-EM yield forecasts in table 16.
For similar reasons, we continue to recommend maximum short EM FX allocations versus the GBI-EM index (10%). The depreciation of many currencies has been greater than declines in cyclical drivers would suggest, notably for the MXN and some EM Asian FX. However, currencies remain the more liquid adjustment valve for investors to hedge bond positions which face liquidity constraints. Further, as slower growth takes hold heading into 2012, downward pressure on EM terms of trade drivers, notably commodities, is likely to prevent EM FX from rebounding meaningfully. While central banks are well prepared with strong balance sheets to stem further FX
Table16: GBI-EM returns and forecasts through year-end Dark bars are year-to-date returns; lighter bars are J.P. Morgan expectations from now to year-end
Country GGBI-EM Global Div Indonesia Peru Malaysia Brazil Colombia Thailand Mexico Philipines Chile Hungary Russia Poland Turkey South Africa Forecast Return Est. 2011 0.3% 11.9% 9.9% 7.5% 6.7% 5.9% 4.9% 3.4% 2.8% 2.2% 1.3% -2.5% -5.8% -12.4% -16.0% YTD -3.5% 16.5% 5.2% -0.4% -1.2% -4.4% -1.7% -5.5% -1.8% -3.9% -1.5% -4.1% -6.5% -14.4% -15.6% Yield Local Return Current Forecast to Year-end 6.7% 7.3% 6.3% 3.6% 10.8% 6.7% 3.8% 6.8% 6.3% 4.7% 7.8% 8.2% 5.4% 8.6% 8.2% 6.8% 8.2% 6.1% 3.7% 10.7% 6.2% 3.8% 6.4% 6.6% 4.7% 7.8% 7.9% 5.4% 8.5% 8.4% 1.4% -4.7% 3.5% 0.3% 2.9% 3.9% 0.7% 3.8% -0.7% 1.1% 1.8% 2.9% 1.4% 2.4% 1.0% Spot Current Forecast 9,000 2.78 3.20 1.89 1961 31.3 14.0 44.0 526 223 32.6 3.31 1.88 8.18 8,928 2.75 2.98 1.80 1900 29.5 13.3 41.8 500 221 33.0 3.33 1.88 8.30 Spot Return to Year-end 2.3% 0.8% 0.9% 7.5% 5.0% 3.2% 5.9% 5.4% 5.4% 5.2% 1.0% -1.2% -0.7% -0.0% -1.4%
-20%
Source: J.P. Morgan
-10%
0%
10%
20%
19
JPMorgan Chase Bank N.A., Hong Kong Bert GochetAC (852) 2800-8325 bert.j.gochet@jpmorgan.com
volatility, governments broadly have shown comfort with the directional moves in currencies. Risks are skewed to further underperformance broadly, and we continue to recommend a maximum short (10%) allocation versus the GBI-EM GD index, a position which we have held since August 9, when we increased short exposure from 5% to 10%. We also continue to recommend outright short trades where we see the highest probability of further outflows in local bonds, most notably in ZAR. We took profits in long PLN/HUF and look for both to underperform versus USD. We close our long-held overweight SGD trade, though we continue to see upside in CNY versus USD despite recent headwinds and increased risks from the policy side. In Latin America, we recently took profits on long USD/BRL but hold short exposure to the region via long USD/COP and USD/CLP which have lagged. EM Asia: Reduce directional risk but hold short USD/CNY and short TWD/THB Asia FX has capitulated as the anchor from growth expectations eroded away. J.P. Morgan ADXY index of EM Asia FX, sold off violently on a position unwind as confidence in the growth cycle turned. The September selloff has been the largest since early-2009, and this has effectively taken out the year-to-date appreciation in EM Asia. The 5% depreciation of the ADXY at the peak of the move is almost equivalent to the full-year depreciation in the sharp recession of 2000. Though this suggests that a sharp economic slowdown is already priced, markets continue to price in risk premia of a crisis or a funding crunch on the scale of Sept-2008. So, while ADXY appears oversold relative to a cyclical slowdown, fear of financial system crisis (even if not our base scenario) may take the market to deeper oversold levels (chart 14).
Chart 14: ADXY synchronized to growth cycle
%oya both scales
10.0 5.0 0.0 -5.0 -10.0 -15.0 Feb-94
Source: J.P. Morgan
However, central bank intervention is now an important offset. Central banks, having bought USD into the USD/Asia fall, now have significant capacity to buffer the USD/Asia rise. Indeed, central banks in many markets are now offering USD in substantial size. Notably, recent moves in the region have started to reflect the relative intervention biases of Asian central banks. Currencies where policymakers are active sellers of USD (PHP, THB, IDR) have traded with relative resilience, while currencies with less or no intervention have seen more violent unwinds (SGD, INR). In the near term, we expect twosided volatility on USD/Asia to stay high with intervention biases influencing relative performances within the region. In local rates markets, trading has been mostly sideways in recent weeks as cyclical factors (for lower yields) have offset the impact of some outflows so far (i.e., higher yields). But we fear that Asian government bonds will eventually have to suffer when foreign investors reduce their local bond holdings. Local investors would be buyerson-dips at current levels, but they will not underwrite the exodus of foreign money out of their markets without asking for concessions. As such, we believe that bond markets such as Indonesia, Malaysia and Korea are vulnerable to a further correction despite bond-positive fundamentals, such as declining inflation, declining growth, and conservative fiscal stance. We will, therefore, wait for better levels to position in Asian bonds for the time being. In Asia FX, we avoid over-emphasizing long-term directional or fundamental views while financial markets are clearly distressed, focusing instead on defensive positions to ride out volatile times. Particularly, we stay in defensive intra-Asia crosses for carry or for relative intervention biases between central banks. We minimize outright USD/Asia risks. We stay short TWD/THB, which continues to benefit from carry and THB stability. We continue to like short TWD funding for carry and in view of a central bank that is expected to remain resistant to currency appreciation. In contrast, THB should remain resilient as it remains a laggard in EM Asia, and the BoT has been active in capping USD/THB upside. In this environment, we minimize outright directional risks in USD/Asia, staying short only in markets where the directional trend remains intact: short USD/CNY as we continue to see records low in the daily fixings. We exit outright short USD/SGD, and advise seeking long SGD exposures only on a basket basis and only if the SGD NEER trades down to the intervention level of the band (-2% band level by our estimates).
10% 5% 0% -5% -10% Asia - US growth differential ADXY %oya -15% -20% -25% Feb-98 Feb-02 Feb-06 Feb-10
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J.P. Morgan Securities Ltd. Michael TrounceAC (44-20) 7777-4356 michael.j.trounce@jpmorgan.com
In Asian rates, we keep risk light. We exit a curve flattener in KRW, where we were long 10-year KTB versus paid in 2-year swaps. We also have exited a long position in INDOGB, as the risk that Indonesian yields rise from here remains real, despite the authorities interventions in both the FX and the bond market. EMEA EM: Most vulnerable to outflows risk; stay short South Africa bonds and favor Poland versus Hungary The ongoing downward revisions in growth forecasts will continue to place modest further negative pressure on EMEA EM FX, which has corrected by more than 16% since May, with much of the move taking place in September. We continue to expect the ELMI+ subindices for EMEA EM currencies to fall (i.e., we expect negative total returns) and we see greater pressure on markets where the growth outlook has been taken down further. Our latest growth forecasts cut back most strongly the outlook for 2012 in Hungary, we keep Hungary in the bottom tier of EMEA EM FX markets long with South Africa, where positions are crowded. EMEA EM central banks have to a varying extent markedly stepped up their response to cyclically weaker FX markets; they are focusing on containing volatility leaning against the windrather than drawing a line in the sand. As growth and inflation forecasts were taken down during August in response to the cyclical slowdown, interest rate expectations fell and short rates rallied. The consequent weakening in EMEA EM FX has been viewed differently across EM central banks, and our trade recommendations reflect this. In South Africa, Hungary, and Romania, the weakening in monetary conditions isfor nowtolerable and will act as counter-cyclical support, although the market is right to price in rate hikes in Hungary as a response to the weaker currency. In Russia, the RUB weakness has passed the tipping point and intervention has returned in force; more than US$6 billion in September. Likewise in Poland, the NBP has for only the second time in ten years resorted to intervention in order to dampen excess volatility. Turkey has come the closest to drawing a line in the sand for the lira; having effectively achieved a significanteven relative to other EM currenciesdepreciation in the November-May period, it is now acting effectively through reserve drawdown to halt the liras fall and maintain credibility over the inflation profile.We believe that central banks will resort to FX intervention over rate hikes, although Hungary may be the exception.
South Africa has the greatest potential for deeper outflows. Deteriorating growth and fiscal dynamics will continue to weigh on South Africa assets as credit premia is priced in. Even after the late September moves (seven consecutive large outflow days and ZAR 15 billion of bond outflows), we think positions are still relatively overweight. In addition, any support from policy rate cuts is more unlikely now given the significant depreciation of the currency. Outflows from South Africa local bonds are also likely to intensify as real money funds meet redemptions by selling assets given low cash levels, potentially fueling further rand weakness. We are bearish on HUF FX and rates due to weak fundamentals. The appetite of the NBH to use reserves to defend the HUF may be limited compared with other central banks since FX reserves may need to be used to pay down maturing FX debts. The market is pricing in the expectation that once again that interest rates will serve as the main adjustment channel. Further, Hungary has adopted a less direct approach to FX intervention, choosing to offset any local bank demand for FX which is likely to materialize from the new FX loan plan against their FX reserves. These weekly EUR auctions will be conducted between October 3, 2011 and February 29, 2012. Assuming the NBH's scenario of a 20% participation rate, we estimate that there could be as much as EUR3.85 billion in additional local bank demand for FX, amounting to the equivalent of FX intervention. However the uncertainties surrounding this plan suggest that NBH will likely hike rates if HUF depreciation continues at the current pace. Poland, Turkey, Israel and Czech are the least vulnerable markets, with lower foreign participation. Positions are relatively light in both rates and FX markets and central banks here have been stepping up their intervention strategies. These markets also benefit better fiscal positions (once parastatal debt has been taken into account in South Africa) or better growth outlooks, or both, but the willingness and ability of policymakers to act to lean against the wind to smooth volatility, coupled with smaller positions, is the key here. Turkey stands out as having the most aggressive intervention strategy in the region. The CBRTs daily USD selling auctions amounted to US$1.7 billion in September, the largest on record. In addition, verbal intervention has been frequent and explicit with the central bank governor making it quite clear last week that further TRY depreciation would be undesirable.
21
J.P. Morgan Securities Ltd. Michael TrounceAC (44-20) 7777-4356 michael.j.trounce@jpmorgan.com
J.P. Morgan Securities LLC Felipe PianettiAC (1-212) 834-4043 felipe.q.pianetti@jpmorgan.com
The NBP has been particularly active in the FX market in recent weeks, directly intervening to support the currency in mid September (for the first time in 10 years) and on several occasions since then. Verbal intervention has also been frequent from both the central bank and the Ministry of Finance with .the goal to cap imported price pressures as well as limit excess speculation and currency volatility. The NBPs strategy has proven effective with the currency appreciating over 2% since midSeptember, prompting us to take profits on our PLN versus HUF relative value trade. We expect the intensity of NBP intervention to moderate while increased risks for a rate hike in Hungary may help to strengthen HUF. That said, we still retain a preference for PLN over in HUF in our model portfolio given Polands healthy growth and fiscal outlook and resilient flow momentum. Latin America: Best opportunities to add duration; BRL and MXN volatility to subside, but ARS to play catch up The BRL and the MXN were the worst performers among major currencies over the past month, a result of hefty positioning by international investors. While these currencies remain vulnerable to further correction, we see less room for them to play the role of the higher beta in a sell-off scenario. Central banks that have been cheering the role of floating exchange rate regimes in providing a buffer amid a global crisis have also become more vocal about potential overreactions in the FX markets, which may prompt some intervention if the overshooting persists. ARS has lagged the sell-off as presidential elections are approaching on October 23. While the timing is uncertain, we believe it is inevitable that the government will let the ARS adjust given the sharp depreciation of the currencies of Argentinas main trading partners (Brazil in particular). The NDF trade tames the carry cost and should perform well (the curve should steepen) in a scenario in which the government tries to hold the peso steady amid continued correction in broader EM FX. Central Banks in Latin America have strengthened their balance sheets since the 2008 crisis, with a substantial increase of international reserves in the period; Argentina was the only exception. Official intervention in the past has been reactive to market liquidity conditions and the pace of the depreciation (or volatility). Some depreciation has been welcome in most of the region, as the FX is seen as buffer in a global economic
downshift, especially for countries that not long ago were trying to fend off appreciation pressures. Brazil has intervened through swaps, when the USD/BRL breached the 1.90 level, and Chilean officials recently stated that the USD purchase operations could be terminated. Argentina BCRA has been the most aggressive central bank in the region as it has sold USD through spot and futures market (US$2 billion total according to J.P. Morgan estimates) to keep the USD/ARS 4.20 level in check. In Latin America, the 5-year to 10-year sector of the local bond curves in Brazil and Mexico are heavily owned by international investors. International investors own 40% of the stock of Mbonos outstanding and 58% of the 5-year to 10-year bucket. Their holdings are around US$50 billion, of which US$16 billion was built in 2011 alone. The steepening of the Mexican curve and the sound fiscal numbers may limit the selling of Mbonos, especially with the currency trading near 14, but forced selling (driven by redemptions) is a risk to monitor. In Brazil, foreign investors hold around US$125 billion in local bonds, or 12% of local debt. Positions are mostly concentrated in the long-end (F17 and F21), where foreigners own over 40% of the stock outstanding. A key risk to monitor is the behavior of Japanese investors as the BRL/JPY cross trends lower. In addition, the rapid expansion of BRL-overlay funds since 2Q09 adds another layer of risk to the BRL (current AUM is just below US$40 billion). A strong central bank balance sheet and the potential unwinding of macroprudential measures provide a silver lining in a scenario of global recession. The BCB holds over US$ 350 billion in international reserves, and the government could remove the IOF on financial transactions at will. In Latin America, receive 2-year (Jan14s) in Brazil and 5-year TIIE in Mexico; in Argentina, sell 2-month versus buy 6-month USD/ARS. Brazil and Mexico may steer clear of counter-cyclical fiscal policies and instead ease monetary conditions as the first line of defense from a global recession. The yield curve in Brazil is relatively flat between 2s5s, as market participants seem to believe that a front-loaded easing cycle will need to be reversed in a 12-month horizon. In our view, the shape of the curve gives the 2-year the most upside in a full-blown recession. Meanwhile, the IRS curve remains steep in Mexico as participants have not factored in the recession risks for 2012. As the scenario for low for long becomes a base case, we see the 5-year outperforming (as it did in the US before QE2 and from March 2011 to date).
22
J.P. Morgan Securities LLC Tejal Ray (1-212) 834-8580 tejal.t.ray@jpmorgan.com
Asia and Latin America Credit Ratings

Moodys Rating View
China Fiji Islands Hong Kong India Indonesia Korea Malaysia Pakistan Philippines Singapore Sri Lanka Taiwan Thailand Turkmenistan Vietnam Aa3 B1 Aa1 Baa3 Ba1 A1 A3 B3 Ba2 Aaa B1 Aa3 Baa1 B2 B2 (+) (+) (-) (+)
S&P Rating View

AAB AAA BBBBB+ A ABBB AAA B+ AABBB+ NR B+ (+) (+)
Fitch Rating View

A+ NR AA+ BBBBB+ A+ ANR BB+ AAA BBA+ BBB NR B+ (+)
Recent Moodys Action Action

Upgrade, O/L chngd (+) Affirmed, O/L (-) Affirmed, O/L (+) Affirmed, O/L stable Affirmed, O/L stable Upgrade, O/L stable Upgrade, O/L stable Affirmed, O/L stable Upgrade, O/L stable Upgrade, O/L stable O/L chngd to (+), Affirmed Affirmed, O/L stable
Recent S&P Action Action

Upgrade, O/L stable Upgrade, O/L chngd to stable Affirmed, O/L stable O/L chngd to stable, Affirmed Upgrade, O/L (+) Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L Stable Upgrade, O/L stable Affirmed, O/L stable O/L chngd to (+), Affirmed Affirmed, O/L stable O/L chngd to stable, Affirmed
Recent Fitch Action Action

Affirmed, O/L stable
Date
Date
Dec-16-10 Aug-04-11 Aug-02-11 Mar-18-10 Apr-08-11 Jan-12-10 Jul-27-11 Nov-15-10 Nov-12-10 Aug-25-11 Jul-19-11 Aug-02-11
Date
Aug-18-11
Asia
Nov-11-10 May-12-11 Sep-20-11 Jul-26-10 Feb-10-11 Apr-14-10 Dec-16-04 Nov-16-10 Jun-16-11 Jun-14-02 Jul-18-11 Aug-25-11
Affirmed, O/L stable Affirmed, O/L stable O/L chngd to (+), Affirmed Affirmed, O/L stable Affirmed, O/L stable
Oct-03-11 Jun-21-11 Feb-24-11 Nov-11-10 Aug-11-11
Upgrade, O/L stable Affirmed, O/L stable Upgrade, O/L stable Affirmed, O/L stable
Jun-23-11 Apr-20-11 Jul-18-11 Nov-10-08
O/L chngd to stable, Affirmed Oct-28-10 Affirmed, O/L stable Affirmed, O/L stable Aug-13-01 Jan-15-09
Dec-09-10 Downgrade, O/L chngd to stable Apr-16-09 Withdrawn Feb-25-05 Apr-11-11
Downgrade, O/L stable
Aug-19-11
Moodys Rating View

Argentina Barbados Belize Bolivia Brazil Chile Colombia Costa Rica* Cuba B3 Baa3 B3 B1 Baa2 Aa3 Baa3 Baa3 Caa1 (+) (+) (-)
S&P Rating View

B BBBBB+ BBBA+ BBBBB NR B+ BBBBB B BBBB NR (-) (+) (+) (+) (+) (+)
Fitch Rating View

B NR NR B+ BBB A+ BBBBB+ NR B BBB BB+ NR BBBB NR (+) BBB NR BBBNR BB+ B+ (+) (+)

O/L chngd to stable O/L chngd to (-), Affirmed Downgrade, O/L stable Affirmed, O/L (+) Upgrade, O/L (+) Affirmed, O/L stable Upgrade, O/L stable Affirmed, O/L stable Assigned Upgrade, O/L stable Upgrade, O/L stable

Affirmed, O/L stable Affirmed, O/L stable CreditWatch (-) O/L chngd to (+), Affirmed Affirmed, O/L chngd to (+), Affirmed Upgrade, O/L stable Affirmed, O/L stable

Date
Date
Sep-12-11 May-03-11 Jun-21-11 Aug-22-11 May-23-01 Dec-16-10 Mar-16-11 Feb-07-11
Date
Jul-22-11
Latin America
Aug-14-08 Jun-13-11 Aug-04-11 Sep-08-11 Jun-20-11 Sep-08-11 May-31-11 Sep-08-11 Apr-05-99 Apr-22-10 Feb-01-11 Upgrade, O/L stable O/L chngd to (+), Affirmed Downgrade, O/L stable O/L chngd to (-), Affirmed O/L chngd to (+), Affirmed Affirmed, O/L Stable Upgrade, O/L stable Jun-13-11 Aug-04-11 Jan-14-11 Aug-02-11 Jun-14-11 Dec-22-10 Dec-17-10 Affirmed, O/L stable Affirmed, O/L stable Feb-08-11 Jan-12-11 O/L chngd to (+), Affirmed Upgrade, O/L stable O/L chngd to stable, Affirmed Affirmed, O/L stable Jan-05-11 Nov-05-10 Jul-29-11 Aug-04-11
Upgrade, O/L stable Upgrade, O/L stable Affirmed, O/L stable Upgrade, O/L stable Upgrade, O/L stable
Oct-05-10 Apr-04-11 Sep-07-11 Jun-22-11 Mar-04-11
Dominican Republic B1 Ecuador El Salvador Guatemala Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Caa2 Ba2 Ba1 B2 B3 Baa1 B3 Baa3 B1 Baa3 (+) (+)
Downgrade, O/L chngd to stable Mar-24-11 Upgrade, O/L stable Affirmed, O/L stable Upgrade, O/L Stable Affirmed, O/L stable Upgrade, O/L stable O/L chngd to (+), Affirmed Upgrade, O/L stable O/L chngd to (+), Affirmed Upgrade, O/L stable Upgrade, O/L stable Affirmed, O/L stable Jun-01-10 Sep-29-98 Mar-02-10 Aug-18-11 May-26-10 Aug-04-11 Dec-02-10 Mar-21-11 Jul-13-06 Dec-08-10 Jan-15-09
BBBBBBBB A BB+ B+
O/L chngd to (+), Affirmed Upgrade, O/L stable Upgrade, O/L chngd to stable Affirmed, O/L stable Upgrade, O/L stable Downgrade, O/L stable
Jul-21-11 Aug-30-11 Aug-30-11 Jan-14-11 Jul-25-11 Aug-19-11
Upgrade, O/L stable
Jun-02-11
Affirmed, O/L (+)
Jul-27-11
Trinidad & Tobago Baa1 Uruguay* Venezuela Ba1 B2
Upgrade, O/L stable Affirmed, O/L stable
Jul-14-11 Apr-11-11
* S&P issue rating is one notch above the issuer credit rating See key on the following page for explanation of ratings terminology and procedures.
23
EMEA EM and Developed Markets Credit Ratings

Moodys S&P Fitch Recent Moodys Action Action
Upgrade, O/L stable Affirmed, O/L (-) Affirmed, O/L (-) Upgrade, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L (-) O/L chngd to stable, Affirmed
Recent S&P Action Action Date

Jul-12-11 Jul-20-11 May-31-11 Dec-17-10 Sep-15-11 Aug-24-11 Mar-10-11 Aug-09-11 Jun-03-11 Aug-27-10 Mar-24-11 Sep-09-11 Feb-08-11 Dec-23-10 Nov-19-10 Jul-20-11 Mar-09-11 Jan-18-11 Apr-13-11 Mar-23-10 Nov-02-10 Jul-20-11 Aug-03-11 Sep-26-11 Jun-08-11 Aug-31-11 Jul-16-07 Mar-16-11 Aug-24-11 Dec-22-10 Jan-25-11 Jul-28-11 Sep-20-11 Sep-13-11
Recent Fitch Action Action Date
Rating View Rating View Rating View

Angola Bahrain Botswana Bulgaria Croatia Czech Republic Egypt Estonia Gabon Ghana Hungary Israel Jordan Kazakhstan Kenya Kuwait Latvia Lebanon Lithuania Morocco* Nigeria Oman Poland Qatar Romania Russia Saudi Arabia Serbia Slovak Republic Slovenia South Africa Tunisia Turkey Ukraine UAE Ba3 Baa1 A2 Baa2 Baa3 A1 Ba3 A1 NR NR Baa3 A1 Ba2 Baa2 NR Aa2 Baa3 B1 Baa1 Ba1 NR A1 A2 Aa2 Baa3 Baa1 Aa3 NR A1 Aa3 A3 Baa3 Ba2 B2 Aa2 BBBBB ABBB BBBAABB AABBB BBBA+ BB BBB B+ AA BB+ B BBB BBBB+ A AAA BB+ BBB AABB A+ AA BBB+ BBBBB B+ NR BBBBB NR BBBBBBA+ BB A+ BBB+ BBBA NR BBBB+ AA BBBB BBB BBBBBNR ANR BBBBBB AABBA+ AA BBB+ BBBBB+ B NR
Date
EMEA EM
(-) (-) (-) Jun-06-11 Upgrade, O/L stable Sep-21-11 O/L chngd to (-), Affirmed Sep-21-11 Affirmed, O/L stable Jul-22-11 O/L chngd to (+), Affirmed Sep-14-11 Affirmed, O/L (-) Aug-04-11 Upgrade, O/L stable Aug-30-11 Affirmed, O/L (-) Mar-31-10 Upgrade, O/L chngd to stable Affirmed, O/L stable Downgrade, O/L chngd to stable Dec-06-10 Affirmed, O/L (-) Apr-17-08 Upgrade, O/L stable Feb-08-11 Affirmed, O/L chngd to (-) Jan-11-11 Upgrade, O/L stable Upgrade, O/L stable Aug-05-10 Upgrade, O/L stable Mar-31-10 O/L chngd to (+), Affirmed Apr-13-10 O/L chngd to stable, Affirmed Mar-31-10 O/L chngd to stable, Affirmed Jun-18-03 Upgrade, O/L stable Affirmed, O/L Stable Feb-18-10 O/L chngd to (-), Affirmed Jan-05-10 Affirmed, O/L stable Jul-24-07 Affirmed, O/L stable Oct-06-06 Affirmed, O/L stable Dec-12-08 Affirmed, O/L stable Feb-15-10 Upgrade, O/L stable Upgrade, O/L stable May-17-11 O/L chngd to (+), Affirmed Sep-23-11 O/L chngd to (-), Affirmed Jul-16-09 O/L chngd to stable, Affirmed Sep-14-11 O/L chngd to (-), Affirmed Oct-05-10 Affirmed, O/L (+) Oct-11-10 Affirmed, O/L stable Jul-09-07 Upgrade, O/L stable May-24-11 O/L chngd to stable, Affirmed Aug-03-11 Affirmed, O/L (-) May-24-11 Affirmed, O/L (-) Mar-08-11 Affirmed, O/L chngd to (+) Jul-25-11 O/L chngd to (-), Affirmed Jun-28-11 Upgrade, O/L stable Jul-05-11 Affirmed, O/L stable Apr-11-11 Affirmed, O/L stable Sep-23-11 O/L chngd to stable, Affirmed Jun-06-11 Affirmed, O/L stable May-27-11 O/L chngd to (+), Affirmed Affirmed, O/L stable Affirmed, O/L stable Upgrade, O/L chngd to (+) Affirmed, O/L stable O/L chngd to (+), Affirmed Affirmed, O/L stable O/L chngd to (-), Affirmed Affirmed, O/L stable Upgrade, O/L stable Affirmed, O/L (+) Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable O/L chngd to stable, Affirmed Downgrade, O/L (-) O/L chngd to (+), Affirmed Affirmed, O/L (+) Dec-20-10 Aug-12-11 Jul-25-11 Mar-15-11 Jul-05-11 May-04-11 Feb-01-11 Oct-22-10 Mar-18-11 Jul-04-11 Sep-02-11 Apr-08-11 Sep-22-11 Jun-06-11 Mar-17-11 Jan-17-11 Mar-02-11 Nov-24-10 Sep-02-11
(-) (-)
(-)
(+) (-) (+) (-)
(-) (-)
(-) (-)
Downgrade, O/L chngd to (-) Upgrade, O/L stable O/L chngd to (-), Affirmed (+) Affirmed, O/L stable O/L chngd to stable, Affirmed (+) O/L chngd to stable, Affirmed Upgrade, O/L stable (+) O/L chngd to stable, Affirmed O/L chngd to stable (-) Upgrade, O/L stable Affirmed, O/L stable Upgrade, O/L stable Upgrade, O/L stable (+) O/L chngd to stable, Affirmed Upgrade, O/L Stable Affirmed, O/L stable Downgrade, Review (-) Upgrade, O/L chngd to stable (-) Affirmed, O/L (-) (+) O/L chngd to (+), Affirmed (+) O/L chngd to stable, Affirmed Upgrade, O/L stable
(+)
(-)
(-) (+)
(+) (-) (-) (+)
Moodys
S&P
Fitch

Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L (-) Upgrade, O/L stable Affirmed, O/L stable Affirmed, O/L (-) Downgrade, O/L stable Downgrade, O/L (-) Downgrade, O/L negative Downgrade, O/L negative (-) Affirmed, O/L chngd to (-) Downgrade, O/L (-)

Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Downgrade, O/L (-) Downgrade, O/L stable O/L chngd to (-), Affirmed Affirmed, O/L (-) O/L chngd to (-), Affirmed Downgrade, O/L (-) Downgrade, O/L stable Downgrade, O/L chngd to (-) Affirmed, O/L (-) Downgrade, O/L (-)

Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Downgrade, O/L stable O/L chngd to (-), Affirmed O/L chngd to (-), Affirmed O/L chngd to (-), Affirmed Affirmed, O/L stable Affirmed, O/L chngd to (-) Downgrade, O/L (-) O/L chngd to stable, Affirmed Downgrade, O/L (-)
Rating View Rating View Rating View

Canada Germany France Austria Netherlands Sweden Norway Switzerland Australia United Kingdom United States New Zealand Belgium Spain Japan Italy Ireland Portugal Iceland Greece 24 Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aa1 Aa2 Aa3 A2 Ba1 Ba2 Baa3 Ca AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AA+ AA AA+ AA AAA BBB+ BBBBBBCC AAA AAA AAA AAA AAA AAA AAA AAA AA+ AAA AAA AA AA+ AA+ AAAABBB+ BBBBB+ CCC
Date
Jun-22-11 May-17-11 May-03-11 Aug-18-11 Jul-07-11 Jun-16-11 Jul-04-11 Jul-04-11 Aug-23-11 Jun-20-11 Aug-02-11 Aug-15-11 Apr-20-11 Jul-29-11 Aug-24-11 Oct-4-11 Jul-12-11 Jul-05-11 Apr-06-10 Jul-25-11
Date
Apr-23-10 May-18-11 Feb-18-11 Dec-21-10 Mar-28-11 Dec-17-10 Apr-15-11 Feb-25-11 Sep-22-11 Oct-03-11 Aug-05-11 Sep-29-11 Dec-14-10 Feb-01-11 Apr-26-11 Sep-19-11 Apr-01-11 Mar-29-11 May-17-11 Jul-27-11
Date
Sep-06-11 Sep-29-11 May-31-11 Jul-25-11 Jul-26-11 Jul-22-11 Jul-22-11 Jul-14-11 Sep-14-11 Mar-14-11 Sep-23-11 Sep-29-11 May-23-11 Mar-04-11 May-27-11 Sep-29-11 Apr-14-11 Apr-01-11 May-16-11 Jul-13-11
Developed Markets
(-)
(-) (-) (-) (-) (-) (-)
(-) (-) (-) (-) (-) (-) (-) (-) (-)
(-) (-) (-) (-) (-) (-)
Local Currency Ratings (GBI-EM Broad Countries)

Moodys Rating View
Brazil Chile China Colombia Czech Republic Hungary India Indonesia Malaysia Mexico Peru Poland Russia Slovakia South Africa Thailand Turkey Baa2 Aa3 Aa3 Baa3 A1 Baa3 Ba1 Ba1 A3 Baa1 Baa3 A2 Baa1 A1 A3 Baa1 Ba2 (+) (+) (-) (+) (+) (+)
S&P Rating View

BBB+ AA A+ BBB+ AA BBBBBBBB+ A ABBB+ A BBB+ A+ A ABB+ (+) (+) (-) (+) (+)
Fitch Rating View

BBBAAAABBB AABBB BBBBB+ A BBB+ BBB A BBB A+ A ABB+ (-) (+) (+) (-) (+)

O/L chngd to (+), Affirmed

Affirmed, O/L stable O/L chngd to (+), Affirmed Affirmed, O/L stable Affirmed, O/L stable Upgrade, O/L stable Affirmed, O/L (-) Affirmed, O/L Stable Affirmed, O/L (+) Downgrade, O/L stable Downgrade, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable Downgrade, O/L stable

O/L chngd to (+), Affirmed Upgrade, O/L stable Affirmed, O/L (-) Upgrade, O/L stable O/L chngd to (+), Affirmed O/L chngd to stable, Affirmed O/L chngd to stable, Affirmed Upgrade, O/L stable Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L chngd to (+) Affirmed, O/L stable Affirmed, O/L (+) Affirmed, O/L stable Affirmed, O/L (-)
Date
Jun-20-11
Date
Dec-14-10 Dec-16-10 Jan-12-10 Mar-16-11 Aug-24-11 Mar-24-11 Apr-06-11 Apr-08-11 Jul-27-11 Jul-28-11 Aug-30-11 Aug-03-11 Aug-31-11 Dec-16-09 Jan-25-11
Date
Jun-28-10 Feb-01-11 Aug-18-11 Jun-22-11 Jun-04-10 Jun-06-11 Jun-14-10 Jan-25-10 Aug-11-11 Jan-12-11 Jul-27-11 Mar-18-11 Sep-02-11 May-18-10 Jul-27-09
Upgrade, O/L chngd to stable Jun-16-10 Upgrade, O/L chngd to (+) Affirmed, O/L stable Affirmed, O/L stable Nov-11-10 May-31-11 Aug-04-11
Downgrade, O/L chngd to (-) Dec-06-10 Upgrade, O/L (+) Affirmed, O/L stable Affirmed, O/L stable Affirmed, O/L stable O/L chngd to (+), Affirmed Affirmed, O/L stable Jul-26-10 Feb-10-11 Feb-26-09 Aug-18-11 Mar-21-11 Jan-05-10
(+) O/L chngd to stable, Affirmed Dec-12-08 O/L chngd to stable, Affirmed Mar-27-09 Downgrade, O/L stable Jul-16-09
O/L chngd to stable, Affirmed Oct-28-10 (+) O/L stable chngd to (+), Affirmed Oct-05-10
O/L chngd to stable, Affirmed Dec-09-10 Upgrade, O/L (+)
O/L chngd to stable, Affirmed May-12-11
Sep-20-11 O/L stable chngd to (+), Affirmed Nov-24-10
RATING SCALE MOODYs

Upper Investment Grade Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C
S&P
AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ CCC CCCCC C SD D
Fitch
AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ CCC CCCCC C RD D Not currently subject to change
STANDARD TERMINOLOGY AND PROCEDURES MOODYs S&P

STABLE STABLE
Fitch
STABLE
Possible long-term change Likely to be put on review
OUTLOOK (+or-)
OUTLOOK (+or-)
OUTLOOK (+or-)
Lower Investment Grade
Likely change in short term
REVIEW (+or-)
CREDITWATCH (+or-)
RATING WATCH (+or-)
Non-Investment Grade
Lower Non-Investment Grade
UPGRADE / DOWNGRADE AFFIRMED / STABLE
Moodys ratings are qualified by outlooks and reviews while S&P and Fitch ratings are qualified by outlooks and watches. A review/watch is indicative of a likely short-term movement. An outlook suggests that a review/watch or a long/intermediate-term movement is likely. (+) positive outlook (-) negative outlook WR Rating Withdrawn + positive review/watch - negative review/watch
Default
25
J.P. MORGAN EMERGING MARKETS RESEARCH CONTACT INFORMATION

Joyce Chang Global Head of Emerging Markets and Credit Research (1-212) 834-4203 joyce.chang@jpmorgan.com Latin America
luis.oganes@jpmorgan.com fabio.akira@jpmorgan.com gabriel.casillas@jpmorgan.com MD, Strategy / Economics (Latin America) ED, Economics (Brazil) ED, Economics (Mexico) (1-212) 834-4326 (55-11) 3048-3634 (52-55) 5540-9558 (1-212) 834-4308 cassiana.fernandez@jpmorgan.com VP, Economics (Brazil, Colombia and Peru) tejal.t.ray@jpmorgan.com tamara.wajnberg@jpmorgan.com iker.x.cabiedes@jpmorgan.com laura.a.karpuska@jpmorgan.com Assoc, Strategy Assoc, Economics (Brazil) Analyst, Economics (Mexico) Analyst, Economics (Brazil, Colombia and Peru) (55-11) 3048-3369 (1-212) 834-8580 (55-11) 4950-3243 (52-55) 5540-9339 (55-11) 3048-3322
benjamin.h.ramsey@jpmorgan.com ED, Strategy (Andean Region) franco.a.uccelli@jpmorgan.com vladimir.werning@jpmorgan.com
ED, Strategy (Central America and Caribbean) (1-305) 579-9415 ED, Strategy / Economics (Argentina and Chile) (1-212) 834-4144
Europe, Middle East and Africa (EMEA EM)

michael.marrese@jpmorgan.com yarkin.cebeci@jpmorgan.com sonja.c.keller@jpmorgan.com nora.szentivanyi@jpmorgan.com neena.x.altaf@jpmorgan.com MD, Strategy / Economics (EMEA EM, Russia, Kazakhstan) ED, Economics (Turkey, Israel, and Baltics) ED, Economics (South Africa) ED, Economics (Poland, Hungary and Czech Republic) (44-20) 7777-4627 (90-212) 319-8599 (27-11) 507-0376 (44-20) 7777-3981 anthony.x.wong@jpmorgan.com Analyst, Economics (EMEA EM, Iceland and Bulgaria) (44-20) 7777-3750 brahim.x.razgallah@jpmorgan.com VP, Strategy / Economics (Middle East and North Africa) anatoliy.a.shal@jpmorgan.com giulia.pellegrini@jpmorgan.com VP, Economics (Russia) Assoc, Strategy / Economics (Sub-Saharan Africa) (44-20) 7777-1381 (7-495) 937-7321 (27-11) 507-0777
VP, Strategy / Economics (Ukraine, Belarus, (44-20) 7777-4504 Serbia, Croatia, Romania and Georgia)
EM Asia
david.g.fernandez@jpmorgan.com jiwon.c.lim@jpmorgan.com jahangir.x.aziz@jpmorgan.com grace.h.ng@jpmorgan.com MD, Strategy / Economics (Emerging Asia) (65) 6882-2461 MD, Economics (Korea) ED, Economics (India) ED, Economics (China and Taiwan) (82-2) 758-5509 (91-22) 6157-3385 (852) 2800-7002 sinbeng.ong@jpmorgan.com sajjid.z.chinoy@jpmorgan.com matt.l.hildebrandt@jpmorgan.com ED, Strategy / Economics (Southeast Asia) (65) 6882-1623 VP, Economics (India) VP, Economics (Malaysia, Singapore, Thailand and Vietnam) (91-22) 6157-3386 (65) 6882-2253
Global Strategy
eric.beinstein@jpmorgan.com bert.j.gochet@jpmorgan.com jonathan.m.goulden@jpmorgan.com holly.s.huffman@jpmorgan.com felipe.q.pianetti@jpmorgan.com michael.j.trounce@jpmorgan.com yenping.ho@jpmorgan.com MD, Strategy ED, Strategy (Asia Local Markets) ED, EM Credit Strategy ED, Strategy ED, Strategy (Latin America) ED, Strategy (EMEA EM Local Markets) VP, Strategy (Asia FX Markets) (1-212) 834-4211 (852) 2800-8325 (44-20) 7325-9582 (1-212) 834-4953 (1-212) 834-4043 (44-20) 7777-4356 (65) 6882-2216 dennis.x.badlyans@jpmorgan.com carlos.j.carranza@jpmorgan.com george.g.christou@jpmorgan.com jason.j.mortimer@jpmorgan.com trang.m.nguyen@jpmorgan.com abhishek.x.panda@jpmorgan.com laura.bierer@jpmorgan.com Assoc, Strategy (Latin America) Assoc, Strategy (Latin America) Assoc, Strategy (EMEA EM Local Markets) Assoc, Strategy (Asia Local Markets) Assoc, Strategy Assoc, Strategy (India Rates Markets) Analyst, Strategy (EMEA EM) (1-212) 834-9150 (54-11) 4348-3425 (44-20) 7777-9177 (852) 2800-8329 (1-212) 834-2475 (91-22) 6157-3387 (44-20) 7777-9173
Corporates
warren.j.mar@jpmorgan.com allison.bellows@jpmorgan.com ym.hong@jpmorgan.com soo.ch.lim@jpmorgan.com nachu.nachiappan@jpmorgan.com jacob.a.steinfeld@jpmorgan.com zafar.nazim@jpmorgan.com MD, Corporate Strategy ED, Corporate Strategy (EMEA EM) ED, Corporate Strategy (Asia) ED, Corporate Strategy (Asia) ED, Corporate Strategy (EMEA EM) ED, Corporate Strategy (Latin America) ED, Corporate Strategy (EMEA EM) (1-212) 834-4274 (44-20) 7777-3843 (852) 2800-8028 (852) 2800-7931 (44-20) 7325-6823 (1-212) 834-4066 (44-20) 7777-9132 isabela.p.bacchi@jpmorgan.com daniel.cc.fan@jpmorgan.com daniel.sensel@jpmorgan.com varun.x.ahuja@jpmorgan.com juliet.lim@jpmorgan.com alexandria.r.coari@jpmorgan.com VP, Corporate Strategy (Latin America) VP, Corporate Strategy (Asia) VP, Corporate Strategy (Latin America) Assoc, Corporate Strategy (Asia) Assoc, Corporate Strategy (Latin America) Analyst, Corporate Strategy (Latin America) (55-11) 3048-6725 (852) 2800-8080 (1-212) 834-7202 (852) 2800 8030 (1-212) 834-2516 (1-212) 834-5638 (44-20) 7742-7432
anne-marie.hendriks@jpmorgan.com Analyst, Corporate Strategy (EMEA EM)
Index and Quantitative Analysis

victor.dituro@jpmorgan.com gloria.m.kim@jpmorgan.com jarrad.k.linzie@jpmorgan.com ann.m.fausto@jpmorgan.com ED, Analytics ED, Index Management ED, Index Management VP, Analytics (1-212) 834-7072 (1-212) 834-4153 (1-212) 834-7041 (1-212) 834-7037 andrew.j.szmulewicz@jpmorgan.com andre.r.harvey@jpmorgan.com jared.e.halpern@jpmorgan.com VP, Index Management Analyst, Analytics Analyst, Analytics (1-212) 834-4029 (1-212) 834-7190 (1-212) 834-4720
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Morgan trading desk personnel in formulating views, opinions and recommendations in preparing research. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) and strategist(s) views and report(s). Therefore, this research may not be independent from the proprietary interests of J.P. Morgan trading desks which may conflict with your interests. In addition, research analysts and strategists receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, trading desk and firm revenues and competitive factors. As a general matter, J.P. Morgan and/or its affiliates normally make a market and trade as principal in fixed income securities discussed in research reports. Analysts Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors and overall firm revenues. The firms overall revenues include revenues from its investment banking and fixed income business units. Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporations Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCCs website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf. J.P. Morgan Credit Research Ratings Distribution, as of September 30, 2011 Overweight Neutral Underweight EMEA Credit Research Universe 28% 50% 22% IB clients* 58% 64% 49% Represents Ratings on the most liquid bond or 5-year CDS for all companies under coverage. * Percentage of investment banking clients in each rating category. Ratings System: J.P. Morgan uses the following sector/issuer portfolio weightings: Overweight (over the next three months, the recommended risk position is expected to outperform the relevant index, sector, or benchmark), Neutral (over the next three months, the recommended risk position is expected to perform in line with the relevant index, sector, or benchmark), and Underweight (over the next three months, the recommended risk position is expected to underperform the relevant index, sector, or benchmark). J.P. Morgans Emerging Market research uses a rating of Marketweight, which is equivalent to a Neutral rating. Valuation and Methodology: In J.P. 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Bank of Kazakhstan, VEB, AUTOMOTORES GILDEMEISTER, BBVA, Banco de Credito del Peru, Hypermarcas, NII Holdings, Itau Unibanco ADR, Votorantim, Hidili Industry International Development Ltd, Road King Infrastructure Ltd, Cemex, Marfrig, Dubai World, Berlian Laju Tanker within the past 12 months. Director: A senior employee, executive officer or director of JPMorgan Chase & Co. and/or J.P. Morgan is a director and/or officer of Itau Unibanco ADR. Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of Vimpelcom Ltd., Lukoil, Dev. Bank of Kazakhstan, VEB, BBVA, Dubai Holding Commercial Operations Group, Dubai World. Vimpelcom Ltd. - J.P. Morgan Recommendation History Date Nov-30-10 Rating Overweight Instrument 8.375% 13 Lukoil - J.P. Morgan Recommendation History Date May-27-11 Rating Underweight Instrument 6.356% 17
Dev. Bank of Kazakhstan - J.P. Morgan Recommendation History Date Jun-24-11 Rating Overweight Instrument 5.50% 15
VEB - J.P. Morgan Recommendation History Date Jun-24-11 Rating Neutral Instrument 6.80% 25
BBVA - J.P. Morgan Recommendation History Date Feb-12-08 Rating Neutral Instrument 5-year CDS
Dubai Holding Commercial Operations Group - J.P. Morgan Recommendation History Date Jun-11-10 Rating Overweight Instrument 6.0% 17
Recommendation changes made by J.P. Morgan Credit Research Analysts in the subject company over the past 12 months (or, if no recommendation changes were made in that period, the most recent change).
27
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Emerging Markets Outlook and Strategy

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Emerging Markets Outlook and Strategy

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Emerging Markets Research Emerging Markets Strategy J.P.

Morgan Securities LLC

Emerging Markets Outlook and Strategy

Spreads and yieldsactual and forecast

490 6.73 532 0.125 1.78

305 6.27 332 0.125 2.48

425 6.70 525 0.125 2.25

EMBI Global, GBI-EM, JPMHY, S&P 500

Source: J.P. Morgan

J.P. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com

EM debt now feeling the pain

Third week September* 2011 YTD

J.P. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com

J.P. Morgan Securities LLC Trang NguyenAC (1-212) 834-2475 trang.m.nguyen@jpmorgan.com

Chart 2: Crowded trades vulnerable to further reductions

28% 21% 14% 7% 0% -7% -14%

2009 9% 15% 18% 20% 8% 12% 21% 19% 17% 2% 10%

Chart 4: Hard currency fund flows and EMBIG ex-UST performance

EMBIG Credit Return (ex-UST) Hard Flows ($bn, rhs)

J.P. Morgan Securities LLC Eric BeinsteinAC (1-212) 834-4211 eric.beinstein@jpmorgan.com

J.P. Morgan Securities LLC Trang NguyenAC (1-212) 834-2475 trang.m.nguyen@jpmorgan.com

Beware the asymmetry in investor positions versus market liquidity

Jan Feb Mar Apr May Jun

Aug Sep Oct Nov Dec

J.P. Morgan Securities LLC Trang NguyenAC (1-212) 834-2475 trang.m.nguyen@jpmorgan.com

Sep-28-11 -3.2 -2.3% 133.8 11.3 58.7 42.9

-2.0 -4.0% 46.1 1.8 22.5

Jun-08 35,865 181,174 16,300 233,339 665,760

Sep-11 133,328 226,352 29,494 27,947 417,121 808,186

Source: J.P. Morgan

J.P. Morgan Securities LLC Warren MarAC (1-212) 834-4274 warren.j.mar@jpmorgan.com

EM sovereign and corporate credit unlikely to follow 2008 extreme moves

60% 40% 20% 0%

-20% -40% Jan-08

* J.P. Morgan Commodities Index. Source: J.P. Morgan

J.P. Morgan Securities LLC Warren MarAC (1-212) 834-4274 warren.j.mar@jpmorgan.com

Table 6: Remaining sovereign borrowing requirements are fully discretionary

High Yield component CEMBI-Broad

J.P. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com

J.P. Morgan Securities Ltd. Michael MarreseAC (44-20) 7777-4627 michael.marrese@jpmorgan.com

ZAR KRW TRY MXN

SGD MRY THB

Chart 12: EM FX depreciation as a percentage of 2008

J.P. Morgan Securities LLC Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com

J.P. Morgan Securities Ltd. Michael MarreseAC (44-20) 7777-4627 michael.marrese@jpmorgan.com

3 3 3 4 4 6 6 9 11 14 14-15 17-18 23 3 3-4 7 8 10 14 15 18 20 23 29 30 30

Table 10: EM central banks begin easing already this year

Source: J.P. Morgan

J.P. Morgan Securities Ltd. Jonny GouldenAC (44-20) 7325-9582 jonathan.m.goulden@jpmorgan.com

EMBIG: Momentum points to likely wider spreads in the short-term

Source: J.P. Morgan

J.P. Morgan Securities LLC Warren MarAC (1-212) 834-4274 warren.j.mar@jpmorgan.com

EM corporates: The virtuous cycle of a negative feedback loop

J.P. Morgan Securities LLC Warren MarAC (1-212) 834-4274 warren.j.mar@jpmorgan.com

Real Estate Real Estate

J.P. Morgan Securities LLC Warren MarAC (1-212) 834-4274 warren.j.mar@jpmorgan.com

J.P. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly.s.huffman@jpmorgan.com

Table 14b: Bonds with a yield between 7-9%

J.P. Morgan Securities LLC Holly HuffmanAC (1-212) 834-4953 holly.s.huffman@jpmorgan.com

Table 15: Top local markets trades

J.P. Morgan Securities Ltd. Michael TrounceAC (44-20) 7777-4356 michael.j.trounce@jpmorgan.com

J.P. Morgan Securities Ltd. Michael TrounceAC (44-20) 7777-4356 michael.j.trounce@jpmorgan.com

J.P. Morgan Securities LLC Felipe PianettiAC (1-212) 834-4043 felipe.q.pianetti@jpmorgan.com