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CEEMEA Equity Research

08 January 2014

Reducing risk in Turkish equities
Higher rates, slower growth hurt while valuations not at trough. Remove Halkbank, add PKO to CEEMEA Strategy Top 10.
We see three negatives for the Turkish stock market in the near-term. First, the monetary tightening, including macro-prudential measures, is cutting the growth outlook. Second, despite the drop, MSCI Turkey is only at an 8% discount to its historic 12m fwd PE average – not that cheap, while we expect further cuts to consensus EPS. And foreign selling is far less than we have seen in previous sell-offs. Third, in the short term, our economists see potential for further political noise driving further pressure on the lira. Therefore, we would recommend reducing risk in Turkish equities from neutral to underweight. We continue to prefer Russia, our key OW in the region, to Turkey within CEEMEA. We remain neutral on SA and UW Poland despite its recent correction.  We might be getting closer to a period of FX stability (our FX team forecasts USDTRY 2.20 in '14), especially if the central bank hikes rates inline with our 75 bp forecast. But high rates (10%+ bond yields) would keep the cost of equity high. We expect Turkish stocks could lag both the local bond market and EM equities when the TRY stabilises.  Within Turkey, we recommend a defensive portfolio: Turkcell (high cash position, possible dividend restart); Koç Holding (diversified, high export exposure to Europe, but N-rated). We would UW banks, fearing NIM compression in 1H14 via higher cost of funding. Yapi Kredi is the lowest beta big cap bank which we rate OW.  We remove Halkbank from the CEEMEA Strategy Top 10 list, leaving only Turckell from Turkey. We replace it with Poland’s PKO BP, one of our top EM banks picks for 2014 and in our view a good way to play the accelerating Polish economy (JPMe +23% ’14 EPS; 4% above consensus). PKO’s 7% drop in 6 weeks offers a sub-40 PLN entry point to our PLN 53 target.
Table 1: CEEMEA Strategy – Top 10 Stock Picks
Name Gazprom Sberbank Sistema Lukoil Aspen Lonmin plc Sasol Standard Bank Turkcell PKO Bank Ticker GAZP RU SBER RX SSA LI LKOD LI APN SJ LON SJ SOL SJ SBK SJ TCELL TI PKO PW Country Russia Russia Russia Russia S Africa S Africa S Africa S Africa Turkey Poland Sector Energy Financials Telecom Energy Healthcar e Materials Energy Financials Telecom Financials Analyst Konchin Kantarovich Gogolev Gromadin Comer Shepherd Comer Francois Achtmann Formanko Price 6 Jan 4.19 98.6 31.3 60.2 26,801 5,341 51,610 12,630 11.1 38.9 Mkt Cap USD m 99,168 64,024 15,078 50,991 11,604 2,856 31,759 19,563 11,245 15,600 % Δ YTD USD -11.7 -0.6 59.3 -4.3 27.1 9.4 18.2 -11.7 -21.1 11.4 JPM Rating OW OW OW OW OW OW OW OW OW OW JPM PT 6.00 149 37.0 83.2 31,800 7,200 57,400 15,000 15.0 52.8 EPS ‘13E 1.64 16.3 3.44 13.0 837 189.3 6,093 1,015 0.53 2.50 ‘14E 1.46 17.9 3.37 16.3 1,123 340 6,146 1,201 0.57 3.08 P/E Ratio ‘13E ‘14E 2.6 2.9 6.1 5.5 9.1 9.3 4.6 3.7 32.0 28.2 8.5 12.4 9.7 15.6 23.9 15.7 8.40 10.5 8.9 12.6

CEEMEA Equity Strategy David Aserkoff, CFA
AC

(44-20) 7134-5887 david.aserkoff@jpmorgan.com Bloomberg JPMA ASERKOFF <GO> J.P. Morgan Securities plc

Ayan Ghosh
(27-11) 507-0372 ayan.x.ghosh@jpmorgan.com J.P. Morgan Equities South Africa Proprietary Ltd.

Uttam Digga
(91-22) 6157-3261 uttam.digga@jpmorgan.com J.P. Morgan India Private Limited

Source: J.P. Morgan, Bloomberg, Updated as of cob 6 January 2014.

See page 14 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com

David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

Reducing Risk in Turkish Equities
We see three negatives for the Turkish stock market in the near-term. First, the monetary tightening, including macro-prudential measures, is cutting the growth outlook. Second, despite the drop, MSCI Turkey is only at an 8% discount to its historic 12m fwd PE average – not that cheap, in our view, while we expect further cuts to consensus EPS; and foreign selling is far less than we have seen in previous sell-offs. Third, in the short term, our economists see potential for further political noise and thus further pressure on the lira. We recommend reducing risk in Turkish equities from neutral to underweight. We continue to prefer Russia, our key OW in the region, to Turkey within CEEMEA. We remain neutral on SA and UW Poland despite Poland’s recent correction. First, the monetary tightening, including macroprudential measures, is cutting the growth outlook while the backdrop of tapering makes external financing more expensive. We have just cut our 2014 GDP forecast from 3 to 2.5% (see Turkey revising down the 2014 growth forecast to 2.5% dated 7 Jan). We have also raised our end-14 CPI forecast from 6.3% to 7.0% (see Turkey: revising up the CPI forecast due to strong cost-led pressures dated 3 Jan) . Our growth/inflation forecasts are both worse than consensus (3.6% GDP and 6.7% CPI on Bloomberg consensus). And only one of 30 forecasters surveyed is below our 2.5% GDP forecast. The recent TRY volatility also cuts the growth outlook. We expect further consensus EPS downgrades on the back of disappointing growth data. 2014 consensus EPS forecasts are actually up slightly over the last 18 months. Our economists are expecting the macroprudential measures to cut loan growth, domestic demand and GDP growth. While the regulations were first announced in end-November, we thought they might be delayed until after the 30 March local elections; instead they were published in the Official Gazette (i.e. became effective) on 31 December. The key measures (see Turkey: the government IMPLEMENTS the macroprudential measures dated 31 Dec) include tighter restrictions on credit car purchases of phones, jewelry, significant restrictions on autos (where 70% of upper-middle and luxury cars which are all imported are sold on credit) and general purpose loans.
Figure 1: 20 years of the Lira and the BIST 100
100,000 BIST 100 (LHS) 80,000 60,000 40,000 20,000 0 Jan-94 TRY (RHS) 2.0 1.5 1.0 0.5 0.0 Jan-98 Jan-02 Jan-06 Jan-10 2.5

Source: J.P. Morgan, Bloomberg

Figure 2: 12 month trailing CAD and ex-Gold
0 CAD -20 -40 -60 -80 Oct-05 CAD ex gold

Oct-07

Oct-09

Oct-11

Oct-13

Source: Turkstat, Bloomberg

Source: J.P. Morgan, Bloomberg

Figure 3: MSCI Turkey IBS consensus EPS estimates
120

2014

110

2013
100

90 Feb-12

Aug-12

Jan-13

Jul-13

Dec-13

Source: J.P. Morgan, IBES, Datastream, Notes: EPS figures are normalized, starting at 100 on base date Feb 2012 for ease of comparison.

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David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

Valuations are a little cheap, but well above trough levels
We note valuations are cheap, with MSCI Turkey on 8.9x fwd PE, and banks 1.13 P/BV, but they are far more expensive than previous lows where MSCI Turkey traded on 4.2x fwd PE and banks on 0.88 P/BV. In fact, the stock market is only 8% below its average 12M PE multiple. It even trades expensive to its 12m forward dividend yield history – we find that especially disconcerting after the sharp declines. Given the rise in interest rates – 10 year yields +175 bps since 23 October and +400 bps from May– we would expect to see equities trading clearly cheap to their history. Also, if our expectations of consensus earnings downgrades are correct, then PE valuations are even higher as the 'E’ in the denominator is overstated. In terms of foreign ownership of equities, we are quite close to historic trough levels overall – which should be bullish. The latest data (23 December) was at 62.19% versus the historic low of 61.59% in June 2012 and the GFC low of 62.10%. This is down from and the 17 May ‘13 peak of 66.41%. But the reality is that foreigners have only sold 4.2% of the free float, which is far less than the drop in the GFC or even 2001. Moreover, looking at the most recent monthly data, net sales were only US$167m in December with more than 100% in one stock (Emlak) – or, put differently, there was net foreign buying in Turkey if we exclude Emlak. For now, we see further room for foreign holdings to decline.
Table 2: Turkey - Foreign ownership peaks and troughs
Period 2007 peak 2009 trough 2010 peak 2012 trough 2013 peak 2013 trough
Source: J.P. Morgan.

Figure 4: MSCI Turkey Dividend Yield
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
Div.Yield Avg Turkey -1sd +1sd

Source: IBES, Datastream, Bloomberg, 3 January 2014

Figure 5: MSCI Turkey 12m Forward PE
12M Fwd PE Avg Turkey -1sd +1sd

14 12 10 8 6 4 Jan-04 Jul-06 Jan-09 Jul-11 Jan-14

Source: IBES, Datastream, Bloomberg, 3 January 2014

Figure 6: Foreign ownership of Turkish equities (% of free float)
74 72 70 68 66 Foreign ownership as % of the free float

% Foreign Ownership 72.63 62.10 68.57 61.59 66.41 62.19

Exact Date 15-Oct-07 24-Mar-09 11-Nov-10 01-Jun-12 17-May-13 23-Dec-13

Change -10.53 6.47 -6.98 4.82 -4.22

64 62 60 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Source: J.P. Morgan, Central Depository of Turkey (MKK)

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David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

If TRY stays weak, then rates could stay high – we now forecast 75 bp rate hikes in Jan
While we might be getting closer to a period of FX stability (our FX team forecasts TRY 2.20 in '14), we think a prolonged period of high rates (10%+ bond yields) will keep the cost of equity high and depress EPS and economic growth. First, we are expecting at least 75 bps in rate hikes from the CBRT pushing the interbank O/N rate to 8.5% (see Turkey: evaluation of the 2014 monetary policy framework dated 24 Dec) . The tougher rhetoric from the CBRT and its push to run a more orthodox monetary policy make us think we will see significant rate hikes to help stabilize the currency. We could have argued for a sub-10% Cost of Equity in May based on 5% 10 year yields. Now, a 15% cost of equity would be optimistic in our view. When we look at banks with low-teens ROE’s for 2014, sub1x P/BV look reasonable in the context of a 15+% CoE. The rate hikes, macroprudential policies and special consumption taxes on cars, tobacco and alcohol have led us to forecast a drop in the current account deficit to US$46.4 billion (5.5% of GDP) in 2014 from US$59.0 billion (7.1% of GDP) in 2013. Since the tapering debate started, 2013, the CAD has been the key worry for investors ‒ we would argue that equity investors will still see 5.5% as an issue, but steady improvement will help diminish it. Also, the European recovery is a boon to Turkey; pre-crisis 58% of Turkish exports went to Europe v sub40% now. Already, we are seeing sharp acceleration in European exports: Germany +12%, France +12%, Spain +25% oya in November. Typically, Turkish assets all move together – bonds, equity and FX all have 100%-ish correlation. But Q1 may see a more stable FX spot rate likely allowing fixed income investors to earn the carry while equity investors see stocks move sideways as higher rates/lower growth/earnings downgrades get priced in. A stable FX could stop the declines in the stock market, but does not guarantee a long-lasting rally, in our view.
Figure 7: Turkey Real effective exchange rate
125 120 115 110 105 100 95 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Turkey REER

Source: JPMorgan economics, 6 January 2014

Figure 8: 10 year bond yields are higher
11 10 year bond … 10 9 8 7 6 Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Source: Turkstat, Bloomberg

Figure 9: 12 month trailing CAD and ex-Gold
0 CAD -20 -40 -60 -80 Oct-05 CAD ex gold

Oct-07

Oct-09

Oct-11

Oct-13

Source: Turkstat, Bloomberg

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David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

Table 3: CEEMEA Strategy Top 10 - Performance and composition history
Start date 26-Oct-12 13-Nov-12 End date 13-Nov-12 31 Dec 12 Entrants Sasol (OW, ZAR369.2) Emlak (OW, TRY2.81), Magnit (OW, $34.5) Exits MTN (OW, ZAR153.18) Sberbank (UW, R84.4),Koc Holding (OW, TRY8.46) Portfolio Perf.: Period Cumulative 1.8% 19.2% 10.8% 32.1% 1.6% MTN (OW, ZAR175.86), Emaar Properties (OW, AED4.13) Sberbank (OW, R109.4) KGH (OW, PLN157.8) Emaar (OW, AED 5.3), Vakibank(OW, TRY 5.7), Koc Hold. (OW, TRY 10) Halkbank (OW, 19.4 TRY) Aspen (OW, 216 ZAR) PGE (N, 18.1 PLN) PKO (OW, 34.1PLN), Rosneft (OW, 6.7 USD), Samba (OW, 50.0 SAR) Komercni (OW,3560 CZK) Erste Bank (OW, €24.0) Amplats (OW, 563 ZAR), Lonmin (OW, 63 ZAR), Halkbank (OW, 14.8 TRY), Vakifbank (OW, 4.53 TRY) Gazprom (N, US$4.45), Sberbank (OW, 105 RUB) Sistema (OW, 26.5 RUB) Sasol (OW, ZAR 502) Standard Bank (OW, ZAR 122), Lukoil (OW, US$62.2) PKO Bank (OW, PLN 38.9) Sasol (OW, ZAR370.5), Erste Bank (OW, €26.26) Emaar Properties (OW, AED4.87) PZU (OW,PLN404) Emlak(OW, TRY 2.8), Samba (OW, SAR 44.5), Yapi Kredi(OW, TRY 5) Rosneft (OW, $6.8) MTN (OW, 171 ZAR) Emaar (OW, 6.01 AED) KGH (OW, 129.5 PLN), Vakifbank (OW, 5.1 TRY), Halk Bank (OW, 16.5 TRY) PGE (UW, 15.4 PLN) Sberbank (OW,R 97.0) Koc Hold (N, 9.4 TRY), Samba (OW, 52.3 SAR) PKO (OW, 37.1 PLN), Komercni (OW, 4227 CZK) Rosneft (N, 8.15 RUB), Magnit (OW, 8389 RUB) Erste Bank (OW, 24.7 EUR) Amplats (OW, ZAR 400) Naspers (OW, ZAR 940), Vakifbank (OW, TRY 4.6) Halkbank (OW, TRY 12.3) 1.3% -3.7% 0.2% -0.4% 34.3% 36.0% 31.0% 31.4% 30.8% 32.1% Benchmark Perf.: Period Cumulative -1.3% -1.9% 9.1% 7.1% 0.4% -0.7% -5.1% -1.5% -0.8% 7.4% 6.7% 1.2% -0.4% -1.2% 7.1% Portfolio v Benchmark Period Cumulative 3.2% 21.5% 1.5% 23.4% 1.3% 2.0% 1.5% 1.8% 0.4% 25.0% 27.5% 29.5% 31.8% 32.4% 23.4%

2012 Summary 31 Dec 12 11 Jan 13 31-Jan-13 29-Mar-13 8-Apr-13 11 Jan 13 31 Jan 13 29-Mar-13 8- Apr-13 26-Apr-13

26-Apr-13 6-May-13 2-June-13 20-June-13

6-May-13 2-Jun-13 20-June-13 5-July-13

6.6% -4.2% -10.9% 1.7%

39.5% 33.6% 19.0% 21.0%

4.1% -5.2% -8.9% 1.4%

2.9% -2.4% -11.0% -9.8%

2.4% 1.0% -2.3% 0.2%

35.5% 36.9% 33.8% 34.1%

5-July-13 2-Aug-13 30-Sep-13

2-Aug-13 30-Sep-13 18-Oct-13

7.5% 5.3% 4.9%

30.1% 37.0% 43.8%

7.0% 4.9% 6.6%

-3.4% 1.3% 8.0%

0.5% 0.3% -1.5%

34.7% 35.2% 33.1%

18-Oct-13

25-Oct-13

-0.9%

42.6%

-0.5%

7.5%

-0.4%

32.7%

25- Oct- 13 18-Nov-13 6-Jan-14

18-Nov-13 6-Jan-14

-1.9% -7.7%

39.9% 29.1%

-2.4% -5.7%

4.9% -1.1%

0.5% -2.1%

33.4% 30.6%

Source: J.P. Morgan research, Bloomberg, updated 6 January 2014. Note: Benchmark is MSCI EMEA. Past results cannot and should not be viewed as an indicator of future performance. Transaction and other costs have not been included in these calculations. Last 12 months data shown. Full details of the calculation and historical comparisons are available.

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David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

CEEMEA Strategy: Investment Rationale
Table 4: CEEMEA Strategy Top 10
Company 1. Gazprom GAZP RU 2. Sberbank SBER RX 3. Sistema SSA LI 4. Lukoil LKOH RX 5. Aspen APN SJ 6. Sasol SOL SJ 7. Standard Bank SBK SJ 8. Lonmin LON SJ 9. Turkcell TCELL TI 10. PKO Bank PKO PW
Source: J.P. Morgan

Why is this in the CEEMEA Strategy Top 10 list? Upside to consensus DPS if government follows through on dividend plan. China gas deal could mean long-term EPS growth. The cheapest big cap EM bank we can find outside of China. EPS downgrade cycle ending in our view. Discount to the NAV, biggest discount excluding the MBT stake. Hope for better dividends. Low valuation. Lower capex going forward could upsize the dividend Consistent earnings delivery and big M&A pipeline. Best-managed health care company in CEEMEA in our view. Serious cost-cutting in the SA (Project Phoenix worth ZAR 4bn by FY16) and the positive impact of the US ethane cracker. Out top pick in SA banks. Repatriating low-return capital from UK should drive returns, as should re-pricing its mortgage book. Beneficiary of global growth rebound and a weaker rand. Improving cash flow and earnings, once restructuring done. Better pricing environment from less aggressive VOD. Shareholder dispute resolution should trigger significant shareholder returns in our view. Best way to play Polish recovery. Top EM bank pick for 2014. Recent 7% drop offers sub-PLN40 entry point to PLN 53 TP. Our ’14 EPS >4% above cons.

Risks to our Strategy Capex to fund the China gas plans. DPS does not come through as hoped. Slowing economy and further CBR limitations/tighter regulation on consumer lending & credit cards. Cost discipline. Catalysts on non-MBT assets could come in 2H14 (or later) not 2H13. Slow growth and high maintenance capex on core Russian assets Stock had a strong run – delays to M&A could mean stock treads water, or worse. Weaker oil/stronger ZAR will hurt near-term EPS. Capex overruns in US projects or delays to SA cost-cutting would hurt DCF. Weak ZAR and under-delivery on ROE expansion.

Cost-cutting and labor relations are key risks. So are PGM prices. Market competition returns. Delays to dividends. Polish market expensive with pension reform looming.

Table 5: CEEMEA Country Views
Company South Africa Russia Poland Turkey Greece Czech Republic Hungary Saudi Arabia Egypt Qatar
Source: J.P. Morgan

JPM View N OW UW UW

Bull case Cheap ZAR could bounce back. Pick-up in commodity prices & good Q3 in the mines. Labour relations could beat expectations Global value rally into Q4 helps Russia, the least expensive EM. Government delivers on dividend hopes in state-owned big caps Further upside from European recovery. ECB easing Rebound from oversold technical level on FX might help. Fewer political headlines Low valuations, a return to economic growth and falling risk premia. EM funds are yet to buy in post-MSCI moves

Bear Case Policy paralysis. Growth remains sluggish. Consumer credit growth remains weak. Weak and volatile ZAR Governance. Slowing GDP growth. Pension fund reform cut inflows and mid-cap valuations. Expensive stocks come back to earth. Deteriorating growth outlook plus rate hikes. Stocks not very cheap despite market declines. More political headlines Debt/GDP still high. Medium-term growth a huge challenge. Gov’t has a small minority. Banks no longer cheap post-rally. Low-beta market in an EM rally. Weak CZK does little but erode returns for USD-based GEM investors PM Orban’s long and consistent track record of high effective taxation. Low growth hurts. Weak Q3 earnings, especially in consumers. Disclosure and transparency remain issues. So does market access. Political and policy uncertainty big negatives. Q3 results were weak. Liquidity and FOL’s still low. Bank sector payout ratios may get sacrificed to fund loan growth.

-

Weaker CZK should revive growth. Faster €-zone growth should mean faster 2H & 2014 growth. Eurozone recovery. Current account now in surplus. Strong GDP growth domestically. Broad and deep stock market. Market opening could come within 12 months. Valuations are low. Growth potential is still there. GDP growth still strong and some good dividend payers.

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David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

CEEMEA Price Earnings (12m forward EPS)
Figure 10: MSCI EM 12m Forward PE
12M Fwd PE Avg EM -1sd +1sd

Figure 13: MSCI EMEA 12m Forward PE
14 12
12M Fwd PE Avg EMEA -1sd +1sd

14 12 10 8 6 Jan-04

10 8 6 4 Jan-04

Jul-06

Jan-09

Jul-11

Jan-14

Jul-06

Jan-09

Jul-11

Jan-14

Source: IBES, Datastream, Bloomberg, 3 January 2014

Source: IBES, Datastream, Bloomberg, 3 January 2014

Figure 11: MSCI Turkey 12m Forward PE
12M Fwd PE Avg Turkey -1sd +1sd

Figure 14: MSCI Poland 12m Forward PE
18 16 14 12 10 8
12M Fwd PE Avg Poland -1sd +1sd

14 12 10 8 6 4 Jan-04 Jul-06 Jan-09 Jul-11 Jan-14

6 Jan-04

Jul-06

Jan-09

Jul-11

Jan-14

Source: IBES, Datastream, Bloomberg, 3 January 2014

Source: IBES, Datastream, Bloomberg, 3 January 2014

Figure 12: MSCI Russia 12m Forward PE
14 12 10 8 6 4 2 Jan-04 Jul-06 Jan-09 Jul-11 Jan-14
12M Fwd PE Avg Russia -1sd +1sd

Figure 15: MSCI South Africa 12m Forward PE
12M Fwd PE Avg South Africa -1sd +1sd

14 12 10 8 6 Jan-04

Jul-06

Jan-09

Jul-11

Jan-14

Source: IBES, Datastream, Bloomberg, 3 January 2014

Source: IBES, Datastream, Bloomberg, 3 January 2014

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David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

Summary: CEEMEA Countries Valuations
EMF EMEA
Czech Republic Hungary Greece Poland Russia South Africa Turkey

P/E (x) Div. Yield (%) 3-Jan-14 Hist.** P/ EPS Current 12m Prospective Hist.** Current Prospective Hist.** MSCI Index Trough (Trend) Trailing Fwd 2012E 2013E 2014E Peak Trailing 2013E 2014E Trough 473 7.0 5.8 8.8 8.7 10.4 8.8 8.7 4.9 3.6 3.6 3.9 1.1 263 7.3 4.5 9.8 11.2 9.2 9.8 11.1 10.0 7.0 7.0 6.7 0.5 19 -0.4 3.9 15.2 2.3 3.9 15.1 1.2 2.3 1.6 1.6 0.1 893 4.4 4.1 11.1 9.3 9.0 11.1 9.3 5.3 2.7 2.7 3.3 0.6 1,701 6.7 10.2 13.3 12.9 10.2 13.3 12.9 7.1 4.8 4.8 4.4 1.0 790 3.6 2.5 5.2 5.3 5.2 5.2 5.3 4.2 4.2 4.2 4.5 0.2 1,137 9.1 11.3 15.9 14.2 16.8 15.9 14.2 4.7 3.1 3.1 3.4 1.4 934,642 5.1 5.4 9.2 8.5 9.8 9.2 8.5 4.0 3.5 3.5 4.1 1.0 1,361 270 957 561 413 667 61.6 809 6,820,041 40,135 196,416 46,269 805 1,350 1,752 437 5.5 10.4 6.8 8.9 -38.6 10.3 7.2 9.6 8.6 9.0 6.5 10.2 11.5 9.8 11.6 9.4 4.2 12.7 7.1 14.4 7.3 9.7 6.1 9.1 29.8 11.3 15.6 14.0 13.6 12.9 14.7 17.9 16.6 12.0 9.7 16.8 14.5 20.6 12.2 11.5 17.8 15.2 17.1 15.6 8.7 11.8 10.5 11.9 14.1 10.5 8.8 13.9 12.3 17.9 10.2 10.3 15.0 13.4 15.6 14.1 11.0 10.6 14.9 18.5 20.3 13.3 10.8 18.6 14.8 19.5 12.8 12.8 30.5 14.8 18.2 16.6 13.7 12.8 14.7 17.9 16.6 12.0 9.7 16.8 14.5 20.6 12.2 11.5 27.2 15.2 17.1 15.6 8.7 11.9 10.6 12.0 14.2 10.5 8.8 14.0 12.3 17.9 10.2 10.4 16.1 13.5 15.6 14.1 9.2 5.8 9.7 7.0 7.5 3.4 5.7 2.6 5.1 4.1 7.6 3.6 3.0 6.1 4.0 4.1 2.6 3.9 4.5 3.2 3.6 2.5 3.4 1.5 3.0 1.7 3.8 2.8 1.7 3.4 2.0 2.5 2.6 5.1 4.8 4.8 3.4 2.5 3.4 1.5 3.0 1.7 3.8 2.8 1.7 3.4 2.0 2.5 3.2 5.1 5.1 5.5 3.8 2.7 3.6 1.7 3.2 1.6 4.2 3.1 1.9 3.6 2.1 2.7 1.0 2.0 1.3 1.4 0.5 1.0 0.5 1.4 0.6 0.7 0.4 1.0 0.8 1.1 1.4 1.3

P/BV (x) Current Prospective Trailing 2013E 2014E 1.1 1.1 1.0 1.3 1.3 1.3 -0.2 1.2 0.0 0.9 0.9 0.8 1.3 1.3 1.2 0.7 0.7 0.6 2.5 2.5 2.3 1.3 1.3 1.2 1.1 -0.5 2.2 3.3 2.6 1.5 1.4 2.6 1.7 2.6 1.4 1.5 1.4 1.7 2.5 2.0 1.1 2.7 1.9 2.1 1.5 1.5 1.4 2.6 1.7 2.6 1.4 1.5 1.4 1.7 2.5 2.0 1.0 0.5 1.8 1.0 0.8 1.4 1.3 2.3 1.5 2.4 1.3 1.3 1.3 1.6 2.3 1.8

Earnings growth (%) 2012 -4.7 -3.2 -6.6 -12.3 -5.6 -11.0 8.2 17.0 4.7 -4.9 10.9 41.0 18.1 5.7 1.4 10.2 -18.4 37.5 -30.5 -1.5 -14.0 -5.0 5.5 2.1 2013E 17.6 -6.9 -40.4 -18.9 -23.0 -1.2 6.0 7.0 -19.3 -17.6 1.5 2.9 22.2 11.0 11.2 10.9 1.7 -5.1 4.7 10.6 12.0 -2.3 6.4 6.4 2014E 1.7 -11.7 -74.4 19.7 3.2 -1.9 11.5 8.2 57.3 8.4 39.1 49.3 17.6 13.7 10.3 20.3 18.5 15.0 19.4 11.4 69.4 12.7 9.7 10.7

ROE (%) 2012 2013E 12.7 13.4 15.4 13.7 19.9 -3.9 9.5 8.0 14.0 10.0 14.7 13.2 16.6 16.4 17.0 15.7 9.7 22.5 14.2 12.9 8.1 13.1 15.2 16.3 10.9 15.2 9.7 12.4 5.1 11.9 15.0 12.7 6.9 28.7 16.1 13.9 9.2 13.5 15.5 16.6 11.6 13.4 10.9 13.0 5.4 11.5 14.9 12.9 2014E 12.3 11.8 4.0 9.0 9.8 11.7 16.9 15.1 11.9 29.3 16.7 14.3 9.3 13.9 15.5 17.6 13.1 14.0 12.9 13.4 8.5 12.5 15.2 13.4

Middle East & Africa Egypt Morocco^ Qatar^ Saudi Arabia UAE^ Other Markets EMF Asia* China India EMF LatAm Mexico Brazil Emerging Markets Japan Europe USA Global

Source: I/B/E/S, MSCI, Bloomberg, J.P. Morgan estimates.

Updated as of cob 3 January 2014

* Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using JP Morgan estimates for covered stocks and I/B/E/S estimates for the rest. ^ Market forecast numbers are Bloomberg Estimates for Generic Years (1 and 2) for each MSCI index. For all other markets, forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates. Hist. ** refers to the historically lowest valuation of the MSCI indices since last 5 years. Trough PE represents the lowest 12 month trailing PE. For dividend yield the highest values are taken to represent the best multiple. USA, Europe and Japan PE are I/B/E/S aggregate estimates. Japan Valuation estimates are for the financial year ending March P / EPS (Trend) uses the trend EPS for the indices calculated by the linear regression on the natural log of trailing EPS. For more, please refer to 'Mayday call for the shorts - Perspectives and Portfolios', 5 May 2009, Mowat et al. P / EPE (Trend)' is NM for indices where the modeled relationship is weak with a less than 0.50 R-square. The start dates China and Singapore models are modified to make them more relevant. Sector indices inputs have not been altered.

8

David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

CEEMEA Market Performance: MSCI Performance by Countries and Sectors
EM Eastern Europe EMF Latin America North America EM Europe EMF Asia Europe Mexico
2013

Consumer Discretionary Consumer Staples Energy Financials Healthcare Industrials Information Technology Materials Telecoms Utilities Region / Country Benchmark Change vs dollar

34.0% 15.9% 10.8% 19.1% 33.4% 27.0% 24.9% -2.9% 19.1% 7.0% 20.3%

40.7% 22.8% 19.0% 28.2% 39.8% 37.2% 27.6% 2.7% 8.6% 8.5% 27.6%

32.5% 14.9% 6.2% 24.2% 28.0% 27.3% 31.4% 0.7% 34.2% 9.4% 20.1%

60.6% 46.7% 20.3% 57.1% 41.4% 41.9% 46.5% 38.3% 113.9% 36.0% 51.9%

4.3% -5.5% -13.6% -7.0% 8.0% -2.8% 12.2% -19.1% -5.3% -5.9% -5.0%

20.4% -5.6% -3.9% -9.1% 13.0% -9.4% -37.7% 0.1% -29.2% -8.0%

8.8% 21.9% -6.4% -8.7% -65.8% -5.8% -25.7% 3.7% -29.2% -7.5%

23.8% 50.7% -5.7% 6.7% -74.6% -25.3% 9.0% -29.7% -2.9%

-8.8% -11.7% -26.0% -14.1% -1.4% -7.2% 11.1% -23.4% -5.5% -18.6% -15.7%

2.6% 0.7% -15.7% -3.9% 8.6% -1.0% 12.3% -6.4% -7.5% 11.4% -0.2% 0.0%

-9.3% 1.3% -14.1% -4.1% 1.5% -2.8% 27.9% -10.9% -9.1% -11.2% -6.4% -13.1%

-1.2% 10.4% -17.5% -3.6% 22.3% 5.2% 79.3% -16.0% -10.1% 36.5% 0.4% 2.9%

3.5% 13.5% 2.4% -12.3% 24.0% -8.9% 61.5% -8.2% 27.2% -14.1% 6.9% -11.0%

9.1% -9.2% -21.5% 11.8% -14.0% -5.3% 1.9% -5.4% 29.5% 10.0% 1.6% 1.4%

15.3% -6.0% 0.2% 19.6% -11.9% 2.7% -0.6% -1.4%

26.4% 15.5% -4.9% 25.4% 30.5% 7.2% 5.5% 7.9% -6.1% 9.4% -2.6%

EMEA(Europe & Middle East)

Czech Republic

South Africa

Hungary

Poland

Russia

2013

Consumer Discretionary Consumer Staples Energy Financials Healthcare Industrials Information Technology Materials Telecoms Utilities Region / Country Benchmark Change vs dollar

8.9% 21.9% -6.4% -8.7% -84.2% -5.8% -25.7% 3.7% -29.2% -7.5%

74.9% 10.2% 30.7% -18.5% -1.2% -75.0%

20.6% -18.4% -11.5% 11.2%

77.8% 2.0% 8.1%

50.5% -16.3% 36.3% 10.3% 40.0% 15.7% -33.5% 20.2% 12.5% -19.2%

-8.8% -24.0% -11.2% -4.4%

13.9% 15.9% -8.4% 40.0% 4.2% -11.2% 2.1%

-31.5% -19.9% -10.2% -4.2% 2.3%

-17.4% 25.7% -45.8% 4.9% -7.1%

Source: Bloomberg, MSCI. Updated as of 3 January 2014 Note: Local currency movements against the dollar: appreciation / (depreciation).Country and sector cross sections in italic blue have outperformed their indices by more than 2%. Cross sections in red have underperformed their indices by more than 2%.

Turkey

Egypt

9

Taiwan

Global

EMEA

Japan

Korea

China

Brazil

India

EMF

David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

Table 6: MSCI EMEA Q-Scores
Bloomberg Ticker TAVHL TI SHF SJ NTC SJ SBER RM MFON LI MGNT LI TFG SJ KER PW KOMB CP SOL SJ COMI EY FSR SJ ENKAI TI RMH SJ SBERP RM GMKN RM SSA LI HALKB TI MIL PW VAKBN TI THYAO TI APN SJ BZW PW EREGL TI MTSS RM IPL SJ PZU PW MBK PW SISE TI BIMAS TI TTKOM TI CHMF RM MPC SJ LTS PW NED SJ MDC SJ ULKER TI TRNFP RM SNGSP RM PKO PW VTBR RM MTN SJ WHL SJ ARCLK TI FROTO TI LHC SJ NPK SJ SPP SJ VOD SJ BAW SJ SBK SJ SAP SJ TPE PW ARI SJ TATN RM ASR SJ MMI SJ NVTK LI REM SJ ATT PW TCELL TI BVT SJ PEO PW LBH SJ PGE PW KOZAL TI PPC SJ BHW PW Closing Price 14.9 4,533 2,574 101 32.8 65.4 9,399 41.2 4,440 51,611 32.6 3,550 6.26 4,854 80.0 5,400 32.2 11.7 7.15 3.72 6.41 27,353 382 2.5 328 19,755 450 490 2.66 42.7 5.76 319 16,113 36.1 20,719 7,600 14.9 86,539 25.9 38.9 0.05 21,525 7,460 12.1 22.9 4,253 4,092 13,300 13,200 9,933 12,853 3,232 4.36 19,100 208 35,299 2,549 133 20,675 63.5 11.0 26,701 178 12,143 16.2 19.6 3,032 103 Valuation Q score 55.3% 81.8% 61.4% 63.4% 26.3% 29.1% 94.7% 98.7% 42.3% 56.8% 57.4% 68.6% 13.2% 67.6% 76.9% 62.7% 19.4% 72.6% 58.5% 69.0% 77.3% 31.9% 39.4% 32.8% 20.7% 74.7% 50.7% 39.9% 89.3% 5.4% 65.1% 70.6% 20.1% 94.8% 75.2% 24.9% 36.1% 81.6% 23.6% 68.5% 84.4% 69.2% 39.4% 38.9% 31.3% 15.8% 14.6% 23.9% 28.6% 56.4% 67.1% 87.0% 45.6% 68.8% 16.3% 40.0% 63.4% 15.7% 22.7% 70.2% 20.5% 57.5% 34.8% 57.7% 55.5% 61.7% 7.2% 22.2% Momentum Q score 97.5% 87.3% 75.3% 77.1% 90.9% 97.1% 4.4% 7.8% 82.3% 86.3% 75.6% 49.1% 89.7% 62.2% 84.5% 60.5% 88.5% 25.4% 73.8% 40.0% 84.4% 91.7% 77.0% 81.6% 86.8% 59.8% 32.0% 80.8% 34.2% 49.8% 45.3% 38.4% 55.4% 20.1% 60.0% 79.2% 96.8% 81.7% 82.2% 36.0% 50.0% 57.2% 42.0% 69.6% 76.2% 60.6% 66.7% 30.5% 34.2% 57.1% 35.0% 38.8% 44.1% 36.7% 62.6% 48.9% 62.8% 72.1% 68.2% 64.8% 51.5% 62.5% 31.0% 63.5% 32.6% 10.6% 26.0% 55.0% Quality Q score 86.7% 54.5% 95.8% 88.4% 98.0% 92.6% 80.4% 28.4% 93.2% 49.4% 82.7% 70.9% 43.2% 62.5% 85.6% 71.0% 44.7% 80.7% 49.5% 45.8% 70.5% 65.7% 71.7% 70.8% 98.2% 69.8% 90.7% 67.2% 23.1% 99.4% 95.5% 27.8% 96.6% 18.4% 58.4% 37.0% 65.8% 65.8% 45.4% 73.6% 50.1% 77.8% 96.3% 55.4% 94.5% 91.6% 59.2% 92.1% 99.4% 43.5% 53.6% 20.4% 34.1% 33.6% 69.0% 65.7% 41.1% 89.9% 42.4% 40.1% 61.8% 69.8% 69.7% 38.8% 35.2% 97.2% 97.8% 68.8% Earnings & Sentiment Q score 93.0% 95.4% 93.9% 97.2% 80.4% 63.4% 84.0% 70.1% 84.3% 91.3% 86.9% 93.9% 95.3% 87.4% 55.0% 90.6% 90.9% 84.4% 87.8% 89.4% 42.6% 79.1% 87.1% 84.1% 64.8% 74.5% 88.3% 84.6% 73.5% 88.5% 58.7% 92.9% 83.5% 62.7% 71.1% 92.1% 34.6% 36.7% 91.1% 79.3% 63.4% 60.8% 72.0% 81.7% 49.3% 81.6% 90.1% 84.8% 56.1% 75.5% 69.5% 46.4% 83.9% 70.3% 83.1% 74.2% 50.0% 59.9% 80.0% 37.6% 80.9% 38.8% 78.2% 52.4% 75.5% 24.8% 66.3% 64.2% Q-score (composite) 98.8% 96.8% 95.3% 94.7% 93.3% 90.9% 90.5% 90.4% 90.4% 89.4% 88.4% 88.2% 85.6% 84.5% 84.2% 84.0% 82.4% 82.2% 82.1% 81.7% 81.6% 80.2% 80.0% 79.9% 79.9% 78.9% 78.6% 78.5% 78.4% 78.1% 77.9% 77.2% 76.3% 75.9% 75.4% 75.2% 75.2% 74.6% 74.5% 74.2% 73.0% 71.4% 70.2% 69.8% 67.4% 66.9% 66.1% 66.0% 65.0% 63.8% 61.7% 59.8% 59.6% 58.4% 57.4% 57.2% 56.0% 55.9% 55.9% 54.9% 54.8% 53.8% 53.4% 53.0% 52.6% 48.8% 48.2% 46.8%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68
10

Company Name TAV Havalimanlari Steinhoff Int. Netcare Sberbank Megafon Magnit Foschini Group Kernel Holding Komercni Banka Sasol Comm. Int. Bank FirstRand Enka Insaat RMB Hold. Sberbank (Pref.) Norilsk Nickel AFK Sistema Halkbank Bank Millennium Vakifbank Turk Hava Yollari Aspen Pharmacare Bank Zachodni Erdemir MTS Imperial Hold. PZU mBank SiseCam BIM Turk Telekomunication Severstal Mr Price Grupa Lotos Nedbank Group Medi-Clinic Ülker Transneft Surgutneftegaz (Pref.) PKO Bank VTB Bank MTN Group Woolworths Hold. Arcelik Ford Otomotiv Life Healthcare Group Nampak Spar Group Vodacom Barloworld Standard Bank Sappi TPE African Rainbow Tatneft Assore MMI Holdings Novatek Remgro ATT Turkcell Bidvest Group Bank Pekao Liberty Hold. PGE Koza Gold Pretoria Portland Cement Bank Handlowy

Country Turkey South Africa South Africa Russia Russia Russia South Africa Ukraine Czech South Africa Egypt South Africa Turkey South Africa Russia Russia Russia Turkey Poland Turkey Turkey South Africa Poland Turkey Russia South Africa Poland Poland Turkey Turkey Turkey Russia South Africa Poland South Africa South Africa Turkey Russia Russia Poland Russia South Africa South Africa Turkey Turkey South Africa South Africa South Africa South Africa South Africa South Africa South Africa Poland South Africa Russia South Africa South Africa Russia South Africa Poland Turkey South Africa Poland South Africa Poland Turkey South Africa Poland

David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125

Bloomberg Ticker SNGS RM BGA SJ KIO SJ LKOH RM ISCTR TI DSY SJ EXX SJ EUR PW NPN SJ AKBNK TI CPS PW ANG SJ PGN PW CCOLA TI GAZP RM SNS PW ETEL EY TMGH EY RDF SJ ROSN RM PIK SJ TRU SJ SHP SJ TOASO TI SLM SJ MOEX RM TUPRS TI SAHOL TI PKN PW CEZ CP GARAN TI FEES RM RTKM RM SPTT CP KGH PW KCHOL TI ALR PW HYDR RM GTHE EY ENA PW EKGYO TI TBS SJ GRT SJ RMI SJ ABL SJ YKBNK TI MSM SJ NHM SJ AEFES TI TPS PW GFI SJ IMP SJ AMS SJ URKA RM JSW PW HAR SJ MOL HB

Company Name Surgutneftegaz Barclays Africa Group Kumba Iron Ore Lukoil Isbank Discovery Hold. Exxaro Resources Eurocash Naspers Akbank Cyfrowy Polsat AngloGold Ashanti PGN Coca-Cola Icecek Gazprom Synthos Telecom Egypt Talaat Moustafa Redefine Prop. Rosneft Pick 'n Pay Truworths Int. Shoprite Hold. Tofas Turk Sanlam Moscow Exchange Tupras Sabanci Hold. PKN ORLEN CEZ Garanti Bank Federal Grid Rostelecom Telefonica KGHM KOC Holding Alior Bank RusHydro Global Telecom H ENEA Emlak Konut Tiger Brands Growthpoint Prop. Rand Merchant Ins. African Bank Inv. Yapi Kredi Massmart Holdings Northam Plat. Anadolu Efes Telekomunikacja Polska Gold Fields Impala Platinum Anglo Amer. Plat Uralkali JSW Harmony Gold MOL

Country Russia South Africa South Africa Russia Turkey South Africa South Africa Poland South Africa Turkey Poland South Africa Poland Turkey Russia Poland Egypt Egypt South Africa Russia South Africa South Africa South Africa Turkey South Africa Russia Turkey Turkey Poland Czech Turkey Russia Russia Czech Poland Turkey Poland Russia Egypt Poland Turkey South Africa South Africa South Africa South Africa Turkey South Africa South Africa Turkey Poland South Africa South Africa South Africa Russia Poland South Africa Hungary

Closing Price 28.3 13,350 44,735 2,040 4.54 8,401 15,198 49.0 108,475 6.45 19.8 13,096 5.17 50.8 139 5.69 14.7 6.23 963 252 5,200 7,626 16,351 12.2 5,290 64.8 41.5 8.24 42.52 521 6.60 0.09 111 294 118 8.60 80.6 0.57 4.73 14.5 2.14 25,925 2,405 2,751 1,225 3.58 12,700 4,155 23.4 9.83 3,477 12,703 39,900 172 54.1 2,835 14,470

Valuation Q score 20.8% 86.4% 37.3% 54.5% 51.8% 45.7% 81.0% 35.4% 6.7% 39.7% 70.6% 82.4% 85.0% 10.4% 79.6% 49.8% 12.2% 38.2% 36.7% 21.7% 18.7% 63.4% 21.2% 33.2% 6.3% 8.0% 37.0% 48.2% 78.6% 52.7% 46.2% 80.9% 26.5% 12.2% 67.6% 28.9% 76.8% 55.2% 89.8% 21.8% 51.0% 40.5% 15.5% 26.4% 90.5% 45.7% 3.6% 29.4% 35.5% 0.7% 55.2% 45.2% 22.7% 0.5% 13.3% 18.4% 75.9%

Momentum Q score 68.7% 25.0% 0.9% 72.1% 16.4% 80.6% 7.4% 33.9% 96.9% 15.7% 27.6% 1.2% 30.6% 93.8% 67.6% 16.7% 27.6% 72.0% 58.9% 53.7% 50.7% 10.0% 28.8% 84.2% 61.9% 33.6% 29.2% 26.2% 7.7% 12.3% 2.4% 52.9% 32.5% 3.4% 44.5% 13.7% 39.1% 59.4% 39.8% 22.5% 24.6% 45.6% 78.8% 0.6% 15.8% 12.0% 36.9% 14.7% 16.3% 2.2% 1.7% 7.4% 27.7% 27.2% 0.5% 2.0%

Quality Q score 43.4% 55.4% 98.7% 66.8% 54.4% 61.7% 50.6% 97.1% 53.9% 59.1% 83.5% 12.1% 37.8% 74.9% 67.0% 71.2% 47.2% 28.9% 34.5% 51.5% 68.7% 92.7% 77.0% 83.6% 39.4% 82.8% 58.0% 36.9% 19.3% 62.4% 60.9% 10.9% 59.8% 13.7% 68.9% 51.3% 52.2% 31.0% 4.3% 27.9% 32.5% 67.3% 9.8% 35.6% 11.4% 41.8% 70.3% 6.1% 31.0% 12.3% 5.6% 13.9% 6.2% 71.0% 5.5% 3.0% 19.9%

Earnings & Sentiment Q score 68.3% 12.7% 50.2% 19.7% 61.1% 18.5% 29.7% 19.2% 15.8% 65.6% 14.1% 75.0% 11.4% 13.2% 4.6% 40.2% 79.7% 37.3% 43.5% 53.0% 44.8% 12.7% 37.8% 5.4% 58.7% 42.4% 25.5% 27.1% 10.8% 26.4% 26.1% 39.5% 15.8% 78.7% 10.6% 18.9% 4.4% 11.5% 7.0% 24.9% 15.1% 7.7% 44.4% 2.0% 2.5% 4.0% 14.6% 19.8% 6.9% 72.5% 24.6% 11.0% 30.2% 11.7% 6.1% 16.1%

Q-score (composite) 44.4% 42.1% 41.7% 40.5% 40.3% 40.2% 40.1% 39.2% 38.0% 37.4% 36.7% 35.8% 35.8% 35.7% 35.4% 34.9% 34.9% 34.8% 34.6% 34.0% 33.4% 30.9% 28.4% 27.4% 26.6% 26.0% 21.6% 21.0% 20.5% 20.2% 20.0% 19.9% 18.9% 18.9% 17.8% 17.3% 17.2% 17.1% 15.3% 14.7% 13.2% 13.1% 12.1% 8.7% 6.9% 5.9% 5.7% 5.4% 5.3% 5.1% 4.5% 4.1% 4.0% 3.2% 1.5% 0.9%

Source: J.P. Morgan Quant, Factset, MSCI, Thomson/Reuters. Prices as of 3 January 2014

11

David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

Combining J.P. Morgan Q-scores and thematic top-down strategy
With the help of J.P. Morgan’s quant team, the strategy team has developed a screening tool to monitor current trades and identify new ideas. The output of the screen is a list of liquid and investible stocks in MSCI EM consistent with our key trades and country asset allocation, and filtered using the J.P. Morgan Q-scores developed by the Quant team. The J.P. Morgan Q-score The J.P. Morgan Q-Score provides an indication of a company’s expected return versus both its country peers and its regional industry peers using a balanced multifactor quantitative approach. The goal is a simple one. To bias stock selection towards cheap, successful, quality companies with solid earnings and away from expensive, poor quality, unsuccessful companies with poor earnings. The higher the company scores, the higher the expected return (or Alpha) relative to the considered universe. A score of 50% indicates that this company is expected to perform in line with the benchmark universe. A score greater than 50% indicates an expected outperformer, and a score less than 50% indicates an expected underperformer. All scores are expressed as a percentile rank from 0% to 100%.
Value Q-score Many quant researchers have explored the ‘Value Anomaly’ and it is widely recognized that low P/E stocks outperform high P/E stocks over the long term. Similar analysis has shown consistent results using P/Sales, P/Dividend and P/Book ratios. Our studies have also shown that Earnings Growth can complement straight Value factors in many markets. Component Factors 12M Forward P/E vs Market (34%) 12M Forward P/E vs Country Sector (33%) EPS Growth; forecast FY1 mean to FY2 mean (33%) Momentum Q-score Momentum theory for stock prices suggests that companies that do well in one (long term) investment period will continue to do well in the subsequent investment horizon. Over short time frames (<1month) studies have also highlighted the tendency of stocks to overreact leading to short term reversion. We have widely observed these phenomenon in our own testing Component Factors 12M Price Momentum (75%) 1M Price Reversion (25%)

How is the Q-Score calculated? Share prices are affected by many different factors. Quant practitioners attempt to isolate factors that can be shown to constantly explain some of this return. The aim is to outperform the benchmark by targeting our portfolios toward those stocks with positive factor exposures and away from those with negative factor exposures. The Q-Score is generated by evaluating the companies’ prospects based on combining 10 such factors categorized into four factor families. These families are current valuation, recent success or momentum, quality attributes and a consideration of recent changes in earnings and sentiment. The detail for each factor family is shown in the table below. Liquidity / investibility criteria

 

Market cap greater than US$2 billion Daily turnover greater than US$5 million

Exception: Minimum of 5 stocks per market

Earnings Q-score The market is not efficient at incorporating new information and a window of opportunity exists to exploit recent analyst revisions in earnings and recommendations. Similarly analyst behavioral biases lead to subsequent changes suggesting an exploitable serial correlation in earnings upgrades/downgrades. Component Factors Earnings Momentum 3M avg FY1&FY2, Risk Adjusted (34%) 1M change in consensus recommendations (33%) Net Revisions (upgrades-downgrades) to mean FY2 EPS (33%) Quality Q-score Whilst arguably less readily observable than some other factors, it is generally accepted that it is desirable to tilt portfolios towards highly profitable and good quality businesses. Similarly over the long term the market also appears to reward 'earnings certainty' and penalize those stocks that carry a large degree of earnings risk. Component Factors ROE: average of FY1 and FY2 mean forecast (50%) Earnings Risk: Variation in FY1 and FY2 forecast EPS (50%)

12

David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

J.P. Morgan Quant Strategy Publications
J.P. Morgan Quant strategy team generates Q-Scores across a range of universes on a daily basis. Summary spreadsheets are available weekly by email and "1 page" company snapshots for several thousand stocks are available on our web portal at: www.morganmarkets.com/equityquants Core research publications including periodicals: The Global Factor Performance Summary Published each month this report is designed to provide a quick summary of factor performance around the world. 8 regions are included and performance over the month and year are summarized for key alpha sources as well as 42 popular alpha and risk factors. Quant Factor Reference Books Our Factor Reference Series of publications are designed to provide a starting point for those approaching a new region or country quantitatively for the first time. Typically each reference includes a summary of the performance of fifty or so of the most popular and commonly used Alpha drivers and a full back-test output for each factor in isolation. A performance/back-test analysis of typical quantitative multi-factor composites (Value, Momentum, Quality etc) is also included. The Fund Manager Monthly Summarizing the Quant and non Quant market activity, the Fund Manager Monthly is published at the start of each month. In addition to a variety of performance items we also use this publication to provide updates for the ‘latest readings’ on models developed in our in-depth analysis papers. The Quant Angle Entering its fifth year of publication, our monthly Asia Quant "thematic mouthpiece", The Quant Angle is published from Hong Kong and provides quant based analysis, ideas generation and analysis across Asia Pac and EM. Collated Academic Abstracts Keep up to date with the latest output from finance academia with our quarterly collated abstract publication Is the Q-Score effective in GEM? We can test the effectiveness of a stock-picking strategy by running a back-test. Our GEM back-test rewinds the clock back to 1993 and examines the performance of those stocks with a Q-Score > 80% from then until now. (Scores are recalculated monthly and the portfolios are rebalanced monthly). The chart below shows the performance of these stocks versus an equal weighted benchmark. Over this 17-year test period the top-ranking stocks have delivered an annualized return of just over 20% converting an initial $100 investment in 1993 into $2207 in 2010 (excluding t-costs). This compares with a $100 investment in the index which would have delivered a return of $305 (equal weighted) or $366 cap-weighted. For more information on factor back-testing please contact the Quant strategy team.
Figure 1: Portfolio Index Performance
3,000 2,500 2,000 1,500 1,000 500 0 Base Nov-94 Nov-95 Nov-96 Nov-97 Nov-98 Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09
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Equal Wt Benchmark

QSCORE > 80%

Source: J.P. Morgan Quant tea

David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention.

Important Disclosures

          

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David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

J.P. Morgan Equity Research Ratings Distribution, as of January 1, 2014
J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients* Overweight (buy) 43% 57% 43% 75% Neutral (hold) 45% 49% 50% 66% Underweight (sell) 12% 36% 7% 59%

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

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David Aserkoff, CFA (44-20) 7134-5887 david.aserkoff@jpmorgan.com

CEEMEA Equity Research 08 January 2014

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