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Dr. David Kelly, CFA Managing Director Chief Global Strategist J.P. Morgan Funds Tai Hui Managing Director Chief Market Strategist Asia J.P. Morgan Funds Geoff Lewis Executive Director Market Strategist Asia J.P. Morgan Funds Yoshinori Shigemi Executive Director Market Strategist Asia J.P. Morgan Funds Joseph S. Tanious, CFA Executive Director Global Market Strategist J.P. Morgan Funds Grace Tam, CFA Vice President Market Strategist Asia J.P. Morgan Funds Ian Hui Associate Market Analyst J.P. Morgan Funds Ben Luk Market Analyst J.P. Morgan Funds Anthony Tsoi Market Analyst J.P. Morgan Funds Anthony M. Wile Market Analyst J.P. Morgan Funds

Quarterly Perspectives
Asia | 4Q 2013

J.P. Morgan Funds Management is pleased to present the latest edition of Quarterly Perspectives. This piece highlights key themes from our Guide to the Markets book and offers critical insights for engaging in portfolio discussions.
Both Quarterly Perspectives and Guide to the Markets are elements of our Market Insights program, which was developed to provide investors with a way to address the markets and the economy based on logic rather than emotion, ultimately helping investors to make rational investment decisions.

This quarters themes

1 2 3 4

US equities: Pendulums dont stop mid-swing Emerging Markets: The importance of differentiation Asias challenges are cyclical, not structural Has QE tapering tapered off the income theme?

MARKET Market Insight Series INSIGHT at aSERIES glance

4Q | 2013
As of September 30, 2013

Guide to the Markets


To download the PDF of the Guide to the Markets - Asia, please visit us at:



Quarterly Perspectives US equities: Pendulums dont stop mid-swing

Overview The extraordinary performance of equities since the depths of the recession has caused many investors to question the time left in this bull market.  Corporate fundamentals, including record high profits and historically low leverage, point to a healthy corporate landscape.  Although equity valuations have approached long-term averages, stocks are not expensive and continue to be a more attractive option than high-grade fixed income.  Real earnings yields are approaching long-term averages, but equity markets do not stop at average. Its all about the fundamentals Many investors have watched the S&P 500 surpass previous peaks in 2013, with year-to-date performance exceeding 19%. As shown on page 41 of the Guide to the Markets - Asia, while returns have been impressive, what may have gone unnoticed are improving fundamentals of US corporations.  Corporate fundamentals remain in excellent condition, with a historical high in first quarter earnings per share and record lows in financial leverage.  Estimates from Standard & Poors with 99% of companies reported indicate a second consecutive record high in earnings per share for the second quarter of 2013. This would indicate US companies have never been more profitable in the history of the S&P 500 than the first two quarters of this year.  Elevated profit margins have helped earnings growth enormously over the past few years. However, revenue growth consistent with modest global GDP growth and the potential for additional leverage on corporate balance sheets make a bullish case for long-term investors in US equities.

 While margins have contributed to earnings growth, revenue growth should take the reins going forward.  The S&P 500 is the most profitable it has ever been in its history.  Companies have room to take on additional leverage, which could boost returns.

United States: Source of Earnings, Corporate Profits and Leverage

S&P 500 Year-over-Year EPS Growth
50% 25% 0% -25% 25% -50%

Growth broken into revenue growth and margin expansion, quarterly

Margin Share of EPS Growth Revenue Share of EPS Growth




















Adjusted j After-Tax Corporate p Profits ( (% of GDP) )

Includes inventory and capital consumption adjustments
12% 10% 8%

Total Leverage
6/2013: 10.1%
240% 220% 200% 180% 160% 140%

S&P 500, ratio of total debt to total equity, quarterly

Average: 6.3%
6% 4% 2%

Average: 172% 9/2013: 104%

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12

'65 '70 '75 '80 '85 '90 '95 '00 '05 '10



Source: FactSet, Standard & Poors, BEA, J.P. Morgan Asset Management Guide to the Markets Asia. (Top) EPS based on operating earnings per share. 2Q13 figures are Standard & Poors estimates and based on company filings as of 19/9/13. 1Q 2009, 1Q2010 and 2Q2010 reflect -101%, 92% and 51% growth, respectively, in operating earnings and are cut off to maintain a more reasonable scale. Data reflect most recently available as of 30/9/13.

Guide to the Markets Asia, page 41

4Q | 2013
Averages: Somewhere in the middle Not all valuation metrics are created equal. A companys earnings yield, for instance, is the inverse of its P/E ratio. This provides a decent gauge as to how much a company is yielding in earnings to an investor for a given price very similar to bond yields. As shown on page 42 of the Guide to the Markets - Asia, the current P/E ratio is still below previous peaks in 2000 and 2007, despite being at a record high index level. More importantly, the current 10-year US Treasury yield is signicantly below prior market peaks. This reects that the valuation remains signicantly skewed in favour towards equities. Markets may continue to outpace earnings growth through margin expansion, pushing real earnings yield below its historic average, or P/E ratios higher. However, bull markets do not stop at average. In most cases, averages are only half way. As bond yields rise, the equity market rally will be more dependent on earnings growth instead of multiple expansion. While not a risk on the immediate horizon, investors need to remain wary of overpriced markets as draw downs can be signicant.

United States: S&P 500 Index at Inflection Points

S&P 500 Index
Characteristic Index level P/E ratio (fwd.) Dividend yield 10 yr Treasury 10-yr Mar 2000 1,527 25.6x 1.1% 6 2% 6.2% Oct 2007 1,565 15.2x 1.8% 4 7% 4.7% Sept 2013 1,682 14.3x 2.2% 2 6% 2.6%

Sept. 30, 2013 P/E (fwd (fwd.) ) = 14 14.3x 3x Index level: 1,682


Mar. 24, 2000 P/E (fwd.) = 25.6x Index level: 1,527

Oct. 9, 2007 P/E (fwd.) = 15.2x Index level: 1,565

P/E ratio remains attractive compared with previous peaks.



+101% +106%





Dec. 31, 1996 P/E (fwd.) = 16.0x Index level: 741 Oct. 9, 2002 P/E (fwd.) = 14.1x Index level: 777 Mar. 9, 2009 P/E (fwd.) = 10.3x Index level: 677

600 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Source: Standard & Poors, FactSet, J.P. Morgan Asset Management Guide to the Markets Asia.


Latest forward P/E ratio as of 30/9/13. Data reflect most recently available as of 30/9/13.

Guide to the Markets Asia, page 42

Investment implications With no impending recession in sight, modest earnings growth and strong corporate fundamentals point to continued strength in equities. While many valuation metrics rest at their long-run averages, bull markets do not end at average valuations. Investors should be aware of the risks inherent in expensive markets, but recognize equities may have room to push higher from current levels.



Quarterly Perspectives

Emerging Markets: The importance of differentiation

Overview Some emerging markets (EMs) have gone through a summer of turmoil on the back of the prospect of monetary policy normalization in the US. However, complete avoidance in emerging markets, either in equities or debt, would have neglected some important differentiating factors. Structural fundamentals of many emerging economies have made some notable progress in recent years through lessons learnt from previous crises. Meanwhile, there are also considerable differences amongst emerging markets to allow active managers to generate excess returns. More crisis-resilient As the US Federal Reserve looks to normalize its monetary policy over time, some emerging markets have experienced capital outows. Current account decit countries, such as India, Indonesia, South Africa, Turkey and Brazil, have seen their currencies depreciate sharply against the US dollar in 3Q 2013. Some investors are concerned that these economies could experience another balance of payments crisis, similar to the 1997 Asian nancial crisis. We believe such worries are overdone. While individual countries may face short-term cyclical difficulties, there are a number of structural safeguards in place to provide sources of stability. Most emerging economies now have exible exchange rate systems, instead of a currency peg to the US dollar. This allows the exchange rate to help in the adjustment of imbalances in the balance of payments. A healthier foreign exchange reserve position also allows central banks to manage currency depreciation in a more orderly manner. According to the International Monetary Fund, emerging market foreign exchange reserves have risen from just over USD 600mn in 1997 to USD 7.4trn in the rst quarter of 2013. This rise in reserves helps to provide a cushion to foreign currency liabilities, such as import bills or foreign currency debt repayments. As shown on page 57 of the Guide to the Markets - Asia, many Asian economies have seen a lower ratio of short term external debt to reserves relative to 1997. In addition, regional and bilateral currency swap agreements have been in place to reinforce market condence towards countries with less robust external payment position. The Chiang-Mai Multilateral Initiative pools USD 120bn worth of FX reserves from 13 Asian countries. Brazil, Russia, India, China and South Africa are also in discussions to set up a USD 100bn reserve pool.

Currencies: Valuation and External Vulnerability

Global Currencies Valuation Based on PPP*
100% DM Currencies 50% EM Currencies Overvalued Relative to PPP 33% 2% 0% -10% Undervalued Relative to PPP 6% 7% 18% 76% 42%

Most EM countries now have a much stronger external payment position compared with 1997.

-50% -63%







-31% 31%

-30% 30%

-25% 25%



Fixed In ncome


Sh t t Short-term External E t l Debt D bt as % of f Foreign F i Reserves R (Excluding (E l di Gold) G ld)

350% 300% 250% 200% 150% 100% 50% 0% Korea Brazil South Africa Indonesia Thailand Mexico Philippines Turkey Malaysia China India 46% 145% 146% 119% 55% 66% 35% 49% 108% 94% 97% 55% 26% 29% 40% 17% 30% 36% 313% 310% 283% 211% 1997 2012

Guide to the Markets Asia, page 57


Source: IMF, Reserve Bank of India, Turkish Undersecretariat of Treasury, J.P. Morgan Asset Management Guide to the Markets Asia. *Purchasing Power Parity (PPP) is the rate of exchange between two currencies that gives them equal purchasing powers in their own economies. All currencies are US dollar per foreign currencies. Undervalued/Overvalued based on the spot rate against the IMF 2013 Implied PPP Conversion Rate except EUR, which is based on OECD 2012 Implied PPP Conversion Rate. Data reflect most recently available as of 30/9/13.

4Q | 2013
Pick out the strong currency links Given the signicant variation in performance amongst emerging markets, it is important to appreciate the differentiating factors determining their relative performance. In the immediate future, currency outlooks could dominate, which is partially driven by the current account balance, as shown on page 55 of the Guide to the Markets - Asia. For markets with depreciating currencies, not only their nancial assets could come under direct pressure in USD terms, but also their central banks and governments could be forced to adopt policies to slow growth and correct cyclical imbalances. For example, Indonesia and Brazil had to raise interest rates to cool ination and reduce their current account decits. This could impact future earnings as well as local currency xed income markets. On the other hand, markets with less downward currency pressures, such as Mexico, have been able to cut rates to support growth. This divergence in performance could continue until the market has a clearer view of the Federal Reserves policy normalisation.

Emerging Markets and Asia: Currencies

Currency Valuation, Current Account and Nominal Yields
20% Current Acco ount as % of GDP P (2013 Forecast)
Bubble size = nominal 5-year 5 year government bond yield



Current account balance is likely to be an important differentiating factor when it comes to currency outlooks.

Taiwan 10% Malaysia 5% Philippines Korea Mexico 0% India -5% Asia Pacific countries Other EM countries -4 -3

Fixed In ncome

Russia Brazil


Thailand South Africa Poland Australia Turkey -2 -1 0 1 2 3 Indonesia

-10% -5

REER currency valuations (standard deviations away from mean)

Source: IMF, Bloomberg, J.P. Morgan Asset Management Guide to the Markets Asia. Current account forecasts are provided by IMF, based on the April 2013 World Economic Outlook. REER is the real effective exchange rate of a currency against a basket of its main trading partners currencies adjusted for inflation. Data reflect most recently available as of 30/9/13.


Guide to the Markets Asia, page 55



Quarterly Perspectives
From decoupling to recoupling Subsequently, economic and export structures could play a more decisive role. Given our view that the US has returned to a more stable growth path and other developed economies are improving, EMs with well-established links to these markets could enjoy additional growth momentum from exports, as shown on page 25 of the Guide to the Markets - Asia. In Asia, open economies, such as Taiwan, Korea, Singapore and Hong Kong, are well positioned in this scenario (Article 3, on page 7, on Asia discusses this in more detail). The bottoming out of the Chinese economy could further enhance investor condence in these Asian markets. Mexico could benet from the US recovery via the strong US-Mexico trade links. Some Central and Eastern European countries and African countries, such as Turkey, South Africa and Poland, could also receive a boost as Europe gradually escapes recession.

The Importance of Exports

Exports as a % GDP - 2012
Goods exports

Economies with strong trade links with the US, Europe and Japan should get additional boost from export performance in 2014.

Global Economy

US Japan EU

US 9.9% EU 13.4% 17.8% Japan China Others

Brazil India China Russia

10.8% 15.8% 24.9% 26.0%

Korea ASEAN Taiwan 0% 10% 20% 30% 40%

48.5% 53.5% 63.4% 50% 60% 70%

Source: IMF, CEIC, J.P. Morgan Asset Management Guide to the Markets Asia. Data reflect most recently available as of 30/9/13.


Guide to the Markets Asia, page 25

Investment implications Differentiation, instead of avoidance, is the right approach when considering EM. Investors should differentiate from the past, and also differentiate amongst markets. The risk of an external payment crisis in EMs is reduced via stronger foreign exchange reserves and swap agreements, even though cyclical growth could go through a consolidation phase in selected economies. EMs with a current account surplus and stable exchange rates could recapture investor interest in the near term. Trade links with recovering developed markets (DM) could differentiate growth and earnings performance over the next 1-2 years.

4Q | 2013

Asias challenges are cyclical, not structural

Overview Asian stock markets have experienced a volatile summer, as international investors became highly selective in the light of sharply rising US bond yields and global liquidity concerns associated with QE tapering fears. Indonesia and India in particular came under strong pressure, as to a lesser extent did Thailand, brought about by their large current account decits judged to be most vulnerable to portfolio outows. Investors should be patient, however, and refrain from panic selling. Asias economic problems today are largely cyclical, not structural, in our view. Moreover, less directly affected Asian markets like Korea and Taiwan have held up well during the turbulence, even as Chinese equities have begun to rally on better economic data. Structural improvements, cyclical weaknesses Asia in 2013 is not Asia in 1997. There is no meaningful comparison to be made between these markets today and the crisis conditions that engulfed the region in 1997, as some nancial media pundits like to assert. Given that the typical Asian economy today has more exible exchange rates, higher FX reserves, lower external debt and healthier corporate balance sheets, the potential for a major crisis originating within the Asia Pacic region is low. These structural improvements also help to explain gains in the efficiency of monetary policy over the past decade in terms of the transmission from policy to market interest rates. The main reason for Asia ex-Japans disappointing economic data and protracted earnings downgrades this year was the external shock to exports from the recession in Europe, coming at a time when the US growth trend was weak. This experience conrmed that the fortunes of the smaller manufacturing-biased Asian economies, like Taiwan and Korea, remain tightly linked to the global industrial production cycle, as do the fortunes of the regions trading entrepots, Hong Kong and Singapore. While the past decade saw big increases for all Asian economies in intra-regional trade with China, a good part of this increase was driven by the development of an integrated regional manufacturing supply chain. In turn, the Asian supply chain remains overwhelmingly driven by enduser demand from the US or Europe. China is mostly in the business of nal assembly and packaging, and for many products still makes only a modest contribution to the value added of exports to destinations outside the region.



Quarterly Perspectives
But there are early signals of revival to depressed Asian export values. US PMI data has far surpassed expectations in recent months, rising well above the 50 threshold that signals expansion. Historically, one of the tightest cyclical relationships between Asia and the US is that between total export values and the US PMI, as shown on page 6 of the Guide to the Markets - Asia. What this relationship is currently telling us is that the stage is set for a US-led recovery in Asian exports in 2014.

A stronger US-led global economy in 2014 will boost Asian export volumes and prices, putting an end to stock market underperformance. PMI trends for the worlds top four economies suggest we may see a synchronised upturn in the global economy in 2014.

Asia: Business Cycle

Asia Export Growth and US ISM Manufacturing PMI US PMI and Equity Performance
US Manufacturing PMI

Regional and Local y Economy

Year-over-year % change
60% 40% 20% 0% -20% -40% '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Asia Exports*

US ISM manu. new orders behaviour and subsequent 3-mth market perf.**
MSCI AC World S&P 500

65 60 55 50 45 40 35 30 Above 50 and falling Below 50 and falling

MSCI Japan MSCI AC Asia ex-Japan MSCI EM

Global Manufacturing PMI trends

60 55 50 45 40 '11 '12 '13 -10% -5% 0% 5% 10% 15%
US Euro Area China Japan

Below 50 and rising

Above 50 and rising

Source: Institute of Supply Management, China Customs, Hong Kong Census & Statistics Department, Indian Ministry of Commerce & Industry, Statistics Indonesia, Malaysian Department of Statistics, Philippines National Statistics Office, Statistics Singapore, Korean Customs Service, Taiwan Ministry of Finance, Bank of Thailand, Markit, MSCI, Standard & Poors, J.P. Morgan Asset Management Guide to the Markets Asia. * Simple average of China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand export growth. ** Subsequent 3-month performance from January 1988 present. Data reflect most recently available as of 30/9/13.

Guide to the Markets Asia, page 6

The strong US PMI numbers have signicance for more than just Asian export values. Once a major upward break above 50 occurs in the PMI new orders index, the move tends to be persistent. Indeed, over the past 30 years new orders have exceeded the 50 mark about 80% of the time. And the good news for investors is that the monthly returns for both global and Asian equities have been higher on average historically whenever US new orders have been above 50 and rising, as shown on page 6 of the Guide to the Markets - Asia. Conversely, Asian and global equity returns have been below par in periods when the orders index was below 50 and falling.

4Q | 2013

Asia: Valuation Analysis

MSCI AC Asia ex-Japan Trailing P/B Valuation Analysis
Trailing P/B ratios since January 1996
Subsequent 12-month re S eturn
120% 80% 40% 0% -40% -80% 0.8 - 1.0x 1.0 - 1.2x 1.2 - 1.4x 1.4 - 1.6x 1.6 - 1.8x 1.8 - 2.0x 2.0 - 2.2x 2.2 - 2.4x 2.4 - 2.6x 2.6 - 2.8x 2.8 - 3.0x 114% 63% 58% 12% 8% 8% 2% -16% -12% -40% -58%

Average return Subsequent 12-month returns range

MSCI AC Asia ex-Japan Trailing P/B

Asian Equities Trailing P/B Valuation Analysis

Asia ex-Japan ex Japan
Latest P/B* Average P/B Range** Total # of times*** A Average return t % of times positive Average return (+) % of times negative Average return (-) 1.5x 1.8x 1.4 1.7x 56 11% 71% 21% 29% -12%

2.0x 2.2x 1.8 2.2x 80 10% 86% 13% 14% -6%

1.5x 1.9x 1.1 1.9x 79 16% 70% 35% 30% -27%

Hong g Kong g
1.3x 1.6x 1.2 1.5x 62 15% 71% 26% 29% -11%

2.5x 3.1x 2.0 2.9x 91 21% 70% 36% 30% -14%

Japan p
1.3x 1.7x 1.1 1.5x 41 1% 44% 20% 56% -13%

1.2x 1.3x 1.0 1.3x 54 17% 70% 32% 30% -17%

1.8x 2.2x 1.4 2.1x 102 10% 75% 18% 25% -12%

Asia currently stands on a valuation discount to PER and PBV that historically has given investors a good chance of strong subsequent returns.

Equities 45

Source: MSCI, Bloomberg, J.P. Morgan Asset Management Guide to the Markets Asia. * Latest P/B ratio as of 30/9/2013. ** Each range is estimated based on +/- 0.5 standard deviation from the latest P/B ratio of individual Asian equity indices using MSCI data from January 1996. *** The number of times the P/B ratio of an individual Asian equity index has fallen within the standard deviation range (i.e. sampling size). The total sampling size since January 1996 included in the valuation analysis is 201 months. Data reflect most recently available as of 30/9/13.

Guide to the Markets Asia, page 45

China data takes a turn for the better Another plus for Asian equities in 4Q 2013 and 2014 is that investor fears of a hard landing for the Chinese economy have begun to fade. In August, 50% of global fund managers in a Credit Suisse survey rated China the biggest macro-economic risk. This compared to only 25% who put Fed tapering risk rst. Consistently more positive economic data since July, together with repeated assurances from Beijing that 7% is the lower bound for growth, have contributed to improving investor sentiment towards China.

Investment implications The synchronised global economic recovery that we expect in 2014 should boost Asias export performance, providing the underlying support for a catch-up rally in Asian equities, especially in cyclical sectors, and an end to the period of relative underperformance. This could be complemented by attractive valuations in selected markets in the region, as shown on page 45 of the Guide to the Markets - Asia. An encouraging earnings season, global consensus underweighting and Chinas robust FX and current account positions within the EM universe bodes well for a gradual warming of investor sentiment towards China. That in turn could be the catalyst for better Asia ex-Japan stock markets more generally.



Quarterly Perspectives

Has QE tapering tapered off the income theme?

Overview The QE tapering concerns accompanied by rising US yields in recent months appear to have tapered off the search for income behavior that we have seen over the past several years, caused by a low interest rate environment. Income investment is likely to be more challenging going forward. Nevertheless, this does not mean that the income theme has come to an end. History suggests that some income-related asset classes could still have decent performance during the periods when US yields are rising, while providing a source of diversication. Income opportunities in a rising rates environment It is well known by investors that rising bond yields should have a negative impact on some incomethemed investments, especially xed income instruments, as bond prices would fall. Meanwhile, defensive stocks (many of which are high dividend payers) may stop outperforming the broad index. However, the results from our analysis using more than 10 years of historical data show that the performance of different income assets can vary signicantly in a rising rate environment (which we dene as rolling 3-month periods with an over 25bps increase in 10-year US Treasury yields). High dividend stocks are not necessarily defensive. As shown on page 62 of the Guide to the Markets - Asia, high dividend stocks were the best performers among all income asset classes on an average rolling 3-month USD total return basis, followed by convertible bonds, US REIT, and selected xed income asset classes. Within high dividend equities, EM and Asia ex-Japan high dividend stocks were the top two performers. We believe their outperformance could largely be explained by their relatively higher weightings (almost 80%) in non-defensives (cyclicals and nancials) within their high dividend universe, which tend to benet more from a strengthening US economy. Regarding the xed income space, US high yield corporate bonds, Asian bonds and EMD showed positive average total returns, with US high yield being the best performing xed income asset class, thanks to their higher yield cushion.

Other Asset ts and Investor Beh haviour

EM and Asia exJapan high dividend equities with more nondefensive characteristics outperformed the most during periods when US yields were rising, while US high yield corporate bonds showed the best performance within the fixed income space.

Rate Rise Impact on Different Income Asset Classes

Total Return Impact in a Rising Rates Environment
Asset classes, rolling 3-month average total return (USD), 1994-2013

Sectors Relative Total Return Impact in a Rising Rates Environment

Rolling 3-month average total return (USD) relative to MSCI AC World broad index, 1994-2013
IT Material 3.2% 2.8% 2.2% 1.5% 1.1% -0.5% -2.2% -2.8% -3.3% -3.7% -4% -2% 0% 2% 4%

Hi h Div. High Di EM E Equities iti High Div. Asia Pac. ex-JP Equities High Div. AC World Equities High Div. DM Equities Convertible Bonds US REITs US High Yield Asian Bonds (USD) EMD (USD) EMD (LCL) IG Corporate US Aggregate US 10-year Treasury -3.3% -6% -3% 0% 3% 6% 9% -0 7% -0.7% -0.7% 5.5% 4.6% 4.1% 3.8% 2.5% 1.4% 1.3%

9 1% 9.1% 8.1%

Energy Con. Disc. Industrials Financials Telecom Con. Stap. Healthcare Utilities -6%

Composition of MSCI High Dividend Equity Indices


Defensives MSCI AC World MSCI World (DM) MSCI EM MSCI Asia Pacific ex-Japan 45 8% 45.8% 51.8% 22.9% 22.0%

Cyclicals 37 8% 37.8% 36.5% 47.7% 37.6%

Financials 16 4% 16.4% 11.7% 29.4% 40.4%


Source: Barclays, MSCI, J.P. Morgan, BoA Merrill Lynch, FactSet, J.P. Morgan Asset Management Guide to the Markets Asia. (Left) Periods of rising US yields are defined as rolling 3-month periods when the US 10-year Treasury yields increased over 25bps from January 1994 to September 2013, data permitting. Returns are total returns in US dollar terms. Asset classes shown above include MSCI Emerging Markets High Dividend Index (Data since 2001), MSCI AC World High Dividend Index (Data since 1999), MSCI World High Dividend Index (Data since 1996), MSCI AC Asia Pacific ex-Japan High Dividend Index (Data since 1999), MSCI US REIT Index (Data since 1996), Barclays US Treasury (10-year) Bellwethers Index, Barclays US Corporate High Yield Index (Data since 2002), Barclays US Investment Grade Credit Index, Barclays US Aggregative Index, J.P. Morgan EMBI Global Index, J.P. Morgan GBI-EM Broad Composite Index, J.P. Morgan JACI - Asia Credit Index (Data since 1999) and BofA Merrill Lynch US Convertibles Index. Data reflect most recently available as of 30/9/13.

Guide to the Markets Asia, page 62


4Q | 2013
REITs Outlook Rising US yields have put some downward pressure on REITs in recent months, as investors became concerned about the effect of rising debt servicing costs and capital availability for property developers. However, REITs can still benet from a rising rate environment. This is because improving US economic growth could increase their net operating income as REITs are able to increase occupancy and push rental income higher, as shown on page 63 of the Guide to the Markets - Asia. As a result, they are still a good source of income, as higher rental income should drive dividend growth. Also, investing in REITs is an alternative way to capture the recovery in the housing sector of developed economies.

REITs and Convertibles

REITs Market Composition
Australia & New Zealand % 8% Canada 4% RoW 1% Market Cap (USD Billions) US Europe Asia 13% Europe 13% US 61% Asia Australia & New Zealand Canada Rest of World (RoW) 680 144 143 89 46 12 0 1999 2001 2003 2005 2007 2009 2011 2012 2013 YTD 40 80

Global Convertible Bonds Issuance

USD billions
120 US Europe Asia ex ex-Japan Japan Japan Other

Real Estate Net Operating Income (NOI) and US GDP

15% NOI Growth (YoY) 10%

US Convertible Bonds and US Equities

Index, total return in USD, rebased 2002 = 100
250 Annualized Return Convertibles Equities 150 6.9% 5.2% Annualized Volatility 10.8% 15.4% BoA Merrill Lynch US Convertible

Other Asset ts and Investor Beh haviour

200 5%

Propertys net operating income tends to increase in tandem with US GDP growth, due to improving rental income.

0% GDP Growth (QoQ annualized)


100 Correlation: 0.85 50 '11 '13 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11


-10% '93 '95 '97 '99 '01 '03 '05 '07 '09




Source: BCA, BoA Merrill Lynch, MSCI, Bloomberg, FactSet, MacData, NCREIF, J.P. Morgan Asset Management Guide to the Markets Asia. (Bottom Left) NOI is lagged four quarters. GDP is smoothed using a two-quarter average. Total may not sum to 100% due to rounding. Data reflect most recently available as of 30/9/13.

Guide to the Markets Asia, page 63

Investment implications Although we should expect a more challenging environment for traditional income investments, investors that are concerned over the high volatility in the high beta equity markets should stay invested in the income theme - an all-weather investment strategy from a total return perspective. Historical evidence tells us that some income assets can still provide decent performance in a rising rate environment.


Quarterly Perspectives Asia | 4Q 2013

Past performance is not a guarantee of future results. Any forecast contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. Opinions, estimates, forecasts and statements of nancial market trends that are based on current market conditions constitute our judgment and are subject to change without further notice. The information provided herein should not be assumed to be accurate or complete. This material is not intended as an offer or solicitation for the purchase or sale of any nancial instrument. The views and strategies described may not be suitable for all investors. References to specic securities, asset classes and nancial markets are for illustrative purposes only and are not intended to be, and should not interpreted as recommendations or investment, product, accounting, legal or tax advice. J.P. Morgan Chase & Co. group assumes no responsibility or liability whatsoever to any person in respect of such matters. The views expressed are those of J.P. Morgan Asset Management. These views do not necessarily reect the opinions of any other rm or other division of the JPMorgan Chase & Co. group. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in Hong Kong by JF Asset Management Limited, JPMorgan Funds (Asia) Limited or JPMorgan Asset Management Real Assets (Asia) Limited, all of which are regulated by the Securities and Futures Commission; in India by JPMorgan Asset Management India Private Limited which is regulated by the Securities & Exchange Board of India; in Singapore by JPMorgan Asset Management (Singapore) Limited or JPMorgan Asset Management Real Assets (Singapore) Pte. Ltd., both are regulated by the Monetary Authority of Singapore; in Taiwan by JPMorgan Asset Management (Taiwan) Limited or JPMorgan Funds (Taiwan) Limited, both are regulated by the Financial Supervisory Commission; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association and the Japan Securities Dealers Association, and is regulated by the Financial Services Agency (registration number Kanto Local Finance Bureau (Financial Instruments Firm) No. 330); in Korea by JPMorgan Asset Management (Korea) Company Limited which is regulated by the Financial Services Commission (without insurance by Korea Deposit Insurance Corporation) and in Australia to wholesale clients only as dened in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919) which is regulated by the Australian Securities and Investments Commission. This communication is for intended recipients only and may only be forwarded or presented to other persons in compliance with local law and regulations which shall be the intended recipients sole responsibility. Investment involves risks. The value of investments and the income from them may fall as well as rise and investors may not get back the full or any of the amount invested. Recipient of this communication should make their own investigation or evaluation or seek independent advice prior to making any investment. It shall be the recipients sole responsibility to verify his / her eligibility and to comply with all requirements under applicable legal and regulatory regimes in receiving this communication and in making any investment. [2013] JPMorgan Chase & Co. Unless otherwise stated, all data are as of [Sep 30, 2013].
BRO-MI-QPA-E Oct 2013