Fund Focus JF Asia Domestic Opportunities

September 2011

The Fund invests in specialised sectors and themes, primarily in companies whose predominant business will
benefit from the domestic growth in Asian economies, excluding Japan but including Australia and New Zealand, and is therefore subject to greater concentration risk than a more diversified investment. The Funds price movement may go down or up sharply over a short time span. The Fund may invest in emerging markets and thus may have exposure to the relevant currency risk. Investors may be subject to substantial losses. Investors should not solely rely on this document to make any investment decision.

Paradigm shift continues

The market direction remains inextricably linked to the global macro environment. Disappointing US macro data, Europes slow and inadequate response to sovereign stress, paired with prospects for further fiscal tightening in Europe and the US, have all added to concerns on global growth that will probably continue to weigh on risk assets in the near term. Nevertheless, our view is that the current bout of economic weakness is indicative of a soft patch rather than the beginning of a recession; i.e. we dont expect a more severe and prolonged risk-off environment. Whats more, the sovereign risk /economic weakening problems have by and large been confined to Europe and the US. Emerging Asian economies, blessed with the robust balance sheets of both corporations and governments, are not in the same quandary as their developed market counterparts. However, given the increasing economic integration of the world, EM Asia will not pass entirely unscathed from the structural headwinds facing the Western economies. But with the renewed weakness in the developed world having yet again brought into focus the structural fault of an external demand-led growth model, Asian countries could take this opportunity to accelerate the pace of structural economic reforms, which would be helpful in rebalancing their economies and boosting domestic demand on a more sustainable basis.

Asia will become more domestically driven

Contribution to GDP growth of net exports and domestic demand in Asia ex Japan and China (ppt)

Source: CEIC, HSBC, 19 August 2011

The information contained in this document does not constitute investment advice, or an offer to sell, or a solicitation of an offer to buy any security, investment product or service. Informational sources are considered reliable but you should conduct your own verification of information contained herein. Investment involves risk. Past performance is not indicative of future performance. Please refer to the offering document(s) for details, including the risk factors before investing. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.
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Outlook & Strategy: JF Asia Domestic Opportunities

As the focus is shifting from inflation risks to growth concerns, we incline to the view that Asian policymakers will not initiate any further aggressive policy actions to deal with inflation. In particular, Chinas response is the key to watch. The combination of falling cost inflation and weakening manufacturing activity revealed in recent PMI numbers suggests that Chinas tightening policies have worked and there is now an increasing probability of policy easing. Moreover, with the persistently high funding costs borne by the small and medium-sized enterprises, we doubt the government would consider extending their tightening measures through this year-end at the risk of a rapid climb in bankruptcies in the SME sector that accounts for over half of the country's GDP. Although fighting inflation remains Chinas short-term priority (July CPI +6.5% yoy) and Chinese equities could remain volatile amid an uncertain external and policy environment, we think China is most likely at the late stage of its tightening cycle. Markets should re-focus on growth prospects once CPI pressure alleviates in around 4Q 2011. Regardless of the worries over policy tightening and expectations of potential growth disappointments, Chinese EPS has so far remained resilient and this year has seen few earnings downgrades. We continue to position for Chinas soft-landing scenario with a preference for policy-constrained sectors, especially property. Also, we continue to be constructive on China consumption, particularly department stores and other diversified retailers. Discretionary consumption, particularly at the high-end, has surpassed estimates and is growing strongly on a year-over-year basis.

China: CRR property price index

Annualised underground lending rate in Wenzhou

Left chart - Source: China Reality Research (CRR), CLSA Asia Maxima 3Q 11. Note: Based on average selling prices at 120+ residential projects in 40+ cities tracked by CRR. Right chart - Source: China Reality Research (CRR), CLSA Asia Maxima 3Q 11.

As of late we also have significantly increased our exposure to Thailand, where domestic fundamentals remain solid and the political risk premium has been falling as the July elections defied expectations of a convoluted, uncertain outcome. Foreign investors have returned to the SET and are now net buyers YTD. While the market has rerated to the high end of its historical PER range, earnings continue to be revised up almost across the board, with the exception of utilities. We favour Thai property developers, particularly those with low-end condominium projects along the mass-transit system routes in the Bangkok area. We envisage improvement in property sentiment given the more stable political situation and solid domestic economy backed by a strong agricultural sector^. Though inflation and asset prices are still elevated, we do not expect an aggressive series of interest rate hikes in Thailand, citing increasing downside risk to the external sector, a softening oil price outlook and the more growth supportive stance of the new government. Elsewhere, the Fund holds a significant position in Indonesia, though we have struggled somewhat to add further to consumer stocks because of market cap /liquidity constraints. We remain cautious on India. On top of high inflation, the countrys power sector has been paralysed by coal shortages, hindering infrastructure developments.

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 As for Taiwan, we are bullish on consumption, in particular the Taipei hotel sector, given the increasing economic integration across the Taiwan Straits. We also favor infrastructure such as cement stocks on the expectation of increasing government spending ahead the 2012 election year.
^Thailand plays an important role in the world food industry, ranking 12th in global food exports with a 2.5% market share. Domestically, rising rural incomes will drive secular consumption growth in Thailand.

Fund performance: JF Asia Domestic Opportunities

Calendar year return (%) Cumulative return (%) 2007* +26.3 1 year +19.0 2008 -55.9 2 years +26.1 2009 +66.3 3 years +24.6 2010 +16.4 4 years +1.8 2011 YTD +2.4 Since inception* +10.5

Source: JPMAM (NAV to NAV in USD with income reinvested). Data valid as at 29 July 2011. *The Funds launch date was 14 May 2007.

Country & Sector Breakdown

Hong Kong India 8.1% Thailand 9.1% 10.1% Indonesia 6.7% Korea 12.2% Singapore 5.5% Taiwan 14.3% Others 1.4% China 33.6%
Net Liquidity -0.9%

Top 5 holdings
Holding Sector Financials Materials Consumer Discretionary Financials Consumer Discretionary % 3.6 3.0 3.0 3.0 2.9

Financials 32.5% Health Care 0.9% Consumer Discretionary 22.8% Utilities 1.9% Consumer Staples 15.1% Information Materials Technology 2.1% Industrials 14.9% Net Liquidity -0.9% 10.8%

China Vanke Co. Ltd. China National Building Material Co. Ltd. Intime Department Store (Group) Co. Ltd. China Life Insurance Co. Ltd. Maoye International Holdings Ltd.

Source: JPMAM. Data valid as at 29 July 2011

Data valid as at 30 June 2011

For more information, please call us or visit J.P. Morgan Investment Centre at: 1/F, Jardine House, Central, Hong Kong G62, E Plaza, Legend Tower, 7 Shing Yip Street, Kwun Tong, Hong Kong Tel: (852) 2265 1188 Fax: (852) 2868 5013

www.jpmorganam.com.hk

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