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

7/27/2019 JP Morgan Funds Management, Quarterly Perspectives Asia, 4Q 2013. Sep 30, 2013.

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J.P. Morgan Funds Management is pleased to present the latest

edition o Quarterly Perspectives. This piece highlights key

themes rom ourGuide to the Marketsbook and ofers critical

insights or engaging in portolio discussions.

Both Quarterly Perspectivesand Guide to the Marketsare elements o ourMarket 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 US equities: Pendulums dont stop mid-swing

2 Emerging Markets: The importance o diferentiation

3 Asias challenges are cyclical, not structural

4 Has QE tapering tapered of the income theme?

Dr. David Kelly, CFAManaging DirectorChie Global StrategistJ.P. Morgan Funds

Tai HuiManaging DirectorChie Market Strategist AsiaJ.P. Morgan Funds

Geoff LewisExecutive DirectorMarket Strategist AsiaJ.P. Morgan Funds

Yoshinori ShigemiExecutive DirectorMarket Strategist AsiaJ.P. Morgan Funds

Joseph S. Tanious, CFAExecutive DirectorGlobal Market StrategistJ.P. Morgan Funds

Grace Tam, CFAVice PresidentMarket Strategist AsiaJ.P. Morgan Funds

Ian HuiAssociateMarket AnalystJ.P. Morgan Funds

Ben LukMarket AnalystJ.P. Morgan Funds

Anthony TsoiMarket AnalystJ.P. Morgan Funds

Anthony M. WileMarket AnalystJ.P. Morgan Funds

MARKETINSIGHTS

Quarterly PerspectivesAsia | 4Q 2013

MARKETINSIGHTSERIES

Market Insight Seriesat a glance To download the PDF o the

Guide to the Markets - Asia,

please visit us at:

www.jpmorganam.com.hk/guide

4 2013As of September 30, 2013

Guide to the MarketsASIA


2/12

2

Quarterly PerspectivesMARKETINSIGHTS

OverviewThe 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 prots 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 xed income.

Real earnings yields are approaching long-term averages, but equity markets do not stop at

average.

US equities: Pendulums dont stop mid-swing

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 rst quarter earnings

per share and record lows in nancial 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 protable in the history of the S&P 500 than the rst two quarters of this

year.

Elevated prot 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 havecontributed to earningsgrowth, revenue growthshould take the reins going

forward.The S&P 500 is the most

profitable it has ever beenin its history.

Companies have room totake on additional leverage,which could boost returns.

United States: Source of Earnings, Corporate Profits and Leverage

50%

Margin Share of EPS Growth

Revenue Share of EPS Growth

S&P 500 Year-over-Year EPS GrowthGrowth broken into revenue growth and margin expansion, quarterly

0%

25%

-50%

-25%

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Adjusted After-Tax Corporate Profits (% of GDP) Total Leverage

Equities

1

200%

220%

240%

Includes inventory and capital consumption adjustments

8%

10%

12% 6/2013:

10.1%

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

100%

120%

140%

160%

4%

6%

Average: 6.3%

9/2013:

104%

Average: 172%

41

'94 '9 6 '9 8 '0 0 '02 '04 '06 '0 8 '1 0 '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


3/12

3

4Q | 2013

United States: S&P 500 Index at Inflection Points

1,800

S&P 500 Index

Index

Sept. 30, 2013=

Characteristic Mar 2000 Oct 2007 Sept 2013

Index level 1,527 1,565 1,682

P/E ratio (fwd.) 25.6x 15.2x 14.3x

Dividend yield 1.1% 1.8% 2.2%

1,600Mar. 24, 2000

P/E (fwd.) = 25.6x

Index level: 1,527

Oct. 9, 2007

P/E (fwd.) = 15.2x

Index level: 1,565

. .

Index level: 1,682- . . .

1,200

1,400

Equities

+106%

+101%

1,000-49%

-57%

+149%

800

Dec. 31, 1996

P/E (fwd.) = 16.0x

Index level: 741

Oct. 9, 2002P/E (fwd.) = 14.1x

Index level: 777

Mar. 9, 2009

P/E (fwd.) = 10.3x

Index level: 677

42

'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.

P/E ratio remains attractivecompared with previous peaks.


Averages: Somewhere in the middle

Not all valuation metrics are created equal. A companys earnings yield, or instance, is the inverse

o its P/E ratio. This provides a decent gauge as to how much a company is yielding in earnings to

an investor or a given price very similar to bond yields. As shown on page 42 o the Guide to theMarkets - Asia, the current P/E ratio is still below previous peaks in 2000 and 2007, despite being at a

record high index level. More importantly, the current 10-year US Treasury yield is significantly below

prior market peaks. This reflects that the valuation remains significantly skewed in avour 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 hal way.

As bond yields rise, the equity market rally will be more dependent on earnings growth instead o

multiple expansion.

While not a risk on the immediate horizon, investors need to remain wary o overpriced markets as

draw downs can be significant.

Investment implications

With no impending recession in sight, modest earnings growth and strong corporate

undamentals point to continued strength in equities.

While many valuation metrics rest at their long-run averages, bull markets do not end at

average valuations. Investors should be aware o the risks inherent in expensive markets, but

recognize equities may have room to push higher rom current levels.


4/12


Currencies: Valuation and External Vulnerability

76%100%

Global Currencies Valuation Based on PPP*

OvervaluedDM Currencies

--17% -16%

-10%

2% 6% 7%18%

33%42%

0%

50%Relative to PPPEM Currencies

-63%

-43% -42% -41% -41%-37% -32%

-31% -30%

-100%

-50%

INR THB MYR PHP ZAR IDR TRY MXN RMB KRW RUB SGD BRL JPY EUR GBP CAD NZD AUD CHF

Undervalued

Relative to PPP

come

or - erm x erna e as o ore gn eserves xc u ng o

313% 310%

283%

211%250%

300%

350%1997

2012FixedI

146%

119%108%

94%

55%40%

30%

46%

145%

55%66%

35%

49%

26%

97%

29% 17%36%

50%

100%

150%

200%

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 Rateexcept EUR, which is based on OECD 2012 Implied PPP Conversion Rate. Data reflect most recently available as of 30/9/13.

0%Korea Brazil South Africa Indonesia Thailand Mexico Philippines Turkey Malaysia China India

4


Most EM countries now havea much stronger externalpayment position comparedwith 1997.

2

Emerging Markets: The importance o diferentiation

More crisis-resilient

As the US Federal Reserve looks to normalize its monetary policy over time, some emerging markets

have experienced capital outflows. Current account deficit countries, such as India, Indonesia, SouthArica, 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 o

payments crisis, similar to the 1997 Asian financial crisis. We believe such worries are overdone.

While individual countries may ace short-term cyclical di culties, there are a number o structural

saeguards in place to provide sources o stability.

Most emerging economies now have flexible exchange rate systems, instead o a currency peg to the

US dollar. This allows the exchange rate to help in the adjustment o imbalances in the balance o

payments. A healthier oreign exchange reserve position also allows central banks to manage currency

depreciation in a more orderly manner. According to the International Monetary Fund, emerging market

oreign exchange reserves have risen rom just over USD 600mn in 1997 to USD 7.4trn in the first

quarter o 2013. This rise in reserves helps to provide a cushion to oreign currency liabilities, such as

import bills or oreign currency debt repayments. As shown on page 57 o the Guide to the Markets - Asia,

many Asian economies have seen a lower ratio o short term external debt to reserves relative to 1997.

In addition, regional and bilateral currency swap agreements have been in place to reinorce market

confidence towards countries with less robust external payment position. The Chiang-Mai Multilateral

Initiative pools USD 120bn worth o FX reserves rom 13 Asian countries. Brazil, Russia, India, China and

South Arica are also in discussions to set up a USD 100bn reserve pool.

OverviewSome emerging markets (EMs) have gone through a summer o turmoil on the back o the prospect

o monetary policy normalization in the US. However, complete avoidance in emerging markets,

either in equities or debt, would have neglected some important diferentiating actors.

Structural undamentals o many emerging economies have made some notable progress in

recent years through lessons learnt rom previous crises.

Meanwhile, there are also considerable diferences amongst emerging markets to allow active

managers to generate excess returns.


5/12


Emerging Markets and Asia: Currencies

Singapore20%

Currency Valuation, Current Account and Nominal Yields

Taiwan

10%

15%

(2013Forecast) -

government bond yield

5%

ChinaKorea

Malaysia

PhilippinesRussia

5%

come

untas%o

fGD

Brazil

IndiaIndonesia

Mexico

South Africa

Thailand

-5%

0%

Fix

edI

CurrentAcco

TurkeyAustralia

-10%

-5 -4 -3 -2 -1 0 1 2 3

Other EM countries

Asia Pacific countries

REER currency valuations (standard deviations away from mean)

55

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.


5

4Q | 2013

Current account balance islikely to be an importantdifferentiating factor when itcomes to currency outlooks.

Pick out the strong currency links

Given the significant variation in perormance amongst emerging markets, it is important to

appreciate the diferentiating actors determining their relative perormance. In the immediate uture,

currency outlooks could dominate, which is partially driven by the current account balance, as shownon page 55 o the Guide to the Markets - Asia. For markets with depreciating currencies, not only their

financial assets could come under direct pressure in USD terms, but also their central banks and

governments could be orced to adopt policies to slow growth and correct cyclical imbalances. For

example, Indonesia and Brazil had to raise interest rates to cool inflation and reduce their current

account deficits. This could impact uture earnings as well as local currency fixed 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 perormance could continue until the market has a

clearer view o the Federal Reserves policy normalisation.


6/12


The Importance of Exports

Exports as a % GDP - 2012

Goods exports

US

Japan

EU

EU

China

Japan

17.8%

9.9%

13.4%

alEconomy

Brazil

India

Others

10.8%

15.8%

Glob

China

Russia 26.0%

24.9%

Korea

ASEAN

Taiwan

53.5%

63.4%

48.5%

25

0% 10% 20% 30% 40% 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.

6


Economies with strong tradelinks with the US, Europeand Japan should get additionalboost from export performancein 2014.


Diferentiation, instead o avoidance, is the right approach when considering EM. Investors

should diferentiate rom the past, and also diferentiate amongst markets.

The risk o an external payment crisis in EMs is reduced via stronger oreign 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 diferentiate growth

and earnings perormance over the next 1-2 years.

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 romexports, as shown on page 25 o 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 o the Chinese economy could urther enhance

investor confidence in these Asian markets. Mexico could benefit rom the US recovery via the strong

US-Mexico trade links. Some Central and Eastern European countries and Arican countries, such as

Turkey, South Arica and Poland, could also receive a boost as Europe gradually escapes recession.


7/12

7

4Q | 2013

3

Asias challenges are cyclical, not structural

Structural improvements, cyclical weaknesses

Asia in 2013 is not Asia in 1997. There is no meaningul comparison to be made between these

markets today and the crisis conditions that enguled the region in 1997, as some financial media

pundits like to assert. Given that the typical Asian economy today has more flexible exchange rates,

higher FX reserves, lower external debt and healthier corporate balance sheets, the potential or a

major crisis originating within the Asia Pacific region is low. These structural improvements also help

to explain gains in the ef ciency o monetary policy over the past decade in terms o the transmission

rom policy to market interest rates.

The main reason or Asia ex-Japans disappointing economic data and protracted earnings

downgrades this year was the external shock to exports rom the recession in Europe, coming at a

time when the US growth trend was weak. This experience confirmed that the ortunes o the smaller

manuacturing-biased Asian economies, like Taiwan and Korea, remain tightly linked to the global

industrial production cycle, as do the ortunes o the regions trading entrepots, Hong Kong and

Singapore. While the past decade saw big increases or all Asian economies in intra-regional trade

with China, a good part o this increase was driven by the development o an integrated regional

manuacturing supply chain. In turn, the Asian supply chain remains overwhelmingly driven by end-

user demand rom the US or Europe. China is mostly in the business o final assembly and packaging,

and or many products still makes only a modest contribution to the value added o exports to

destinations outside the region.

OverviewAsian stock markets have experienced a volatile summer, as international investors became highly

selective in the light o sharply rising US bond yields and global liquidity concerns associated with

QE tapering ears.

Indonesia and India in particular came under strong pressure, as to a lesser extent did Thailand,

brought about by their large current account deficits judged to be most vulnerable to portolio

outflows.

Investors should be patient, however, and rerain rom panic selling. Asias economic problems

today are largely cyclical, not structural, in our view.

Moreover, less directly aected 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.


8/12

8


The strong US PMI numbers have significance or 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% o the time. And the good

news or investors is that the monthly returns or 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 o

theGuide to the Markets - Asia

. Conversely, Asian and global equity returns have been below par inperiods when the orders index was below 50 and alling.

A stronger US-led globaleconomy in 2014 willboost Asian export volumesand prices, putting anend to stock marketunderperformance.

PMI trends for the worldstop four economies suggestwe may see a synchronisedupturn in the global economy

in 2014.


Asia: Business Cycle

Asia Export Growth and US ISM Manufacturing PMI

Year-over-year % change Index

Local

y

US PMI and Equity Performance

US ISM manu. new orders behaviour and subsequent 3-mth market perf.**

6560% Asia Exports* US Manufacturing PMI

Regional

and

Econom

40

45

5055

60

0%

20%

40%

Below 50 and falling

MSCI AC World

S&P 500

MSCI AC Asia ex-Japan

MSCI EM

MSCI Japan

Global Manufacturing PMI trends

30

35

-40%

-20%

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

Above 50 and falling

Index

55

60 Below 50 and rising

China

Euro Area

US

Japan

40

45

'11 '12 '13

-10% -5% 0% 5% 10% 15%

Above 50 and rising

6

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.


But there are early signals o revival to depressed Asian export values. US PMI data has ar surpassed

expectations in recent months, rising well above the 50 threshold that signals expansion. Historically,

one o the tightest cyclical relationships between Asia and the US is that between total export values

and the US PMI, as shown on page 6 o the Guide to the Markets - Asia. What this relationship iscurrently telling us is that the stage is set or a US-led recovery in Asian exports in 2014.


9/12

9

4Q | 2013

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 first. 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.

Asia currently stands on avaluation discount to PER andPBV that historically has

given investors a good chanceof strong subsequent returns.


Asia: Valuation Analysis

114%120%

MSCI AC Asia ex-Japan Trailing P/B Valuation Analysis

turn

Average return

Subsequent 12-month

returns range

Trailing P/B ratios since January 1996

63% 58%

12% 8% 8% 2%

-16% -12%

-40%-58%

-80%

-40%

0%

40%

80%

ubsequent12-monthr

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

Asian Equities Trailing P/B Valuation AnalysisEquities

MSCI AC Asia ex-Japan Trailing P/B

AsiaAustralia China Hong Kong India Japan Korea Taiwan

-

Latest P/B* 1.5x 2.0x 1.5x 1.3x 2.5x 1.3x 1.2x 1.8x

Average P/B 1.8x 2.2x 1.9x 1.6x 3.1x 1.7x 1.3x 2.2x

Range** 1.4 1.7x 1.8 2.2x 1.1 1.9x 1.2 1.5x 2.0 2.9x 1.1 1.5x 1.0 1.3x 1.4 2.1x

Total # of times*** 56 80 79 62 91 41 54 102

11 1 1 1 1 1 1 1Average return 11% 10% 16% 15% 21% 1% 17% 10%

% of times positive 71% 86% 70% 71% 70% 44% 70% 75%

Average return (+) 21% 13% 35% 26% 36% 20% 32% 18%

% of times negative 29% 14% 30% 29% 30% 56% 30% 25%

Average return (-) -12% -6% -27% -11% -14% -13% -17% -12%

45

Source: MSCI, Bloomberg, J.P. Morgan Asset Management Guide to the Markets A sia.

* 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 sinceJanuary 1996 included in the valuation analysis is 201 months.Data reflect most recently available as of 30/9/13.


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 couldbe 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.


10/12

Rate Rise Impact on Different Income Asset Classes

3.2%IT

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

Sectors Relative Total Return Impact in a Rising Rates EnvironmentRolling 3-month average total return (USD) relative to MSCI AC World broad index, 1994-2013

1

1.1%

1.5%

2.2%

2.8%

Industrials

Con. Disc.

Energy

Material

4.6%

5.5%

8.1%

.

High Div. DM Equities

High Div. AC World Equities

High Div. Asia Pac. ex-JP Equities

ig iv. qui ies

-3.7%

-3.3%

-2.8%

-2.2%

-0.5%

Utilities

Healthcare

Con. Stap.

Telecom

Financials

2.5%

3.8%

4.1%

US High Yield

US REITs

Convertible Bonds

-6% -4% -2% 0% 2% 4%

sand

aviour

-

1.1%

1.3%

1.4%

I

EMD (LCL)

EMD (USD)

Asian Bonds (USD)

Composition of MSCI High Dividend Equity Indices

Defensives Cyclicals Financials

OtherAsse

InvestorBe

-3.3%

-0.7%

- .

-6% -3% 0% 3% 6% 9%

US 10-year Treasury

US Aggregate

I . . .

MSCI World (DM) 51.8% 36.5% 11.7%

MSCI EM 22.9% 47.7% 29.4%

MSCI Asia Pacific

ex-Japan22.0% 37.6% 40.4%

62

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 ACWorld 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 USInvestment 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 - AsiaCredit Index (Data since 1999) and BofA Merrill Lynch US Convertibles Index. Data reflect most recently available as of 30/9/13.

10


Has QE tapering tapered of the income theme?

4

Income opportunities in a rising rates environment

It is well known by investors that rising bond yields should have a negative impact on some income-

themed investments, especially fixed income instruments, as bond prices would all. Meanwhile,deensive stocks (many o which are high dividend payers) may stop outperorming the broad index.

However, the results rom our analysis using more than 10 years o historical data show that the

perormance o diferent income assets can vary significantly in a rising rate environment (which we

define as rolling 3-month periods with an over 25bps increase in 10-year US Treasury yields).

High dividend stocks are not necessarily deensive. As shown on page 62 o the Guide to the Markets

- Asia, high dividend stocks were the best perormers among all income asset classes on an average

rolling 3-month USD total return basis, ollowed by convertible bonds, US REIT, and selected fixed

income asset classes. Within high dividend equities, EM and Asia ex-Japan high dividend stocks

were the top two perormers. We believe their outperormance could largely be explained by their

relatively higher weightings (almost 80%) in non-deensives (cyclicals and financials) within their high

dividend universe, which tend to benefit more rom a strengthening US economy.

Regarding the fixed income space, US high yield corporate bonds, Asian bonds and EMD showed

positive average total returns, with US high yield being the best perorming fixed income asset class,

thanks to their higher yield cushion.


EM and Asia ex-Japan high dividendequities with more non-defensive characteristicsoutperformed the mostduring periods when USyields were rising, whileUS high yield corporatebonds showed the bestperformance within thefixed income space.

OverviewThe QE tapering concerns accompanied by rising US yields in recent months appear to have

tapered of the search or 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 orward. 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 perormance

during the periods when US yields are rising, while providing a source o diversification.


11/12

11

4Q | 2013

REITs Outlook

Rising US yields have put some downward pressure on REITs in recent months, as investors became

concerned about the efect o rising debt servicing costs and capital availability or property

developers. However, REITs can still benefit rom a rising rate environment. This is because improvingUS 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 o the Guide to the Markets - Asia.

As a result, they are still a good source o 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 o

developed economies.

Propertys net operatingincome tends to increasein tandem with US GDP

growth, due to improvingrental income.


REITs and Convertibles

REITs Market Composition

Australia &New Zealand

8%

Canada4%

RoW1% Market Cap

(USD Billions) 120

Global Convertible Bonds Issuance

USD billions

Europe

US

US61%Europe

13%

Asia13%

US 680

Europe 144

Asia 143

Australia &

NewZealand89 40

80

sia ex- apan

Japan

Other

US Convertible Bonds and US E uities

Canada 46

Rest of

World (RoW)12

0

1999 2001 2003 2005 2007 2009 2011 2012 2013YTD

Index, total return in USD, rebased 2002 = 100

200

250Annualized

Return

Annualized

Volatility

Convertibles 6.9% 10.8%

Equities 5.2% 15.4%

BoA Merrill Lynch

US Convertible

tsand

aviour

5%

10%

15%

NOI Growth (YoY)

100

150

Correlation: 0.85

. .

MSCI USAOtherAsse

InvestorB

e

-5%

0%

GDP Growth

(QoQ annualized)

63

Source: BCA,BoA Merrill Lynch,MSCI,Bloomberg, FactSet, MacData,NCREIF,J.P. MorganAsset ManagementGuide to theMarkets Asia.

(BottomLeft) NOIis lagged fourquarters.GDP is smoothed usinga two-quarteraverage.Totalmay notsumto 100% dueto rounding.Datareflectmostrecentlyavailableas of30/9/13.

50

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13-10%

'93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13


Although we should expect a more challenging environment or 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 rom a total return

perspective.

Historical evidence tells us that some income assets can still provide decent perormance in a

rising rate environment.


12/12

Past perormance is not a guarantee o uture results. Any orecast contained herein are or illustrative purposes only and are not to be relied upon as advice or interpretedas a recommendation. Opinions, estimates, orecasts and statements o financial market trends that are based on current market conditions constitute our judgment andare subject to change without urther notice. The inormation provided herein should not be assumed to be accurate or complete. This material is not intended as an oferor solicitation or the purchase or sale o any financial instrument. The views and strategies described may not be suitable or all investors. Reerences to specific securities,asset classes and financial markets are or 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 o such matters. The views expressedare those o J.P. Morgan Asset Management. These views do not necessarily reflect the opinions o any other firm or other division o the JPMorgan Chase & Co. group.

J.P. Morgan Asset Management is the brand or the asset management business o JPMorgan Chase & Co. and its a liates worldwide. This communication is issued by the

ollowing entities: in Hong Kong by JF Asset Management Limited, JPMorgan Funds (Asia) Limited or JPMorgan Asset Management Real Assets (Asia) Limited, all o which

are regulated by the Securities and Futures Commission; in India by JPMorgan Asset Management India Private Limited which is regulated by the Securities & ExchangeBoard o India; in Singapore by JPMorgan Asset Management (Singapore) Limited or JPMorgan Asset Management Real Assets (Singapore) Pte. Ltd., both are regulated bythe Monetary Authority o Singapore; in Taiwan by JPMorgan Asset Management (Taiwan) Limited or JPMorgan Funds (Taiwan) Limited, both are regulated by the FinancialSupervisory Commission; in Japan by JPMorgan Asset Management (Japan) Limited which is a member o 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 (withoutinsurance by Korea Deposit Insurance Corporation) and in Australia to wholesale clients only as defined in section 761A and 761G o the Corporations Act 2001 (Cth) byJPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919) which is regulated by the Australian Securities and Investments Commission.

This communication is or intended recipients only and may only be orwarded or presented to other persons in compliance with local law and regulations which shall bethe intended recipients sole responsibility. Investment involves risks. The value o investments and the income rom them may all as well as rise and investors may not getback the ull or any o the amount invested. Recipient o this communication should make their own investigation or evaluation or seek independent advice prior to makingany investment. It shall be the recipients sole responsibility to veriy his / her eligibility and to comply with all requirements under applicable legal and regulatory regimes inreceiving this communication and in making any investment.

[2013] JPMorgan Chase & Co.Unless otherwise stated, all data are as o [Sep 30, 2013].

BRO-MI-QPA-E Oct 2013

Quarterly Perspectives

Asia | 4Q 2013

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

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