JP Morgan Funds Management, Quarterly Perspectives, Asia, Q3. July 2013.

7/27/2019 JP Morgan Funds Management, Quarterly Perspectives, Asia, Q3. July 2013.

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J.P. Morgan Funds Management is pleased to present the latestedition o Quarterly Perspectives . This piece highlights keythemes rom our Guide to the Markets book and ofers criticalinsights or engaging in port olio discussions.

Both Quarterly Perspectives and Guide to the Markets are elements o ourMarket Insights program, which was developed to provide investors with away 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 The investment implications o the end o QE

2 Market normalisation should avour cyclicals and emerging

markets

3 Asia dividend income theme: More than an investment ashion

4 Abenomics third arrow o structural re orms

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

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

MARKETINSIGHTS

Quarterly PerspectivesAsia | 3Q 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

3 2013 As of June 30, 2013

Guide to the MarketsASIA


2/122

Quarterly PerspectivesMARKETINSIGHTS

OverviewThe Federal Reserves current quantitative easing (QE) program represents the most extrememonetary stimulus ever applied to the US economy. This policy looks increasingly inappropriategiven an improving economy and the problems a larger balance sheet will cause for nancialmarkets when the Fed needs to raise interest rates. Because of this, Fed Chairman Ben Bernankehas outlined a potential schedule for ending QE, suggesting that investors should position theirportfolios for higher long-term interest rates.

1

The investment implications of the end of QE

While it is unclear how much credit this stimulus is due for an improving US economy, there is nodoubt that the economy is getting better. As shown in the chart above, the unemployment rate hasnow fallen by 2.4% since its peak in October 2009. Moreover, even modest job growth should continueto reduce the unemployment rate, since demographic changes have slowed labour force growth toa crawl. With home prices rising, scal threats abating, consumer condence improving and labourmarkets tightening, the case for further Fed stimulus is rapidly fading.

Fed over-easy

Since last September the Fed has bought Treasuries and mortgage-backed securities at a monthlypace of USD 85bn, while reinvesting interest and maturing principal payments. This pace of purchases,if maintained, would boost the Feds assets from USD 2.9trn in early 2013 to USD 3.9trn by years end.These huge asset purchases combined with a federal funds rate at 0-0.25% and explicit guidance onthe conditions necessary for Fed tightening represents the most extreme monetary stimulus everapplied to the American economy.

Falling unemployment hasdiminished the case for further quantitative easing.

United States: Inflation and Unemployment

Unemployment RateSeasonally adjusted

InflationYear-over-year % change

18%

Avg.since1964

Avg.since1999

5/2013

12%

Avg.since1964

Avg.since1999

5/2013

15%

Headline CPI 4.3% 2.5% 1.4%

Core CPI 4.2% 2.0% 1.7%

10%

11%

. . .

a l E c o n o m y

9%8%

9% G l o b

3%

6%

5%

6%

7%

' 64 '6 9 '7 4 ' 79 '8 4 '8 9 ' 94 ' 99 ' 04 '0 9-3%

0%

'6 4 ' 69 '7 4 '7 9 ' 84 '8 9 '9 4 ' 99 '0 4 ' 093%

4%

29

Source: US Bureau of Economic Analysis, Census Bureau, FactSet, J.P. Morgan Asset Management Guide to the Markets Asia.

Data reflect most recently available as of 30/6/13.

Guide to the Markets Asia , page 29


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3Q | 2013

United States: The Fed and the Money Supply

4

Money Multiplier M2 / Monetary Base

Feds Balance Sheet: AssetsUSD trillions

10x

2

3

5x

6x

7x

8x

9xe

US Treasuries

Agency MBS

6/2013: 3.3x a l E c o n o m y

0

1

'04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Feds Balance Sheet: Liabilities Federal Funds Rate & FOMC Interest Rate Projections

'04 '05 '06 '07 '08 '09 '10 '11 '12 '132x

3x

4x

G l o b

6%

8%

10%

12%

3

4

r ons

Long-term Fed ProjectionOther Liabilities

Excess Reserves

Required Reserves FOMC Projections

0%

2%

4%

'84 '88 '92 '96 '00 '04 '08 '12 '16'04 '05 '06 '07 '08 '09 '10 '11 '12 '130

1

2 6/2013:0.0%-0.25%

32

Source: Federal Reserve, FactSet, J.P. Morgan Asset Management Guide to the Markets Asia.

Monetary base is defined as the total amount of a currency that is either c irculated in the hands of the public or in the commercial bank deposits heldin the central bank's reserves. Money multiplier defined as M2 divided by the monetary bas e. Fed projections are based on median of expectations of FOMC members.Data reflect most recently available as of 30/6/13.

The Fed is also increasingly aware that its ast-expanding balance sheet carries dangers o its own. Asshown in the chart below, the Fed has increased the size o its balance sheet without causing a surgein the money supply by paying banks interest on the reserves they hold with the Fed (as opposedto lending out to the private sector). However, this also implies that in order or the Fed to raise the

ederal unds rate (when it nally deems this appropriate), it will need to increase the interest paid onreserves in tandem.

When the Fed needs toraise rates, the bigger their balance sheet, the moreexpensive it will be to maintit and the more disruptive it will be to dismantle it.


The problem is that with banks holding a projected USD 2.5trn with the Fed by the end o 2013, i theFed over the next ew years raised the ederal unds rate to a roughly neutral level o 4%, the 4%interest that they would then have to pay on bank reserves at the Fed would cost them USD 100bnper year, which could leave them in a net negative income si tuation. I they tried to avoid this byselling bonds and shrinking their balance sheet, they could cause long-term interest rates to spike.Conversely, i they postponed rate hikes altogether, they could set the economy up or ination. Thebottom line is that the bigger the Feds balance sheet gets, the more expensive it will be to maintainand the more disruptive it will be to dismantle.

Impacts of Fed tapering

In the press con erence ollowing the June 18/19 FOMC meeting, Fed Chairman Ben Bernankeindicated that he expected that the Fed would begin to phase out QE later this year and end thephase out by the middle o 2014, when he expected the unemployment rate to be at roughly 7.0%.While a nine-month phase-out period may appear to be gradual, moving rom USD 85bn per monthto zero should put signicant upward pressure on long-term interest rates. This appears to alreadybe recognized by many investors as interest rates moved up sharply in the wake o the Chairmanscomments.


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Investment implications An improving economy and the rising long-term costs o an expanding balance sheet justi y the

Feds recent announcement o a schedule or ending QE. This reduction in monetary stimulus could push long-term rates higher, although rom these

levels, the bond market should be ar more vulnerable to rising rates than the stock market. Investors should position themselves to weather higher rates not only in overall asset

allocation, but also among sectors o the equity and xed income markets.

The US economy should be able to weather higher interest rates quite well. Even a substantialincrease in mortgage rates rom current levels should leave them at very afordable levels roman historical perspective, while increases in consumer interest income should ofset increases in

consumer interest expense, particularly when the Fed begins to raise short-term rates.While uncertainty about economic and nancial market impacts o higher rates could continue toimpact the stock market in the short run, in the long run, stocks should be able to avoid too muchpain rom higher rates. Indeed, analysis o the impact o rate hikes on the stock market over the past25 years suggests that, starting rom very low levels (such as those that exist today), increases ininterest rates have been associated with rising rather than alling stock prices.

Rate Rise Impact on Fixed Income and Equity Sectors

Price Impact of a 1% Increase in 10-Year RatesBarclays fixed income sectors, 1994-2013

Price Impact of a 1% Increase in 10-Year RatesS&P 500 GICS sectors, 1994-2013

-1.3%

.

EMD (USD)

g e

1.2%

1.5%

.

Energy

Info Tech

-

-2.5%

- .

US A

Munis

-0.7%

0.6%

1.0%

Financials

Industrials

Cons. Disc.

s a n

d

a v i o u r

-3.9%

-3.7%

.

TIPS

Investment Grade Corp.

-1.5%

-1.1%

Cons. Staples

Telecom

O t h e r A s s e

I n v e s t o r B e

-7.7%

-10% -5% 0% 5%

10-Year Treasury -2.5%

-2.0%

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

Utilities

Health Care

60

Source: Standard & Poors, US Treasury, FactSet, Barclays, J.P. Morgan Asset Management Guide to the Markets Asia.Simulated price impact of a 1% increase in the 10-year Treasury yield based on estimated equations using monthly data from 1994 2013, data permitting, where sector indices are regressed on 10-year yields and the S&P500. Note that the S&P500 is held constant in simulations. Fixed income sectors shown above are provided by BarclaysCapital and are represented by Broad Market: Barclays US Aggregate (US Agg); Fixed Rate MBS Index (MBS); US Corporate (Investment Grade Corp); Municipals BondIndex (Munis); Emerging Markets Debt (EMD (USD)); Corporate High Yield Index (High Yield); Treasury Inflation Protection Securities (TIPS).Data reflect most recently available as of 30/6/13.

However, as shown in the chart above, within equity port olios, low dividend, high beta sectors tend todo best when rates rise, while more de ensive areas such as utilities tend to are worse. Bond sectorsgenerally are more vulnerable. However, within xed income markets, sectors with low duration and/or higher credit risk (such as high yield bonds) tend to outper orm at a time o rising rates.

Rising interest ratesshould have different impacts across sectors.



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3Q | 2013

An all-round stronger worldeconomy in 2014 willbe US led, with further strength in 2015 marking

the 6th year of expansion

The IMFs AprilGDP forecast looks too low for Japan, the worlds 3rdlargest economy.

2Market normalisation should favour cyclicals andemerging markets

Until May, the rally in nancial markets was unconvincing, characterised by a strong investorpre erence or lower risk assets such as credit, emerging market bonds and low beta de ensive stockslike consumer staples, utilities and telecom. Since mid May, we have seen a repositioning o por t oliosby international investors panicked into believing that a change in US monetary policy in the orm oan end to large-scale asset purchases was rapidly approaching. This wholesale panic over the courseo Fed policy triggered a knee-jerk move out o many o the carry trades ostered by years o zerointerest rates and central bank liquidity expansion under QE, causing risk assets to sell of heavily. Butinvestors should not ear that a move up in bond yields rom abnormally low levels will cause the USeconomy or earnings to stall. Moderate increases in bond yields during mid-cycle expansions are thenorm. They occur precisely because growth in markets, sales revenues, wages and company protsare strengthening.

Markets are wrong to give in to Fed tightening fears

The latest economic data show a more vibrant US economy, improvement in sentiment in Japan andstabilisation in Europe (see the chart below or GDP growth orecasts rom the IMFs World EconomicOutlook). Nonetheless, investors have chosen instead to give in to resh ears surrounding theunwinding o the Feds asset purchase program. The bears either believe the real economy wouldsufer due to reduced liquidity or the drop in liquidity would undermine risk assets, especially inemerging markets.

OverviewWe believe that the US cyclical expansion has begun to broaden out as the efects o the scal dragstart to ade a ter peaking in the rst hal o 2013. The earnings cycle should improve and benetcyclical stocks in the US and Europe. Market dips and corrections due to Fed tightening earsand carry trade unwinding provide long-term investors with an opportunity to reposition theirport olios or better times ahead.


Global Growth

12%

Year-over-year % changeEmerging Market Real GDP Growth

2010 2011 2012 2013 2014 2015

Historical IMF Forecast

0%

4%

8%

a l E c o n o m

y

-4%EM China India Indonesia Turkey Brazil Korea Russia Mexico

Developed Market Real GDP Growth

G l o b

Historical IMF Forecast

8%

12%

Year-over-year % change2010 2011 2012 2013 2014 2015

-4%

0%

4%

DM US Australia Canada UK France German Ital Ja an

24

Source: J.P. Morgan Economics, J.P. Morgan Asset Management Guide to the Markets Asia.

Forecasts are from the IMFs April 2013 World Economic Outlook.



6/126


So far in 2013, defensivestocks have stronglyoutperformed cyclicals andfinancials. This may be about

to change. As the macro environment

improves, higher betacyclicals and emerging market equities shouldreturn to favour.

So what happens next?

With the Feds more explicit direction on the path of QE tapering, investors everywhere now realisethat sooner or later government bond yields in the developed markets will start to trend higher.Many assets that were formerly regarded as safe havens by investors will be less trusted afterthe emergence of tapering fears shook markets. Of course, the Feds new timetable will put someadditional pressure on developed market government bond markets, and US Treasury yields inparticular are likely to trend higher in 2014.

The earnings cycle is broadening out and defensives are no longer the only sectors holding thepromise of positive earnings growth, with revisions already positive for nancials as a group. In termsof 2H 2013 performance, sector leadership within the equity market is likely to switch away fromdefensives towards nancials and cyclicals (see the chart below). Areas that could underperform,using historical analysis as a guide, include those sectors most sensitive to higher Treasury yields,such as utilities, health care, consumer staples and stocks that generally possess low operating protgearing and high nancial leverage.

Investment implicationsDespite investor fears of the Fed reining back its ultra-loose monetary policy over coming years,this should be seen as a healthy sign of US economic recovery, ultimately benetting economicgrowth globally. Cyclicals, value and higher beta equities should then start to attract moreinvestor interest. Although immediate catalysts appear few, there is now good value to be foundin a number of larger emerging markets, such as Brazil, Russia, Turkey and even unloved China.

Global Sectors: Returns

2008 2009 2010 2011 2012 2Q '13 Cum. Ann.Health

CareM aterials

Cons .Disc.

HealthCa re

FinancialsCons .Disc.

Cons . S tp . Cons . S tp .

5-yrs ('08 - '12)

180

Global Sector Performance*Index, rebased2007 = 100

-21.4% 70.1% 25.2% 8.9% 28.7% 5.4% 33.2% 5.9%

C o ns . S t p. I T I nd us t ri al s C o ns . S t p.Cons .Disc.

HealthCare

HealthCare

HealthCare

-24 .0% 58.1% 23.8% 7.8% 23.5% 2.7% 23.8% 4.4%

UtilitiesCons .Disc.

M a t e r ia l s Te l ecomsHealth

CareTelecoms

Cons .Disc.

Cons .Disc.

-30 .4% 43.7% 21.6% -0.4% 17.8% 2.1% 21.4% 4.0%

100

140Defensives

Cyclicals

T ele co ms F ina nc ia ls C ons . S tp. E ne rgy Indus tr ia ls IT IT IT

-35 .6% 36 .7% 14.2% -3.0% 16.1% 0.4% 7.4% 1.4%

E ne rg y E ne rgy E ne rgy IT IT F in anc ia ls In dus tr ia ls Ind us tr ia ls

-42 .2% 33 .3% 11.5% -4.4% 15 .3% -0.1% -8.4% -1.7%

Cons .I nd us t ri al s I T U ti li ti es C o ns . S t p. I n du st ri al s T e l ec o ms T e le co m s

20

60

'07 '08 '09 '10 '11 '12 '13 E q u

i t i e s

Global Cyclicals vs. Defensives*

Financials

sc.

-42 .3% 29.0% 11.3% -4.6% 14.5% -0.4% -10.1% -2.1%

I T C o ns . S t p. T e le co m sCons .Disc.

M a t e ri a ls U t il it i es M a t e ri a ls M a t e ri a ls

-44 .6% 24.2% 11.3% -5.2% 11.0% -1.4% -13.3% -2.8%

IndustrialsHealth

CareF i na n ci a ls I n d us t r ia l s Te le c o ms C o n s. S t p . E n er g y E n er g y

130

Index, rebased 2007 = 100

CyclicalsOutperformance

- . . . - . . - . - . - .

M a t e r ia l s Te l ec omsHealth

CareF i na nc ia ls E ne rg y E ne rg y U ti li ti es U ti li ti es

-51.9% 16.5% 2.9% -19.3% 2.5% -3.7% -25.4% -5.7%

F i na n ci a ls U t il i ti e s U t il it i es M a t e ri a ls U t il it i es M a t e ri a ls F i na n ci a ls F i na n ci a ls

-53 .9% 9 .7% 0.0% -21.5% 2.4% -10.3% -30.4% -7.0% 70'07 '08 '09 '10 '11 '12 '13

DefensivesOutperformance

36

Source: MSCI, FactSet, J.P. Morgan Asset Management Guide to the Markets Asia.Sector returns are total (net) returns based on MSCI indices in US dollar terms. 5-yr data are used to calculate cumulative net total return (Cum.), annualized net total returns(Ann.), reflecting the period from 1/1/08 31/12/12.* Based on MSCI AC World GICS Sectors. Cyclical sectors include Consumer Discretionary, Industrials, Information Technology, Materials and Energy.Defensive sectors include Consumer Staples, Utilities, Telecommunication Services, and Health Care.Data reflect most recently available as of 30/6/13.



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3Q | 2013

Asian dividend stockshave not only contributedsignificantly to total returns,

they have also consistently

outperformed in the longer term.

3

Asia dividend income theme: More than an investmentfashion

The importance of dividends in generating total return

Although the absolute amount o dividend income may seem modest on an annual basis, itscontribution to total return is signicant on a cumulative basis over the longer term. In act, dividendshave accounted or around 40% o the annualised total return or the MSCI AC Asia Pacic ex-Japan Index over the past 10 years, thanks to the compounding efect o dividend reinvestment.For individual markets such as Australia and Taiwan, dividends have been even more important,contributing to hal o the annualised total return over the same period.

In addition to attractive yields, high dividend stocks in Asia have consistently outper ormed the overallmarket since 2000. The rst and second quintiles, or the top 40%, o the MSCI AC Asia ex-Japan Indexbased on dividend yield, have outper ormed the ourth and bottom quintiles, or the bottom 40%, by530% since 2000 on a total return basis.


OverviewGiven the low, or even negative, real interest rate environment in many Asian economies, it isnot surprising that there is an aggressive hunt or yield and income. In an environment where USdollar interest rates are set to rise in coming years, investors rotation rom bond income to equitydividend income is set to continue. We believe investing in Asian dividend stocks is not just a trendyinvestment theme, but is actually an evergreen theme or all seasons. Income rom dividendscombined with potential capital appreciation could help to enhance investors total returns overthe long run.

Asia Dividend Income

1,000

MSCI Asia ex-Japan: Performance by Dividend YieldUSD cumulative total return of quintiles with quarterly rebalancing (Jan. 2000 base = 100)

Top Quintile

400

600

8002nd Quintile

3 rd Quintile

4 th Quintile

Bottom Quintile

All Stocks

0

200

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 E q u

i t i e s

. Average annualized returns over 10 years Capital Appreciation

Asia Pacific Other EM Regions

11.6%

13.9%

7

30%

40%

4.6% 4.7%11.0% 9.6% 8.4% 11.3%

12.9% 15.2%18.0%

22.0%

6.0% 7.4%11.8%

15.1% 16.0% 15.9%

5.1% 4.4%9.6% 10.9%2.6%

5.2%

4.3% 6.7% 8.4%7.8% 7.5%

11.0%

3.9%6.4%

7.8%6.4%

9.2% .

3.2% 5.1%

6.9% 6.6%

0%

10%

20%

J ap an Tai w an K or ea H on gKong

Australia Malaysia China ThailandPhilippines

Indonesia Russia Poland South Africa

M ex ic o Tur ke y B ra zi l U S E ur op e A C A si aPacific ex

JP

EM(EmergingMarkets)

48

Source: FactSet, MSCI, CLSA, J.P. Morgan Asset Management Guide to the Markets Asia.



8/128


Is it possible to have both dividend yield and earnings growth?

Theoretically, higher dividend stocks should have lower earnings growth prospects, as companiesreturn cash to investors instead o investing or the uture. However, this relationship is less clear-

cut in practice. Although there is an overall negative relationship between dividend yield and EPSgrowth or many countries and regions, as shown in the chart below, there are a number o countriesthat ofer both attractive yields and good earnings growth. Over the past three years, the averagedividend yield o MSCI Asia Pacic ex-Japan was 3.0%, while average EPS growth was 13.8%. The UShad almost the same average EPS growth (13.7%) over the same period, but i ts average dividend yieldwas lower (2.2%). Within Asia Pacic ex-Japan, Australia, China, Taiwan and Thailand were the marketsthat ofered both decent yields and growth. Sector-wise, the technology hardware and consumerdiscretionary sectors in Asia also provided a combination o yield and growth.

Is Asia in a dividend sweet-spot?

With strong cash ows and low gearing, we believe Asian companies can continue to grow dividends.Compared to other regions in the world, Asia Pacic ex-Japan has shown the highest annualiseddividend per share (DPS) growth during the past decade (9.3%). Among individual markets in theregion, China had the strongest DPS growth, ollowed by Singapore and Australia. Europes DPSgrowth (6.3% annualised) has been the slowest, as companies hoarded cash in the wake o the GlobalFinancial Crisis. In contrast, as shown in the chart on the next page, US dividend payouts have beencatching up very quickly since bottoming in 2009.

Asia Pacific ex-Japan offeredboth decent dividend yieldsand good earnings growthover the past three years.


Global Dividend Income

Equity Dividend Yield 10-year government bond yield Dividend Yield vs. EPS Growth3-year average

5% Asia Pacificcountries4.5%

6%

Taiwan

AustraliaPoland

BrazilEurope4%

Other EM countriesRegions

2.7%

3.6% 3.7% 3.5%2.9%

2.6% 2.1%1.8%

3.4%

2%

4%

REIT Dividend Yields 10-year government bond yield

E q u

i t i e s

i d e n

d Y i e l d

ChinaHong Kong

Indonesia

Malaysia

Philippines

Thailand

RussiaTurkey

South Africa

EM

AP ex-Jp3%

0%

D i v i

Korea India

Mexico

US

1%

2%

4.1%

4.7% 4.8% 4.5%

3.6%

5.7%

3.2%

5.3%5.6%

4.0%4%

6%

EPS growth

0%0% 5% 10% 15% 20% 25%

0%

46

Source: FactSet, NAREIT,Standard& Poors, Ibbotson, J.P.MorganAsset ManagementGuide to theMarkets Asia.(TopLeft) Yields shownare forthe appropriateMSCI index.(Bottom Left)Yieldsshown are forthe appropriateFTSE NAREIT REITindex,which excludes property developmentcompanies.(Right) Yieldand EPS growthareaverage valuesoverthe last 3 yearsfromrespective MSCI indices andS&P500.



9/129

3Q | 2013

Asia Pacific ex-Japan andemerging markets have showan annualised DPS growthof 7-9% over the past 10years.

1 Quintile 1 and quintile 2 dividend stocks o the respective index.

Are Asian dividend stocks expensive?Given strong support by investors, high dividend equities in Asia have per ormed well. It is there orereasonable to question whether their valuations are expensive. We believe they are not. The median12-month orward PE or the MSCI AC Asia Pacic ex-Japan Indexs high dividend stocks 1 is 12.9x,slightly above their long-term average o 12.2x, but below the median PE o 13.7x or the broad indexand the median PE o 13.1x or MSCI AC World high dividend stocks 1 .

Certain de ensive sectors, such as REITs, health care and consumer staples, are expensive, while thereare still some sectors or markets, such as China and Korea, which ofer sustainable dividend incomeat reasonable valuations. Furthermore, the recent sell-of in high dividend sectors, triggered mainlyby the Feds tapering concerns, have provided good buying opportunities or cheaper high dividendstocks in the region.


Investment implicationsWe believe investing in Asian dividend stocks is not purely a de ensive strategy or bear markets.It is an all-weather investment theme that has not only provided a rising income stream, but hasalso delivered consistent outper ormance in the longer term. As such, it should be considered asa staple part o an investors asset allocation.

Regional Dividend Income

Regional DPSIndex, rebased 2003 = 100

Median 12-month Forward P/E by Style*MSCI AC World Index

280 20xGrowthAC World

i i i

Asia Pacific ex-JapanEMEurope

240

260

10x

15x

i i iValue

E q u

i t i e s

Median 12-month Forward P/E by Region180

200 5x'07 '09 '11 '13

13.513.1

14.6

12.913x

15x

17xPE comparison of high dividend stocks by region**

120

140

160 6-yr. averageLatest

6-yr. range

.

10.9

.11.1

11.4 11.7

7x

9x

11x

MSCI AC Wor ld MSCI US MSCI Europe MSCI AC APxJ MSCI EM80

100

'03 '05 '07 '09 '11 '13

47

Source: MSCI, FactSet, J.P. Morgan Economics, J.P. Morgan Asset Management Guide to the Markets Asia.*Value is defined as bottom 2 quintiles (bottom 40%) of low forward PE stocks within the MSCI AC World index. Growth is defined as the top 2 quintiles(top 40%) of high forward EPS growth stocks within the MSCI AC World index.**High dividend stocks are defined as top 2 quintiles of dividend-paying stocks within the index.



10/1210


Abenomics third arrow o structural re orms

4

Japanese public reaction to rst two arrows

Abenomics has been a good demonstration o the role o expectations in nancial markets andin the real economy. First o all, it called or aggressive monetary easing, which led to a signicantdepreciation o the Japanese yen. This weaker yen ostered expectations o higher corporate earningsthat, in turn, drove up stock prices. Higher stock prices and the possibility o higher personal income,in wages and bonuses, have made households eel wealthier and led to a surge in department storesales. Besides, rising ination expectations prompted people to buy houses and to lock in xedincome mortgages. Furthermore, rising business expectations should contribute to corporate capitalinvestments.

Japan: Economic Snapshot

8% 15%

Real GDP Growth and CPI InflationYear-over-year % change

Department Store SalesYear-over-year % change, 3-month moving average

GDP L o c a l

y Consumption Tax Hikef

Consumption Tax Hikef

0%

4%

-5%

5%

Inflation

Nationwide

R e g

i o n a

l a n

d

E c o n o m f rom o 5 , pr f rom o 5 , pr

-8%

-

'95 '97 '99 '01 '03 '05 '07 '09 '11 '13-15%

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

Monthly Cash Earnings by Employees

Tokyo Area

Bank of Japan Tankan Business Confidence Survey

PM Koizumi Era(Apr 01 Sep 06)

0

20

40

0%

2%

4%ManufacturingIndex

n ex - - , -

Real6/2013: 12

(Forecast)9/2013: 12

-60

-40

-20

'95 '97 '99 '01 '03 '05 '07 '09 '11 '13-6%

-4%

-2%

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

Non-manufacturing

IndexNominal

6/2013: 4

(Forecast)9/2013: 10

17

Source: Japanese Cabinet Office, Ministry of Internal Affairs and Communications, Japan Department Stores Association, The Bank of Japan, Ministry of Health, Labor andWelfare, FactSet, J.P. Morgan Asset Management Guide to the Markets Asia.(Top Left) Japans 1Q 2009 GDP growth reached a trough of -9.4% and is cut off to maintain a more reasonable scale.

(Bottom Left) Forecast for September 2013 from Bank of Japan Tankan Short-Term Economic Survey of Enterprises in Japan.Data reflect most recently available as of 1/7/13.


Higher stock prices andexpectations of higher household income arestimulating consumer spending.

OverviewThe Japanese stock market, a ter impressive gains ollowing the introduction o Abenomics, hasseen a sharp correction since late May. This correction could be explained by a) the signicantoverbought position ollowing the 60% rally in TOPIX since December 2012, b) investor concernsover the tapering o quantitative easing by the US Federal Reserve and c) disappointment overPrime Minister Abes structural re orm plans. We believe Abe deserves more patience rom themarket, as we think he will push ahead with more aggressive structural re orms, ofering Japan thebest chance o economic revival in the past 10 years.


11/1211

3Q | 2013

Reforms critical to sustained recovery, but likely to be gradual

On June 14 the cabinet approved the structural reform plan Japan Revitalisation Strategy, whichaims to improve the countrys long-term economic potential. Some investors were disappointed at

the plan, as it did not include a lower corporate tax rate or liberalisation of the labour market. Italso failed to challenge the vested interests of the powerful agricultural cooperatives and doctorsassociation or to address the falling population.

However, one of the important lessons learnt by Prime Minister Abe as former Prime MinisterKoizumis Chief Cabinet Secretary is that reforms that could face resistance from various lobbyinggroups can only proceed in a gradual manner. The best strategy is to make haste slowly. In this sense,the recommendation to set up special economic districts is key. Success in these zones could reinforcepublic support for the experiment to be extended to the whole nation.

While economic reforms take time to implement, consumer and business expectations of higherproductivity and income in the future following the reforms could induce present consumption andcapital investment.

Increasing productivity inboth the agriculture andservice sectors is consideredimportant.


Japan: Structural Trends

200 4%

Labor Productivity Growth by Sector % annualized between 2006 to 2010

L o c a

l

y

OECD Indicators of Market Regulations*

Labor Market

Index relative to Japan (Japan rebased = 100)

100

150

1.1%

3.6%

1%

2%

3%

R e g

i o n a l

a n

d

E c o n o m Trade and Investments

0

50

J apan F ran ce Ger ma ny A us tral ia U K C anad a U S

0.6

- 0. 2% - 0. 2% -0.3%

-1%

0%

Total Manufacturing Agriculture Construction Service Financials

Corporate Tax Rate (2013) Population Forecast 0 14 Working Age Ratio**

40% 38%20%

30%

40%

80

120

16065+

15 64 2012 63%

2030 58%

2060 51%

30%24% 23%

17% 17%

0%

10%

U S J ap an F ra nc e Ge rm an y K or ea U K S in ga po re H K

0

40

2010 2016 2022 2028 2034 2040 2046 2052 2058

: I

20

ource: a iona Ins iu e o opuaion apan, , apan ro uciviy en re, , ac e , . . organ sse anagemen ui e o e ar e s s ia .

* OECD has developed a range of indicators at both the economy-wide and sector levels. All of these indicators measure the extent to which policy settings promote or inhibitcompetition in areas of the product market where competition is viable. In general, the higher the value, the more restrictive the country is towards that particular criteria.** Working age ratio is the ratio of the working age population (aged 15-64) to the total population.


Investment implicationsAfter the market rally in response to phase 1 of Abenomics, a sustained rally will be contingentupon the economic reform measures and strategy. The good news is that the Japanese publicare already showing signs of buying-in to Prime Minister Abes plan and this could attract morestrategic investors to build long-term positions in Japanese equities.


12/12

Past per ormance 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 nancial market trends that are based on current market conditions constitute our judgment andare subject to change without urther notice. The in ormation 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 nancial instrument. The views and strategies described may not be suitable or all investors. Re erences to specic securities,asset classes and nancial 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 reect the opinions o any other rm 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 InvestmentAdvisers 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 dened 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 veri y 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 [June 30, 2013].BRO-MI-QPA-E July 2013

Quarterly Perspectives

Asia | 3Q 2013

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