Q2 | 2011

As of 31 March 2011
{ }

GTTM: A guide to global financial markets

Table of contents

WORLD FIXED INCOME UNITED STATES ASIA EX-JAPAN EMERGING MARKETS BRAZIL

2 11 17 21 23 26

World equity market total returns by region (USD)

World 2000
MSCI Europe -8.1%

2001
MSCI EM -2.4%

2002
MSCI Asia Pac. exJP -5.8%

2003

2004

2005

2006

2007

2008
MSCI Japan -29.1%

2009
MSCI Brazil 128.6%

2010
MSCI EM 19.2%

Q 1 2011
{ } {

MSCI Brazil MSCI Brazil MSCI Brazil MSCI Brazil MSCI Brazil 115.0% 36.5% 57.0% 45.8% 80.0%

MSCI Europe 6.6%

S&P 500 -9.1%

MSCI Asia Pac. exJP -9.4%

MSCI EM -6.0%

MSCI EM 56.3%

MSCI Asia Pac. exJP 29.6%

MSCI EM 34.5%

MSCI Europe 34.4%

MSCI EM 39.8%

S&P 500 -37.0%

MSCI EM 79.0%

MSCI Asia Pac. exJP 17.1%

S&P 500 5.9%

MSCI Brazil -11.4%

S&P 500 -11.9%

MSCI Japan -10.1%

MSCI Asia Pac. Pac exJP 47.0%

MSCI EM 26.0%

MSCI Japan 25.6%

MSCI Asia Pac. Pac exJP 33.2%

MSCI Asia Pac. Pac exJP 31.7%

MSCI Europe -46.1%

MSCI Asia Pac. Pac exJP 73.0%

MSCI Japan 15.6%

MSCI Asia Pac. Pac exJP 2.8%

MSCI Asia Pac. exJP -15.2% 15 2%

MSCI Brazil -17.0%

MSCI Europe -18.1% 18 1%

MSCI Europe 39.1% 39 1%

MSCI Europe 21.4% 21 4%

MSCI Asia Pac. exJP 14.8% 14 8%

MSCI EM 32.6%

MSCI Europe 14.4% 14 4%

MSCI Asia Pac. exJP -50.0% 50 0%

MSCI Europe 36.8% 36 8%

S&P 500 15.1%

MSCI Brazil 2.6%

MSCI Japan -28.1%

MSCI Europe -19.6%

S&P 500 -22.1%

MSCI Japan 36.2%

MSCI Japan 16.0%

MSCI Europe 9.9%

S&P 500 15.8%

S&P 500 5.5%

MSCI EM -53.2%

S&P 500 26.5%

MSCI Brazil 6.8%

MSCI EM 2.1%

MSCI EM -30.6%

MSCI Japan -29.3%

MSCI Brazil -30.7%

S&P 500 28.7%

S&P 500 10.9%

S&P 500 4.9%

MSCI Japan 6.3%

MSCI Japan -4.1%

MSCI Brazil -56.1%

MSCI Japan 6.4%

MSCI Europe 4.5%

MSCI Japan -4.9%

Note: Total return indices. Source: J.P. Morgan Asset Management.

MSCI AC World Index weighting by country; market returns after consecutive down years
World Equit ties MSCI AC World Index: % weighting by country
France Switzerland Germany Spain Italy Other 4% 3% 3% 2% 1% 4%
Japan 8% UK 8% Developed Pacif ic 6% Europe 17% Canada 5% Em. Markets 13%

United States 43%

China Brazil Korea Taiwan India Other

2% 2% 2% 2% 1% 4%

1933-1936
+190%

1942-1945
+122%

09/10/02 08/10/07 1975-1976

+66% +121%

09/03/09 31/03/11
}

+ 105%
{

-17% -65%

-38%

-47%

1940-1941

1973-1974

-55%

1929-1932
Great Depression World War II Oil crisis

24/03/00 08/10/02
Internet bubble bursting

09/10/07 08/03/09
Credit crunch

Note: Total returns in USD. Source: Dimson, Marsh and Staunton ABN AMRO/LBS Global Investment Returns Yearbook 2008, J.P. Morgan Asset Management.

Commodities
World Equit ties Commodity indices and steel production
400 70

Chinese steel production (rhs)

60

Chinese steel production (millions of me n etric tons)

Metals and agr ricultural indices s

300

Metals (lhs)

50

40 200

Agricultural products (lhs)

30

20 100

10

Dec 94

Dec 99

Dec 04

Dec 09

Source: Goldman Sachs, National Bureau of Statistics of China, J.P. Morgan Asset Management.

Gold and oil

World WTI Crude oil price Gold price

31 March 2011 $107

}

140

2,000

Inflation adjusted 31 January 1980 $1,873

$/bbl
120

Inflation adjusted 31 December 1979 $111

$/oz 31 March 2011 $1,432

}

1,600 100 1,200

80

60

800

40 400 20

0 Dec 69

Dec 79

Dec 89

Dec 99

Dec 09

0 Dec 69

Dec 79

Dec 89

Dec 99

Dec 09

Source: Bloomberg, J.P. Morgan Asset Management.

Risk
World Equit ties Credit Suisse Global Risk Appetite Indicator

Euphoria
6

N Number of stand dard deviations

31 March 2011 1.90 1 90

}

-2

Distress
-4 81 85 89 93 97 01 05 09

Note: The Credit Suisse Global Risk Appetite Indicator compares aggregated risk-adjusted returns across 64 markets (both equity and fixed income). It compares six month excess returns over cash with 12 month volatility for each asset. Source: Credit Suisse, J.P. Morgan Asset Management.

Market volatility
World Equit ties VIX and VDAX

90

VIX
80

Credit crunch

VDAX

70

60

Russian crisis Asian crisis Tech bubble

Gulf war 2 Eurozone debt crisis

Volat tility

50

40

30

20

10

Cheap money
Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09

Note: VDAX is the name given to the Deutsche Brse equivalent of the VIX, based on the DAX. Source: Bloomberg, Chicago Board Options Exchange, Deutsche Brse, J.P. Morgan Asset Management.

World economic data

World Equit ties Q 4 2010 GDP Growth q/q / Unemployment U l t y/y Annualised % % %
{ }

CPI inflation y/y%

6.3 9.5 8.8 4.9 1.7 2.2 4.4 2.5 3.6 2.4 4.4 2.1 0.0

Money supply growth (M3) y/y%

18.3 28.2 16.3 15.7 5.6 3.8 1.8 0.6 0.3 1.8 0.0 4.1 2.3 M2 M2 M4* M2 M2

Current account as % GDP

-2.9 4.8 -2.7 4.1 -1.8 4.9 -2.9 -3.0 -3.8 -0.3 -1.7 -3.4 3.3

Brazil Russia India China France Germany Greece Italy Spain Eurozone UK US Japan

5.0 4.5 8.2 9.8 1.5 4.0 -6.6 1.5 0.6 2.0 1.5 2.8 2.5

3.1 10.8 37.1 12.7 1.4 1.5 -5.6 0.5 0.9 1.1 -1.9 3.1 -1.3

6.4 7.6 7.3 4.1 9.6 7.1 14.2 8.5 20.3 9.9 8.0 8.8 4.6

Note: Arrows represent change on previous quarter. China q/q annualised GDP growth J.P. Morgan estimate. Data is latest available at time of publishing. Source: EIU, OECD, J.P. Morgan Asset Management. *UK money supply measure is M4 adjusted (M4 excluding intermediate OFCs).

Consensus estimates 2010 and 2011

World Equit ties

Real GDP growth % 2011 2012

CPI headline inflation % 2011 2012

Brazil Russia India China France F Germany Eurozone UK US Japan

4.1 4.4 8.0 9.5 1.7 1 2.7 1.7 1.7 17 3.1 1.5

4.5 4.4 8.7 9.0 1.8 18 2.0 1.7 2.1 21 3.1 1.9

5.5 9.1 8.5 4.6 1.9 19 2.2 2.2 4.0 40 2.3 0.0

4.6 8.0 8.0 3.0 1.7 1 2.0 2.0 2.1 21 1.9 0.3

Actual Mar 11 11.75

Policy t P li rates % Forecast Forecast Jun 11 Dec 11 12.25 12.25

8.00 6.75 6.31 1.00 1 00 1.00 1.00 0.50 0 50 0.25 0.10

8.50 6.00 6.50 1.25 12 1.25 1.25 0.50 0 50 0.25 0.10

8.50 6.25 6.50 1.75 1 1.75 1.75 1.00 1 00 0.25 0.10

Source: Bloomberg, J.P. Morgan Asset Management.

Cross-country earnings and valuations

Topical Ch World harts Regional earnings growth and valuation Country earnings growth and valuation

-60 Asia -45

Positive earnings momentum and cheap valuation

-60 Japan -45 45 Italy UK -30 Spain -15 US 0 China France

Positive earnings momentum and cheap valuation

Relative valuation*

Relative valuation*

-30 Europe Asia -15

Germany

Developed Markets Emerging Markets

North America EMEA

Russia

0 Latin America 15

India 15 Turkey

South Af rica

30 99.8

100.0

100.2

100.4

100.6

100.8

101.0

30 99.0

99.5

Brazil B il 100.0 100.5

101.0

101.5

102.0

Earnings revision index

Earnings revision index

Note: Earnings revisions are magnitude of changes, in dollars, over the last month. *Latest value of forward P/E relative to long-run average. Source: I/B/E/S, J.P. Morgan Asset Management.

10

International yield curves

Fixed Income Government yield curves

UK 3.58 %
{ }

US 3.4 5%
{ }

Germany 3.35 %
{ }

Japan 1.26 %
{ }

6M

2Y

5Y

10Y

30Y

Maturity y

Source: Bloomberg, J.P. Morgan Asset Management.

11

International yield curves BRICs

Fixed Income Government yield curves

15

15

Brazil 13.2%

12

12

India 8.0% Russia 7.2%

6 6

China 4.0%
3 3

0
6M 1Y 2Y

3Y

4Y

5Y

10Y

Maturity y

Source: Bloomberg, J.P. Morgan Asset Management.

12

US Fed and ECB policy and real rates

Fixed Income

US Federal Reserve Bank

Forecast F t 2011: 0.25% 2012: 1.00%

European Central Bank

Forecast 2011: 1.75% 2012: 2.00%

4
4

2
2

Fed Funds 31 March 2011 0.25%

Real interest rate February 2011 -0.84%

Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09

-2 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09

Note: Real interest rates are calculated using core CPI and Fed Funds rate. Source: US Federal Reserve Bank, Bloomberg, J.P. Morgan Asset Management.

Note: Real interest rates are calculated using core CPI and repo rate. Source: ECB, Bloomberg, J.P. Morgan Asset Management.

13

US and European interbank rates, investment grade and high yield bonds
Fixed Income Europe interbank rates
8

Investment grade and high yield bond returns

10 October 2008 5.4% Spread over Repo rate 1.2%

ECB Repo rate Overnight Euribor 3 month Euribor

%
6

Yields 31 Mar 2011

JPMorgan Government Bond Index JPMorgan Emerging Market Bond (EMBI Global) 2.8%

Total Returns in USD 2009

1.9%

2010
6.4%

Q1
0.5%

6.4%

28.2%

12.0%

1.0%

Dec 04

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

BarCap Global Aggregate B C Gl b l A t

3.0% 3 0% 1.7% 4.6% 4 6% 6.9%

6.9% 6 9% 7.4% 23.7% 23 7% 46.1%

5.5% 5 5% 2.3% 7.0% 7 0% 14.5%

1.2% 1 2% 1.7% 2.8% 2 8% 3.6%

US interbank rates
8

BarCap Global 1-3 year Aggregate 17 October 2008 4.4% Spread over Fed Funds rate 2.9% BarCap Global Corp Merrill Lynch High Yield US B-BB Index

%
6

US Fed Funds rate

2

Overnight USD Libor 3 month Libor

Dec 04

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10
Source: Barclays Capital, Bank of America Merrill Lynch, J.P. Morgan Asset Management.

Source: ECB, US Federal Reserve, J.P. Morgan Asset Management.

14

Investment grade and high yield bond spreads

Fixed Income Investment grade and emerging markets spreads
bps over Treasuries

US corporate high yield spread and default rate

bps over Treasuries

Default rate (rhs): 1.1%

1,200

2,400

Corporate high yield (lhs): 477

12

%
1,000

2,000

10

800

Emerging Market Sovereign

1,600

600

1,200

400

800

Mortgages 261
200

US Investment Grade
0 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09

201 150

400

0 Dec 99

0 Dec 02 Dec 05 Dec 08

Note: Investment grade based on Merrill Lynch Investment Grade, mortgages on Fannie May 30 Year mortgages and emerging markets bond is JPMorgan EMBI+. Source: Merrill Lynch, J.P. Morgan Asset Management.

Source: Merrill Lynch US High Yield Master Index II, J.P. Morgan Asset Management.

15

US and emerging market debt yields and index weightings

Fixed Income US and emerging market sovereign debt yields EMBI weighting (dollar denominated)
Other Asia 8% Africa 4% Other Latin America* 14%

16

Indonesia 6% Philippines 7%

Asia 21%

Latin America 43%

Mexico 12%

12

Emerging market sovereign (USD)

Other Europe 9%

Europe 30%

Brazil 10%

Emerging market sovereign local currency

Turkey 9% Russia 12%

Venezuela 7%

GBI-EM weighting (local currency)

Africa 5% Other Asia 11% Brazil 13% Mexico 8% Other Latin America 5% Poland 8%

10 year US Treasury
4
India 15%

Latin America 26% Asia 52%

Europe 17%
Turkey 4% Other Europe 5%

Fed funds rate

0 Dec 00
China 26%
Note: The EMBI and GBI-EM track total returns on sovereign issued debt. Figures may not sum to 100 due to rounding. Source: J.P. Morgan Asset Management. *Includes the Caribbean.

Dec 02

Dec 04

Dec 06

Dec 08

Dec 10

Note: Emerging Markets Sovereign is the JPMorgan EMBI Index of dollar denominated debt until March 2003 thereafter it is the EMBI+. The local currency is the JPMorgan GBIEM Global. Source: US Federal Reserve, J.P. Morgan Asset Management.

16

US S&P 500 Index at inflection points (USD)

United States d S&P 500 Index (USD), log scale
1,800 1,600 1,400

27 March 2000 P/E 22.7 1,527 1 527

9 October 2007 P/E 14.9 1,565 1 565

{

31 March 2011 P/E 12.5 1,326

}

1,200

1,000

+231%

-49%

+101%

-57% +96%

800

9 October 2002 P/E 15.6 777

600

9 March 2009 P/E 12.2 677

12 J January 1995 P/E 12.3 462

Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09

Note: On a log scale the distance between tick marks shows the same percentage change. P/E is forward P/E. Source: I/B/E/S, J.P. Morgan Asset Management.

17

US equity valuations
United States d Forward P/E ratio S&P 500
25

31 January 2000 24,4

20

One year earnings growth forecast: 14%

Average since 1989 16.0

15

10 Dec 89 Dec 91 Dec 93 Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07

31 March 2011 12.5

}

Dec 09

S&P 500 Index dividend yield vs. 10 year US Treasury yield

10 % % 8 6
{

10 yr US Treasury Yield y y

31 March 2011

4 2

Dividend yield

3.5% 3 5%

1.8 %
}

Dec 89

Dec 91

Dec 93

Dec 95

Dec 97

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Source: I/B/E/S, Tullett Prebon Information, J.P. Morgan Asset Management.

18

US GDP and inflation

United States d Real GDP
change year on year Forecast GDP 2011: 3.1% 2012: 3.1%

Inflation
change year on year Forecast Headline CPI 2011: 2.3% 2012: 1.9%

% Fourth Quarter 2010 2.8%

4

Average 2.0%

Headline CPI February 2011 2.1%

2 0

-2

-4 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07

Core CPI February 2011 1.1%

Dec 09

Source: BEA, Bloomberg, J.P. Morgan Asset Management.

19

US market scorecard
United States d
Fourth-quarter GDP growth in the US rose 2.8% compared to the same quarter in the previous year, and was up 3.1% over the quarter at an annualised rate. Strong leading economic indicators have included the February and March purchasing managers indices (PMIs) while fears of a double-dip recession have evaporated The housing market (PMIs), evaporated. remains weak.

Overall economy

Employment

Unemployment came down sharply in the first quarter of 2011, but some of this is due to a re-counting of the working age population.

Corporate earnings

Corporate earnings growth remains robust.

Interest rates

We do not expect the Federal Reserve Bank to raise interest rates this year. Although a double dip recession has been avoided, economic growth is lower than one would normally expect to see at this stage of an economic cycle and headline inflation is lower than in most other major developed economies.

Inflation

The market does not appear overly worried about US inflation, perhaps because disinflationary forces, such as high unemployment and weak wage growth, remain strong.

Key news items

Consumer confidence is precarious. While labour market data generally improved during the first quarter, on going precarious quarter weakness in the housing market and higher energy costs contributed to a drop in the March University of Michigan consumer confidence index to levels last seen in November 2009.

Note: Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgement and are subject to change without notice. Source: J.P. Morgan Asset Management.

20

MSCI AC Asia ex-Japan Index by country

Asia ex-Japan

Market Country C t Cap. ($b ) C ($bn) Asia ex-Japan $3,842 Australia China Hong Kong India Indonesia Korea Malaysia New Z l d N Zealand Philippines Singapore Taiwan Thailand 1,004 1 004 701 317 299 96 577 116 12 22 192 437 69

Weight W i ht 100% 26 18 8 8 2 15 3 0 1 5 11 2

% Change (USD) March M h 2011 Q1 2011 5.2% 2.1% 2.2 22 5.3 1.3 11.1 9.7 11.7 5.3 4.3 43 10.0 4.8 1.7 17 8.0 4.5 45 2.9 -0.4 -5.1 4.7 7.6 4.3 4.4 44 -2.8 -0.6 -4 2 4.2 4.2

2010 18.4% 14.7 14 7 4.8 23.2 21.0 34.6 27.2 37.0 9.3 93 35.5 22.2 22.7 22 7 56.3

Note: Total returns. Source: I/B/E/S, J.P. Morgan Asset Management.

21

Asia ex-Japan scorecard

Asia ex-Japan

Overall economies

Expectations for growth in the regions remain high, though they have been tempered somewhat over the last few months with the expected rate for 2011 falling by 0.2% to 7.2%. This has been due to the floods in Australia and to worries about the impact of interest rate hikes in several countries to counter inflationary pressures. While commodity exporters continue to benefit from strong demand and elevated prices for their goods, commodity importers are commensurately at risk of a slowdown due to ever more costly manufacturing inputs. Intra-regional trade has kept factories humming and employment at high levels. As companies look for new suppliers to replace ones damaged in Japan the outlook will probably improve further. Though rising living costs might put pressure on wages, many of the countries subsidise staples so consumers dont necessarily feel the pain (though governments do). don t The Australian dollar has surged to its highest level in 25 years as booming commodity prices benefit assets linked to them. The risk for the economy, however, is that manufactured goods become too expensive to find willing markets abroad. Other countries in the region may be realising that they have to let their currencies appreciate in order to keep domestic inflation in check, in spite of concerns about the impact on exports. Almost every central bank in the region has raised benchmark interest rates since the beginning of the year to slow growth and manage inflation. This had created problems for equity markets initially but the big run up in the price of oil since February has turned the trend around. The series of hikes has probably not finished, however, so the next few months are likely to continue to be volatile for equities. p g y Despite a series of interest rate hikes from central banks inflation continues to be a concern in the region. Crucially for China, inflation excluding food costs appears to be falling but investors will need to see this trend confirmed for a few more months before an All Clear signal is warranted.

Employment

Currencies

Interest rates

Inflation

Key news items

The multiple disasters in Japan will have widespread and long lasting effects on the region and the world, even if they do not necessarily drag down GDP growth Supply chains will be reconfigured and companies will reconsider the benefits of growth. a cheap, but distant supplier. The yen has began what may be a long lasting period of weakening against the dollar, putting further pressure on the exports of other countries in the region to the United States. China itself has become as important an importer as it is an exporter and so should continue to support area demand.

Source: J.P. Morgan Asset Management. Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgement and are subject to change without notice.

22

Emerging markets valuations, returns and data

Emerging Markets M MSCI Emerging Markets Index (USD), log scale
Returns
1,600

USD 2010 19.2% 19.4% 23.8% 17.1% 14.9% 14 9% Q1 2.1% 1.6% 5.1% 11.8% 0.9% 0 9%

EUR 2010 27.5% 27.6% 32.4% 25.2% 22.9% 22 9% Q1 -3.5% -4.0% -0.6% 5.7% -4.6% 4 6%

1,200

MSCI EM MSCI EM Asia MSCI EM EMEA MSCI EM Europe MSCI EM Latin America

31 October 2007 P/E 14.2 1.338

31 March 2011 P/E 10.6 1,171

{ {

800

+392% 31 December 1999 P/E 16.8 489 -44%

-63%

+135%

400

27 February 2009 P/E 9.4 499

31 March 2003 P/E 8.4 272

Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10

Note: On a log scale the distance between tick marks shows the same percentage change. P/E is forward P/E. Source: I/B/E/S, J.P. Morgan Asset Management.

23

Emerging markets indices and GDP growth

Emerging Markets M Equit ties
All market indices are log scale

Brazil
BOVESPA
72.000 60.000 48.000 36.000 24.000

India
GDP % SENSEX
10 32,000 8 6 4 2 0

Russia
GDP % 12 RTS
2.000

31 March 2011 P/E 10.1 10 1 68,587

31 March 2011 P/E 14.4 14 4 19,445

31 March 2011 P/E 6.6 66 2,044

GDP %
15 10

10 16,000 8 , 8,000 6 4 4,000

1.000 700 600 500 400 300 200

5 0 -5

12.000

Fourth quarter 2010 5.0 %

{ }

-2

Fourth quarter 2010 8.9 %

{ }

2 0

Fourth quarter 2010 4.5 %

{ }

-10

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

-4

2,000 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09

100

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

China
MSCI China 100

Korea
GDP % 16
14 1,500 12 10 1,000 4 10.000 8 0 500

S. Africa
}

31 March 2011 P/E 10.9 66

KOSPI 2,500
2,000

31 March 2011 P/E 9.4 2,107 2 107

{ } { }

GDP % FTSE-JSE All Share 16 35.000 30.000 30 000 25.000 12

20.000 8 15.000

31 March 2011 P/E 10.7 32,204

GDP % 8
6 4 2 0

50 40 30 20

Fourth quarter 2010 9.8 %

{ }

Fourth quarter 2010 4.8 %

{ }

-4

Fourth quarter 2010 3. 8%

{ }

-2

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

Note: GDP is quarterly percentage change year on year. On a log scale the distance between tick marks shows the same percentage change. Source: Bloomberg, I/B/E/S, J.P. Morgan Asset Management.

24

China GDP and inflation

Emerging Markets M Equit ties Real GDP
change year on year Forecast GDP 2011: 9.5% 2012: 9.0%

Inflation
change year on year Forecast Headline CPI 2011: 4.6% 2012: 3.0%

16
%

25

%
20

14

Headline CPI February 2011 4.9 %

{ }

15

12

Food February 2011 11.0 %

{ }

10

Average 9.7%

10

8
0

Fourth quarter 2010 9.8 %

{ }

Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Dec 09

-5 Dec 99

Dec 01

Dec 03

Dec 05

Dec 07

Non-food February 2011 2.3 % Dec 09

Source: National Bureau Of Statistics of China, Bloomberg, J.P. Morgan Asset Management.

25

Brazil BOVESPA Index at inflection points

BOVESPA Index, log scale Brazil Equit ties
100,000 90,000 90 000 80,000 70,000 60,000 50,000

20 May 2008 P/E 13.3 13 3 73,516

31 March 2011 P/E 11.6 68,587

{ {

-60%
40,000

+134%

30,000 30 000

31 December 1999 P/E 12.5 20,000 17,092

+778%

27 October 2008 P/E 4.8 29,345

10,000 10 000 9,000 8,000 7,000 Dec 99

-51% 51%

16 October 2002 P/E 4.8 8,370

Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10

Dec 00

Note: On a log scale the distance between tick marks shows the same percentage change. P/E is forward P/E. Source: Factset, J.P. Morgan Asset Management.

26

Brazil scorecard
Emerging Markets Brazil M
After growing at a faster pace than potential in 2010 - a remarkable rebound from 2009 crisis, the full GDP growth should decelerate to a level close to its potential in 2011. Monetary and fiscal policy remain uncertain. We expect the extent of the rate cycle to become clear over the next quarter. Fiscal policy is crucial to putting Brazil on a sustainable growth path.

Overall economy

Interest rates and Inflation

Brazil continues to be fully absorbed in dealing with inflation and the economy is set to experience benign deceleration in 2011. Should these conditions not materialise, inflation is poised to be an important problem for 2011 given past y y money and credit creation in the country. Linked to the faith of interest rates and monetary policy, the BRL continued its appreciating trend, piercing the 1.65 level, which was a psychological support and a level well defended by the government. This prompted the authorities to introduce a 6% IOF tax on external corporate loans with a maturity shorter than a year. We expect volatility until there is greater clarity on the rate cycle and fiscal policy. After underperforming global emerging markets in 2010, Brazil screens well on valuation having moved back to a comfortable discount on forward PE. Domestic growth sectors are most interesting g g g given the p potential for rising investment to stimulate trend g g growth. Brazil has historically under-invested producing high returns on investment but low growth. Investment is rising as the private sector responds to lower real rates and a stable business cycle.

Currency and external accounts

Market outlook and valuation

Investment Themes

Key news items

On the corporate side, after facing mounting pressure from shareholders and the Rousseff administration Vale CEO side administration, Roger Agnelli confirmed that he will step down from his position when his mandate ends in May. As expressed before, we view this increasing influence by the government as something to be concerned about and an indication of further deterioration in overall corporate governance.

Source: J.P. Morgan. Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgement and are subject to change without notice.

27

J.P. Morgan Asset Management

THIS MATERIAL IS INTENDED FOR USE SOLELY BY PROFESSIONAL ADVISERS AND INSTITUTIONAL INVESTORS. NOT FOR PUBLIC DISTRIBUTION. Any forecasts, figures, opinions or investment techniques and strategies set out, unless otherwise stated, are J.P. Morgan Asset Managements own at date of this document. They are considered to be accurate at the time of writing. They may be subject to change without reference or notification to you. The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. performance Changes in exchange rate may have an adverse effect on the value price or income of the prod ct Investments in smaller companies ma in ol e a higher degree of risk as the are usually e change ma ha e ad erse al e product. In estments may involve they s all more sensitive to market movements. Investments in emerging markets may be more volatile and therefore the risk to your capital could be greater. Further, the economic and political situations in emerging markets may be more volatile than in established economies and these may adversely influence the value of investments made. You should also note that if you contact J.P. Morgan Asset Management by telephone those lines could be recorded and may be monitored for security and training purposes. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. Products may not be authorised or its offering may be restricted in your jurisdiction. Prior to any application investors should inform themselves as to the requirements within your country for transactions in the Fund, any applicable exchange control regulation and the tax consequences of any transaction in the product. Shares may not be offered to or purchased directly or indirectly by US persons. All transactions should be based on the latest available simplified and full prospectuses and any local offering document. These documents together with the annual report semi-annual report and the articles of incorporation for the Luxembourg domiciled products are available free of charge upon request from JPMorgan Asset Management (Europe) S r l report, semi annual S..r.l., European Bank & Business Centre, 6 route de Trves, L-2633 Senningerberg, Grand Duchy of Luxembourg, your financial adviser or your J.P. Morgan Asset Management regional contact. In Switzerland: J.P. Morgan (Suisse) SA has been authorised by the Swiss Financial Market Supervisory Authority FINMA as Swiss representative and as paying agent of the funds, J.P. Morgan (Suisse) SA, 8, rue de la Confdration, PO Box 5507, 1211 Geneva 11, Switzerland. Issued by JPMorgan Asset Management (Europe) Socit responsabilit limite, European Bank & Business Centre, 6 route de Trves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR 10.000.000. Material issued in the United Kingdom are approved for use by JPMorgan Asset Management (UK) Limited, 125 London Wall, London EC2Y 5AJ, England. England JPMorgan Asset Management (UK) Limited is authorised and regulated by the Financial Services Authority Registered in England No. 01161446. Registered address: 125 London Wall, London Authority. No 01161446 Wall EC2Y 5AJ. Unless otherwise stated, all data is as of 31/03/2011 .
{ }

Prepared by: Kerry Craig, Tom Elliott and Dan Morris

28