Asian Year Ahead 2014

www.jpmorganmarkets.com

Asia Pacific Equity Research 18 November 2013

Asian Year Ahead 2014

Stock Ideas for the Year of the Horse

Asian Equity Strategy & Emerging Market Equity Strategy Adrian Mowat AC

(852) 2800-8599 [email protected] Bloomberg JPMA MOWAT

Director of Asia Pacific Equity Research Sunil Garg AC

(852) 2800-8518 [email protected] J.P. Morgan Securities (Asia Pacific) Limited

See page 554 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. In the United States, this information is available only to persons who have received the proper option risk disclosure documents. Please contact your J.P. Morgan representative or visit http://www.optionsclearing.com/publications/risks/riskstoc.pdf.

For a full list of authors please refer to the sector and country heads list on the back page


Adrian Mowat (852) 2800-8599 [email protected]

Asian Year AheadStocks for the Year of the Horse The year-ahead process The goal of this document is to present our key strategy themes for 2014 using our most and least favored stocks from the 1011 and 548 stocks in emerging markets and developed Asia, respectively, covered by J.P. Morgan. Both J.P. Morgan equity research analysts and our macroeconomic team have been involved in the production of this document. The process started with the Strategy Team briefing analysts on our key themes and macroeconomic forecasts for 2014. Analysts then reviewed their earnings models and presented their top picks and avoids to both their sector and country strategists. The sector and country teams then produced their list of top picks and avoids. These ideas form the core of this document.

Table of contents Investment strategy ............................................................ 4

Surprises for the year of the Horse .................................. 34

Economic outlook ............................................................ 65

Economic forecasts .......................................................... 81

Country strategy .............................................................. 87

Sector strategy ............................................................... 111

Summary tables of stock ideas ...................................... 157

Top picks ....................................................................... 171

Stocks to avoid .............................................................. 393

Strategy dashboards ....................................................... 521

Table 1: What to own and avoid: Our country and sector teams views plus regional strategy country asset allocation

Austr

alia

Hong

Kon

g

Sing

apor

e

China

India

Kore

a

Taiw

an

Indon

esia

Malay

sia

Thail

and

Philip

pines

Banks @ Insurance Life Property Energy Materials Iron Ore Coal, Ni & Al Metals Chems Chems Coal Industrials Autos SUV/OEM Cons' desc' Macau Gaming Gaming Technology Internet Semis Semis Infrastructure E&C Staples Utilities Wind, Pol, IPPs IPPs Telecom Healthcare APxJ Strategy Teams View

Source: J.P. Morgan. @ indicates a conflict between strategy team and country strategists recommendation.

Other top picks: Chinese airlines, bulk shipping, China O&G and oil services, Malaysia O&G, China copper Other avoids: China power equipment makers, container shipping, policy plays in Indian O&G, Thermal coal

105 top picks (See pages 171 to 391)

Examples of top picks

Top picks - examples Country Return to our PT

(%) Krung Thai Bank Thailand 44 Tata Steel Ltd India 40 Hyundai Motor Company South Korea 36 TSMC Taiwan 26 SK Hynix South Korea 21 ICICI Bank India 14

Source: J.P. Morgan estimates. Note: To PT = Returns to analyst price target as at 14 Nov 2013. Stocks with 3m average trading value greater than US$20 million.

62 stocks to avoid (See pages 393 to 519)

Examples of stocks to avoid

Stocks to avoid - examples Country Return to our PT

(%) Lotte Chemical Corp South Korea (32) Unilever Indonesia Tbk Indonesia (26) DongFeng Motor Co., Ltd. China (26) Genting Singapore Singapore (11) Bank of East Asia Hong Kong (10) Hindustan Unilever Limited India (2)

Source: J.P. Morgan estimates. Note: To PT = Returns to analyst price target as at 14 Nov 2013. Stocks with 3m average trading value greater than US$20 million.

2

3



Year of the Horse: Challenging steeplechase Equity drivers Faster (slightly) and broader economic growth: Growth premiums narrow UW staples OW cyclicals (exporters plus selected domestic) After 40% relative underperformance: Structural problems discounted Resilient economies versus expectations: Expectations low Cautious companies focus on profits and cash flow Tapering is the start of long road: Interest rate volatility in bond bear market Asset deflation in Hong Kong and Singapore UW Yield plays

Potential returns MSCI APxJ end-2014 target 550 (+15%) Forward P/E of 12.5x, a marginal re-rating from 12x. Consensus 2015E MSCI APxJ EPS is 44. We fear

downgrades in Korea earrings growth forecast, whichcontributes 20% to MSCI APxJ 2015 EPS growth.MSCI APxJ 2013 and 2014 earnings revised down byc6% year to date.

(See page 22 for range of possible returns)

2013 YTD US dollar total returns (MSCI indices): Asia Pacific ex Japan 4%, Japan 27% Pacific ex Japan 10%, EM Asia 0%

Investment themes/baskets 1. 2014 Top Picks in Preferred Country Sectors

(JPHAPTOP ): top picks in country sectorspreferred by the strategy team

2. Long Global Demand (JPHAPGDM ): toppicks with exposure to global demand)

3. Cheap Domestic Growth (JPHAPDGR ): toppicks with domestic growth bias that are tradingcheaper compared to 10-year average forward P/E(trailing P/BV for banks)

4. Downgrade Dogs (JPHAPDOG ): top pickswhich suffered EPS downgrades in 2013.Possiblerecovery plays.

5. Best ideas from country strategist6. Best ideas from sector heads7. Avoid expensive: stocks expensive relative to 10-year

average forward P/E (trailing P/BV for banks)8. Rotation Riders Underperforming top picks with

low P/BV relative to 10-year average and the oppositefor stocks to avoid.

(See page 27 for details)

Risks Unclear Fed communication US policy and economic surprise US economic growth disappoints (again) Inflation complacency Uncertain Chinese economic policy Chinese environmental crisis Amnesty Bill resubmitted in Thailand Political cycle frustrates reform Volatility in FX and energy not priced into markets India faces deteriorating growth inflation trade-off Risk to OW on technology European political risk

(See page 32 for details) Key issues for Horse briefing notes Politics: Horse race Neutral monetary policy Lessons from past bond market sell-off EM underperforming DM by 40% China discounting structural issues Valuation: The extremes EM credit growth not crunch EM GDP correlated to Europe

Technical Strategy Asias growth struggles have kept markets range-bound with MXAPJ flat YTD and some of the high-growth markets underperforming the most. Near-term outlook is bearish in absolute terms and we renew our Asian underperformance call. MXAPJ needs a volume-led breakout from the 485-93 resistance zone to get constructive, in our view. MACD, RSI and moving average positioning suggest downside risks in the near term and increasing likelihood of a reversal in the intermediate trend. 450 is an important support/ stop level.

(See page 51 for details)

Market performance Figure 1: MSCI PxJ and EM Asia index performance

Source: Bloomberg, 13 November 2013

0

100

200

300

400

500

600

88 90 92 95 97 99 02 04 06 09 11 13

PxJ EM Asia

Life High:PxJ: 594EM Asia: 572

Current:PxJ: 500EM Asia: 438



Equity Strategy: Challenging steeplechaseFaster (slightly) and broader economic growth: Growth premiums narrow (Philippines downgrade) UW staples Stay OW won export cyclicals (IT and Korean CD) Out of sync: China cyclical peak in 3Q13

After 40% relative underperformance: BRICs are pricing in structural issues Companies managing for a tough

environmentearnings prove more resilient

Resilient economies versus expectations Credit growth little changed after the May taper scare Modest slowdown in Australia

Tapering is the start of a long road: Multi-year bond bear market. Fed can offset with dovish guidance on first Fed

Fund Target rate increase Long beneficiaries of higher interest rates: Korean

and Taiwanese financials Avoid simple yield plays Asset deflation in Hong Kong and Singapore (UW)

Sweet and sour Australia: Sweet switch from cash/bonds Sour valuations and currency risk

Chinas debt to GDP continues to rise Structural reform too expensive.old model

continues Financial risk rises 2014 risk to consumption with decelerating wage

growth and rising inflation

Overweight markets India, Taiwan, Korea, and Thailand

Underweight markets China, Indonesia, Hong Kong, and Singapore

Before considering 2014 we need to agree what equities imply today. EM underperformance of DM since its relative peak in 2010 is circa 40%. As described on page 15 this was a three-stage relative de-rating. In 2010 the consensus was that EM was structurally sound while the probability of a sustainable recovery in DM was low. Japan was off the map. These perceptions have changed. Confidence in EM policy is low. EM embraced the cheap leveraged of QE. As was demonstrated mid-year those with current account deficits woke up to the risk as the Fed alluded to tapering QE.

Our starting assumption is that EM equities are pricing in the structural issues; a frustrating reality for a strategist.

DM equities made new highs with weak growth. The key test is can the companies deliver a constant improvement in cash flow? EMs in aggregate failed to do this. We believe this is changing. Economic growth forecasts are modest (see page 81 for complete Asia and EM forecasts). The feared credit crunch after the tapering stress did not occur (see page 20). With the bar set low, EM equities should squeeze higher as companies generate growth in earnings and cash flow ahead of expectations. Resilience of earnings is a key theme. Each country and sector page covers this topic.

We are OW on India, Taiwan and Thailand where we believe 2014 GDP growth forecasts are below potential. This increases the chance of a positive surprise. Thailand should enjoy the benefit of lower interest rates, a more competitive currency and stronger global trade in 2014.

Figure 2: Large relative underperformance vs. DM

Source: Bloomberg, 11 November 2013.

Table 2: Economic growth below potential in most countries Country 2014E 2014E -

Potential 2014E - Max

GDP growth in Avg GDP

growth over GDP

growth last 10 years 20 quarters

(%oya) Singapore 3.8 0.8 -10.9 4.4 Philippines 5.6 0.6 -2.0 5.1 Malaysia 5.7 0.2 -1.7 4.0 Indonesia 4.9 -0.1 -1.6 5.9 Korea 3.7 -0.3 -2.6 2.7 Australia 2.7 -0.3 -1.9 2.5 China 7.4 -0.6 -6.8 8.8 Russia 2.2 -0.8 -6.3 1.0 Brazil 2.3 -0.9 -5.2 2.6 India 5.0 -1.0 -4.7 6.7 Hong Kong 3.3 -1.2 -5.4 2.5 Taiwan 3.1 -1.4 -7.6 2.8 Thailand 3.0 -1.5 -4.9 2.8 Source: J.P. Morgan forecasts. Note: Table sorted by 2014E potential GDP growth.

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Faster (slightly) and broader economic growth With all DMs growing and a cyclical lift ex-China growth is broadening (see table below). Our style bias is shifting to value. The large premiums in staples and growth stocks that developed in 2013 should reverse in 2014 (see page 17). The Philippines forward P/E is 35% above average. We are downgrading the Philippines to neutral as valuations discount strong fundamentals.

Australia: carry can carry high P/Es, not currency Australias equity market is largely made up of high-return, high-payout oligopolies in a high-rate currency. Hence it has been squarely in the way of the global carry trade in which valuation bands have been blurred by easy DM monetary policy. An Aussie OW within a regional portfolio duly behaved like a typical carry trade in 2013: steady positive returns most of the time, with a big drawdown when volatility spiked in the middle of the year.

Going into 2014 we see two possible reasons to be underweight Australia versus Asia-Pacific. The negative one is that this liquidity-driven upward grind has pushed valuations to vulnerable levels, both for stocks and for the currency. We are more cautious on the latter than the former. It is optimistic, in our view, to expect growth to rebalance from the terms of trade and commodity capex at this exchange rate. The AUD remains vulnerable to the tapering cycle. We are more reconciled to high multiples, but take issue with those who see them as a

down-payment on a profits upswing. There is little macro or micro basis to forecast earnings acceleration. Yet high valuations do not justify a bear case while global rates remain supportive and RBA easing. Cash rates hitting ex-crisis lows bring local investors into the carry business.

Australia lagged MSCI World in 2013 but edged ahead of Asia Pacific ex Japan. Valuations imply the continuation of high returns in the key non-Mining sectors, which may be right but leaves less room for re-rating. Hong Kong and Singapore, the other developed Asian markets, face asset deflation. To avoid a large underweight in developed Asia we are neutral on Australia. The key risk is Australian dollar weakness. Fortunately hedging costs are reasonable.

Figure 3: AUD driving relative performance particularly since May

Source: Bloomberg, 11 November 2013. Note: Chart shows total returns of MSCI Australia relative to MSCI APxJ in USD and AUD.

Table 3: The Economic Heatmap Better and broader momentum into 2014 Real GDP growth QoQ saar for EM and DM QoQ saar 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E EM Asia 9.1 6.1 6.8 5.1 7.1 6.1 6.0 7.6 4.7 5.8 6.7 6.3 6.0 5.9 6.1 6.0 China 9.9 8.9 8.6 7.8 6.8 7.8 7.7 9.0 6.4 6.9 9.1 7.8 7.0 7.0 7.2 7.2 India 10.6 2.3 5.1 6.7 5.5 4.6 3.8 5.5 5.2 3.1 3.0 4.5 5.5 4.8 5.0 5.3 Indonesia 6.0 6.2 6.0 7.4 5.2 6.3 5.9 6.4 5.5 5.5 5.0 4.5 5.0 5.0 5.0 4.5 Korea 5.3 3.3 3.3 1.5 3.3 1.2 0.2 1.1 3.4 4.5 4.3 3.8 4.0 3.5 3.5 3.0 Malaysia 6.1 3.1 6.8 4.1 -6.1 6.0 10.0 16.6 -13.0 7.1 5.5 5.5 5.5 6.0 6.5 6.5 Philippines 4.3 4.4 2.2 7.0 9.7 5.4 7.0 7.8 9.6 5.7 4.9 5.7 5.7 5.7 5.7 5.7 Taiwan 10.3 1.2 -0.5 -4.6 5.7 0.0 3.0 7.1 -2.5 2.3 0.4 3.5 3.4 3.7 4.0 4.2 Thailand 2.1 -4.0 10.1 -35.9 53.7 10.1 7.9 11.4 -6.5 -1.4 2.6 3.5 3.8 4.0 4.2 4.0 LatAm 4.3 4.5 2.6 2.2 2.7 2.0 1.9 3.8 2.1 4.4 0.6 2.9 3.1 3.2 3.0 3.1 Brazil 3.2 2.6 -0.3 0.2 0.7 0.4 1.5 3.1 2.6 6.0 -1.0 1.9 2.4 2.9 2.9 2.6 Colombia 6.7 7.9 5.8 6.0 3.7 2.8 -0.1 6.9 1.2 8.9 2.0 4.5 4.5 4.7 5.0 4.5 Mexico 1.5 5.3 6.1 3.1 2.6 6.2 1.1 3.0 0.1 -2.9 3.1 4.6 4.0 3.2 3.5 3.6 Czech Rep. 3.0 0.7 -0.2 0.1 -2.0 -1.9 -1.2 -1.4 -5.1 2.5 2.6 2.0 1.4 1.8 1.3 1.4 Hungary 5.7 -1.2 -0.1 0.8 -5.8 -2.0 0.0 -2.1 2.3 0.3 2.7 2.5 2.0 2.0 1.8 2.0 Poland 4.5 5.3 3.2 3.6 1.2 0.0 1.6 0.4 0.8 1.6 3.5 2.5 2.5 2.5 3.0 3.0 Russia 2.5 3.7 7.4 5.8 2.3 2.5 2.0 1.2 0.9 1.0 2.0 3.0 2.0 2.0 2.5 2.7 South Africa 4.8 1.9 1.9 3.3 2.5 3.4 1.2 2.1 0.9 3.0 0.8 3.9 3.6 3.3 3.7 3.7 Turkey 14.2 0.1 3.4 3.2 -1.6 5.9 0.9 0.8 6.0 8.5 0.0 0.4 2.8 6.1 7.0 7.0 United States -1.3 3.2 1.4 4.9 3.7 1.2 2.8 0.1 1.1 2.5 2.8 1.5 2.5 2.5 3.0 3.0 Euro area 3.1 0.3 0.3 -0.8 -0.4 -1.2 -0.5 -2.0 -0.9 1.1 0.4 1.0 1.5 1.5 1.5 1.5 Japan -7.6 -3.4 10.7 1.4 5.0 -1.2 -3.5 1.1 4.1 3.8 1.5 3.8 4.0 -4.5 1.2 1.7 Australia -1.9 5.0 4.9 2.6 5.4 1.9 3.2 2.7 2.2 2.4 1.9 1.7 2.7 3.4 3.6 3.9 Hong Kong 11.2 -1.6 0.8 2.0 1.2 -0.4 4.5 5.7 0.8 3.2 3.8 4.0 2.0 3.5 3.5 4.0 Singapore 17.5 -2.9 3.4 -2.3 7.8 0.1 -4.6 3.3 1.7 15.5 -0.8 4.5 3.4 3.4 3.4 3.4 Source: J.P. Morgan economics. Note: Yellow slowdown, green recovery, red contraction

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The IMF article IV on China was a rude shock for the final bulls. As was the case in other Asian countries in the mid-90s, the economic miracle of opening a competitiveness ambitious workforce to global demand has matured into a leverage-driven growth model. Debt/GDP expanded by 50% in the last four years (see Figure 25). The augmented fiscal deficit was an alarming 10% of GDP (excluding the railway budget). Investors have voted. Asset-based businesses including banks are at distressed valuations. The few growth/ thematic sectors internet, pollution control and staples re-rated. We are left agreeing with the market.

We are concerned that inflation is rising as wage growth is decelerating. This is a poor combination for real consumption growth.

There remains a strange expectation that more rational capital allocation is consistent with growth above 7%. In our view, it is not. Talk of rebalancing is simply talk: the data is that 57% of growth in 3Q13 was driven by investment. This is disturbing. To defeat 19 months of PPI deflation (see Figure 26), less capex combined with capacity reduction is needed. But this would hit local government revenue as would land reform. Credible reform is expensive in a fiscally constrained country and could result in much slower headline growth. The high cost of reform may explain the lack of detail from the Third Party Plenum. The stock market is not the economy. Reform that leads to better capital allocation may prove more profitable for equity investors. We expect China to remain a narrow market of expensive thematic sectors with occasional cyclical rallies with mini-stimulus similar to 3Q13. This was the pattern for Japanese equities in the last two decades. The notable difference is that Chinese equities do not appear to be overvalued. We are UW on China as thematic growth stocks are crowded expensive trades and the cyclical peak was in 3Q13.

Industrial production in India is barely growing (2%oya in September). Despite a very weak economy, EPS growth in India is ahead of that of many markets (see page 22). Equity markets are not simply a reflection of the local economy. Export earnings and a corporate sector that assumes a difficult macro environment provides the condition for more resilient earnings. Policy expectations are understandably low ahead of the general election (see page 8). The Reserve Bank of India policies helped restore confidence. FX reserves are rising and the current account deficit narrowing. We are OW on IT, financials and metals in India, resulting in an OW on India within APxJ.

Figure 4: Rising investment share of GDP growth in China

Source: J.P. Morgan economics, Data until 3Q13

Figure 5: Chinese IT and staples performance relative to MSCI China

Source: Bloomberg, 11 November 2013.

Figure 6: China: Higher CPI and lower wage growth

Source: Bloomberg, 31 October 2013, Wage inflation data till 2Q13

Figure 7: Indian IP growth and market performance

Source: Bloomberg, 31 October 2013.

-20

0

20

40

60

80

2010 2011 2012 2013 2014

% ytd Total consumption expenditure

Gross fixed capital formation

Net export

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We are in a 'tapering time-out'. See page 10 for the uncomfortable journey to neutral monetary policy. Strangely the new goldilocks is slow US growth combined with a better Europe and Japan. This lukewarm US delays tapering in the US, while providing an external lift for EM exports to Europe and Japan. We doubt this environment will be sustained through 2014. J.P. Morgans estimate on the start of tapering was 2Q14; it is now 1Q14. The change was driven by one data point Octobers non-farm payroll. Those current account deficits (CAD) countries that use the tapering-time-out to promote pro-FDI policies and narrow their CAD will be less vulnerable when the time-out ends. The rest are likely to suffer from weaker currencies and asset prices. Be prepared to move ahead of the herd.

Tapering is just the start. The all-time low for 10-year US Treasuries was 1.39% on 24 July 2012. This years low was 1.63% in early May, after the BoJ announcement on QQE and a few weeks before the Feds tapering minutes. J.P. Morgan forecasts that we are now in a bond bear market. UST10-year yields of 5-6% would be consistent with pre-GFC neutral monetary policy. The two key forecasts are the first increase in the Fed fund target rate in 3Q15 and a 4Q14 UST10-year yield of 3.5%. Our global fixed income returns forecasts are +/-5%; little reward for unchartered territory. The journey to neutral policy is likely to be protracted and uncomfortable. Korean and Taiwanese financials are some of the few direct beneficiaries of higher interest rates. We are OW on Taiwan and Korea. These countries also benefit from current account surpluses.

Zero interest rates generated bubbles in Hong Kong and Singapore property. We forecast asset deflation. Policy designed to control prices has just increased market friction through high stamp duty. This is counter-productive as it impacts supply. Lower transaction volume typically leads to volatility. Our concern is that property prices gap down. Banks in Hong Kong proved resilient when property prices fell 70% from 1997 to 2003. Risk today is higher due to cross-border lending. Avoid real estate and banks in Hong Kong and Singapore. We are UW on Hong Kong and Singapore.

The dispersion in FX returns drove relative performance in 2013. FX risk is likely to be higher for expensive currencies. We are concerned about Indonesian Rupiah and the Australian dollar. J.P. Morgans end-2014 forecast for the IDR and AUD are 11,800 and 0.92 respectively. The combination of a weakening currency and higher interest rates drives our UW in Indonesia.

The core of this document is the contribution from our country and sector heads (see page 87 to156) plus 105 top picks and 62 stocks to avoid (see pages 171 to 519).

For more details on strategy please see: Politics: Horse race (page 8) Neutral monetary policy (page 10) Lessons from past bond market sell-off (page 11) EM underperforming DM by 40% (page 15) China discounting structural issues (page 16) Valuation: The extremes (page 17) EM credit growth not crunch (page 20) EM GDP correlated to Europe (page 21) For risks to our strategy (page 32) Figure 8: Volatile journey to neutral policy J.P. Morgan EM currency volatility index & US 5Y bond yield

Source: Bloomberg, J.P Morgan, 12 November 2013.

Table 4: Impact of FX on dollar returns in APxJ markets Year to date performance Country Market (US$) Market (lcy) Currency Australia 9.4 22.0 (11.7) Hong Kong 7.9 7.9 (0.0) Taiwan 5.8 7.8 (1.9) Malaysia 5.5 10.8 (4.7) Philippines 5.5 12.5 (6.3) APxJ 3.5 - Korea 2.3 2.4 (0.8) China 0.9 1.0 2.3 Thailand (2.0) 1.3 (3.2) India (10.4) 4.0 (13.7) Indonesia (17.2) (0.4) (15.9) Source: MSCI, Datastream, Bloomberg, 12 November 2013

Figure 9: Bubble about to burst? HK property price index

Source: HEOSA, June 2013.

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Politics: Horse race The key political events in Asia are: 1. India: May general elections

2. Indonesia: July presidential elections

India and Indonesia face similar challenges: slowing economic growth, governance issues, and the need for structural reforms.

India Key parties: 1. United Progressive Alliance (UPA) led by Indian

National Congress: The ruling coalition UPA did better than in the opinion polls in the last two elections. The governments pro-rural policies may have helped. The UPA is yet to announce its candidate for PM.

2. National Democratic Alliance (NDA) led by Bharatiya Janata Party (BJP): Recent opinion polls have the NDA in the lead. Mr Narendra Modi, the current Chief Minister of Gujarat, is a potential BJP PM candidate. GDP growth in Gujarat averaged 10% versus 8% median growth of states in India, from FY06 to FY12 (Source: CSO).

3. Third Front: Left Front, Bahujan Samaj Party (BSP), Biju Janata Dal (BJD), Telugu Desam Party (TDP), All India Anna Dravida Munnetra Kazhagam (AIADMK) and Janata Dal United (JDU) are some of the key parties in the Third Front alliance. The Third Front has no track record or well-defined policy priorities. But there have been some major policy developments in non-NDA, non-UPA coalition governments.

Five big state elections from 11 November to 4 December (Chattisgarh, Madhya Pradesh, Rajasthan, Mizoram and Delhi) will be viewed as a guide to the May election. The result of a recent opinion poll carried out for ET NOW was an increase in votes for the BJP at the expense of the UPA.

A ruling majority is 272 seats in the Lok Sabha. This is a challenge for all potential coalitions. The market and opinion polls track record in predicting the election is poor. Be careful if the market is discounting its desired outcome.

Table 5: Current parliamentary composition Party No. of Seats in Lok Sabha Indian National Congress (INC ) 204 Nationalist Congress Party (NCP ) 9 Rashtriya Lok Dal (RLD) 5 J&K National Conference (J&KNC ) 3 Others 6 UPA 227 Outside Support to UPA 50 Total Support 277 Bharatiya Janata Party (BJP) 117 Shiv Sena (SS) 11 Shiromani Akali Dal (SAD) 4 Others 3 NDA 135 Samajwadi Party (SP ) 22 Bahujan Samaj Party (BSP ) 21 Rashtriya Janata Dal (RJD ) 4 Janata Dal (Secular) 3 Janata Dal (United) (JD(U)) 20 Parliament Lower House 542 Source: loksabha.nic.in, J.P. Morgan.

Table 6: Parties currently governing the states in India State Name Ruling party

Andhra Pradesh Indian National Congress Arunachal Pradesh Indian National Congress Assam Indian National Congress Delhi Indian National Congress Haryana Indian National Congress Himachal Pradesh Indian National Congress Karnataka Indian National Congress Kerala Indian National Congress Maharashtra Indian National Congress Manipur Indian National Congress Meghalaya Indian National Congress Mizoram Indian National Congress Rajasthan Indian National Congress Uttarakhand Indian National Congress Chhattisgarh Bharatiya Janata Party Goa Bharatiya Janata Party Gujarat Bharatiya Janata Party Madhya Pradesh Bharatiya Janata Party Tamil Nadu All India Anna Dravida Munnetra Kazhagam Pondicherry All India N.R. Congress West Bengal All India Trinamool Congress Odisha Biju Janata Dal Tripura Communist Party of India (Marxist) Jammu and Kashmir Jammu & Kashmir National Conference Bihar Janata Dal (United) Jharkhand Jharkhand Mukti Morcha Nagaland Naga People's Front Uttar Pradesh Samajwadi Party Punjab Shiromani Akali Dal Sikkim Sikkim Democratic Front Source: J.P. Morgan. Note states with elections in italic and bold

8



Indonesia

Candidates for president will be announced after the parliamentary elections in early April. Parties or groups of parties that control at least 20% of the parliament or have 25% of the popular vote will be eligible to nominate a presidential candidate. We believe the stock market will react positively if Joko Widodo, the governor of Jakarta, is nominated. Below we list the leading parties in the current parliament and some of the potential presidential nominees:

1. Partai Demokrat: 21% of the current parliament, founded by current president SBY. By constitutional limits, SBY cannot stand for another term. PD has opted for a convention process to choose its next candidate. Ret. Gen. Edie Pramono, ex army chief of staff and brother in law of the current president, is among prominent convention candidates. According to recent surveys PD may lose many seats and could end up with 7-10% of the next parliament. This could make it difficult for it to nominate a candidate without an alliance with another party.

2. Golkar: 14.4% of the current parliament, founded by Soeharto, but targets getting over 20%. The Presidential candidate is Abu Rizal Bakrie, the party Chair. However he is polling at low levels in presidential preference polls (LIPI, CSIS April 2013), with weakness in Central and East Java surveys. His candidacy could be vulnerable to a leadership challenge if the party does well but his personal popularity does not improve. Other senior politicians from Golkar include former VP Jusuf Kalla.

3. PDI-P: 14.4% of the current parliament, but aims to get to more than 20%. This is the party led by former President Megawati Soekarnoputri, the daughter of Indonesias first President. She has been its presidential candidate in every election since 2000. The party has not officially announced its candidate, but the highly popular Jakarta Governor, Joko Widodo, a PDIP member, has been widely discussed as a contender. It is unlikely that PDIP will make an official decision until early next year. Other important party functionaries include Megawatis daughter, Puan Maharani.

4. Gerindra: Gerindra has 4.5% of the current parliament. Polls put the party at c11% currently. Its candidate is Prabowo Subianto, a former general, who is personally polling strongly among presidential aspirants, behind only Mr Widodo. The issue for Mr Prabowo would be to get through the nomination threshold. He needs to convince voters to go out and vote for Gerindra and then go out again to vote for him.

5. Hanura: Hanura is headed by former head of the Army Ret. General Wiranto, and has 3.6% of the current parliament. Its presidential candidate is Ret. Gen. Wiranto, with MNC group Taipan Hary Tanoesoedipto as his running mate. Current opinion polls suggest it is unlikely that the party will reach the nomination threshold, but it might look to exert leverage as a swing factor for another party making the nomination.

Table 7: 2014 election calendar Jan Feb Mar Turkey Local election Apr May June Indonesia India Parliamentary election General election South Africa Colombia General election Presidential election Hungary Parliamentary election Jul Aug Sep Indonesia Turkey Presidential election Presidential election Oct Nov Dec Brazil Poland Presidential election Local election Source: J.P. Morgan.

9



The uncomfortable journey to neutral monetary policyThe destination should be neutral policy. This assumes that the US economy has not entered a Japanese-style period of protracted deflation. Based on pre-GFC monetary policy, period from 1971 to 2007, neutral Fed Fund Target Rate (FDTR) is 4% and assuming an average yield curve the 10-year bond yield would be 5.7%. This destination is a long way from todays 0.125% FDTR and 2.5% bond yield.

In our view the US economy has recovered from the excess of the global financial crisis and that the bulk of the fiscal adjustment is behind us. J.P. Morgan estimates GDP growth in 2013 at 1.6%oya, but this was with a 1.4% fiscal drag. The estimate for fiscal drag in 2014 is 0.4%. It is likely to be concentrated in 1H14. In 2H14 GDP growth is forecast to be near trend at 3%. Based on the Case Shiller Index property prices are inflating. Job creation is slow, but is creation.

The May taper-tantrum was the start of the market speculation on exiting QE. In our view the amount of tapering is not important; rather it is the signaling of the exit from extraordinary monetary policy. The added complication is central banks use of forward guidance. We doubt the Fed intended to tighten monetary policy in May, but it did. It is experimenting. No central bank has exited QE. The challenge is to neutralize policy while minimizing bond volatility. We believe the Fed wishes to exit QE but will offset the impact by dovish guidance on the timing of the first Fed fund target rate increase. It is possible that the journey to neutral policy is characterized by a period of interest-rate stability punctuated by volatility driven by good economic data, i.e. recovery in corporate capex. With the position less bullish in bonds than after the announcement of QQE by the BoJ on 12 April 2013, volatility should be lower during the next period of isntability. Equities, particularly EM equities, are likely to decline during periods of interest-rate volatility.

Neutral policy results in a bond bear market. QE asset bubbles, e.g. Hong Kong and Singapore real estate, are likely to deflate. Investors are likely to switch from bonds to equities, although regulatory restrictions and anchoring on past performance will probably slow this switch. The QE leveraging tailwind for EM is gone. Carry bond markets are likely to struggle.

2016 or 2017 problem: some additional facts Average yield curve (US10Y FDTR): 1971 to date = 1.8% (ex inversion), 1.1% 1971 to 2007 = 1.7% (ex inversion), 0.9%

Average real rates FDTR minus PCE deflator 1971 to date = 2% (median 2.8%) 1971 to 2007 = 2.5%

JPM 2016 FDTR forecast 2.25% Neutral would normally be circa 4%

Figure 10: The curve and real yields (FDTR PCE deflator)

Source: Bloomberg, 30 October 2013

Table 8: US interest rate forecasts JPM Consensus 4Q13 1Q14 2Q14 3Q14 4Q13 1Q14 2Q14 3Q14

FDTR* 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 3M Libor 0.25 0.25 0.30 0.40 0.26 0.28 0.31 0.35 2Y treasury 0.35 0.45 0.55 0.65 0.45 0.52 0.63 0.77 5Y treasury 1.40 1.70 2.00 2.20 10Y treasury 2.60 2.85 3.10 3.30 2.80 2.98 3.14 3.27 30Y treasury 3.65 3.85 4.05 4.20 Source: J.P. Morgan forecasts, Bloomberg, *Federal Funds Target Rate (FDTR), Consensus forecasts not available for 5Y and 30Y benchmark yield.

Table 9: US deficit decomposition FY, % of GDP 2010 2011 2012 2013f 2014f Deficit -9.0 -8.7 -7.0 -4.0 -3.4 Automatic stabilizers -2.7 -2.6 -2.3 -2.5 -2.5 TARP and GSE's 0.8 0.2 -0.1 0.6 0.0 Structural deficit -7.1 -6.3 -4.6 -2.1 -0.9 Change in structural deficit 0.6 -0.8 -1.7 -2.5 -1.2 Thrust (+) Drag (-)* 0.4 -0.6 -1.2 -1.8 -0.8 Source: CBO, J.P. Morgan, *Assuming average 0.7 multiplie

10



Lessons from past bond market sell-off Kedran Panageas AC

2013 has been a difficult year for US fixed income assets. The US component of our Global Aggregate Bond Index (GABI) has returned -2.1% through September, and fixed income mutual funds have seen substantial outflows over recent months. In particular, bond funds saw a $60bn outflow in Junethe biggest monthly outflow in the history of the series (back to 1992)and another $60bn of outflows over July through September. The large magnitude of these outflows has led investors to wonder if these outflows are temporary or the start of a broader trendi.e. a great rotation. This begs the question, what is a great rotation?

First, we could consider a great rotation to be a sustained shift in flows out of fixed income mutual funds. For example, if we look back over the past 20 years, we can see that most of the time, 12-month flows into bond funds were positive (Figure 12). In particular, inflows into bond funds after the financial crisis and the onset of the Feds quantitative easing programs have been substantial relative to history: over 1993-2008, bond funds saw an average 12-month inflow of $39bn, but over 2009-2012, the average inflow rose to $181bn. However, there are three distinct periods when bond funds saw outflows1994-95, 1999-2000, and 2004and we can consider these periods to be periods of great rotation. Unsurprisingly, these periods coincide with Fed tightening cycles.

Alternatively, we could consider a great rotation to be a shift in allocations between equities and fixed income. For much of the 1990s, inflows into equity funds outpaced inflows into bond funds (Figure 11). As the Fed began easing in 2001, however, the balance shifted, and bond funds saw more inflows than equity funds. As the economy recovered in the middle of the 2000s, equity inflows again outpaced bond flows. Since the financial crisis and the onset of the Feds subsequent quantitative easing programs, however, flows into bond funds have substantially outpaced equity fund flows, though the balance appears to have shifted in recent months.

Figure 11: Mutual fund investors tend to chase returns, preferring equities to fixed income when S&P returns are higher than bond returns and vice-versa 1-yr flows into fixed income mutual funds* minus 1-yr flows into equity mutual funds versus 1-yr total return on J.P. Morgan Global Aggregate Bond Index minus 1-yr total return on S&P 500; $bn %

* Includes flows into investment grade, high yield, municipal, Treasury and MBS mutual funds. Source: Lipper FMI, J.P. Morgan

Figure 12: In the past, sustained outflows from bond funds coincided with Fed tightening periods 1-yr rolling sum of flows into fixed income mutual funds* versus Fed funds target rate; $bn % (inverted axis)

* Includes flows into investment grade, high yield, municipal, Treasury and MBS mutual funds. Source: Lipper FMI

11



Equity/bond allocations appear to be driven by returns. When equity returns outpaced bond returns, retail investors preferred equity funds to bond funds and vice-versa. Interestingly, the 1999-2000 period and 2004 periods of negative bond fund flows coincide with periods when investors most preferred equities to fixed income, but this preference was not so apparent in 1994-1995. In the current cycle, with bonds underperforming equities, bond funds seeing outflows, and inflows into equities outpacing those into bond funds, we do appear to be at the beginning of a great rotationat least by retail investorsbut it is too soon to tell if it will be sustained.

Past sell-offs began with the Fed tightening

The Treasury market sell-offs in 1987, 1994, 1999 and 2004 were all sparked by the beginning of a Fed tightening cycle, but each of these cycles were unique. The 1994-95 tightening cycle was especially aggressive: the Fed doubled the Fed funds ratefrom 3% to 6% over 12 months, and this tightening came after an extended 17-month on-hold period (Figure 13). The sizes of the rate increases were generally large: the Fed raised rates six times in total, including two 50bp increases and one 75bp tightening. In contrast, the pace of tightening in 1999 and 2004 was much more gradual: in 1999 and 2004, the Fed tightened by approximately 50bp per quarter, well below the 74bp per quarter rate seen during the 1994 period. Meanwhile, the 1987 episode is somewhat unique: the Fed began tightening after a relatively short period of just six months on hold, and the tightening cycle lasted just 7 months. However, in this short horizon, the Fed managed to raise the Fed funds rate by 150bp, second only to the 1994 episode for the aggressive pace of tightening.

Figure 13: The bond market sell-offs in 1987, 1994, 1999 and 2004 were driven by Fed tightening, but these cycles were distinctly different Details around the 1987, 1994, 1999 and 2004 Fed tightening cycles

Given that the pace of tightening in each of these periods was different, the markets reaction was quite different as well. Figure 4 shows the cumulative change in 10-yr yields from six months before the first tightening in February 1987, February 1994, June 1999 and June 2004, until six months after. In 1987 and 1994, 10-yr Treasury yields rose only modestly in the months leading up to the first tightening, and then reacted severely, rising almost 200bp in the six months following the first rate hikes. Meanwhile, in 1999, 10-yr yields rose more than 100bp in the six months leading up to the first tightening, but then rose 55bp in the following six months. Finally, in 2004, 10-yr yields rose more than 50bp in anticipation of the first Fed tightening, but then steadily rallied once the Fed began to raise rates.

Figure 14: in 1987, 1994 and 1999, yields rose in reaction to the first tightening, while in 2004, yields rose in anticipation of Fed tightening Cumulative changes in 10-yr Treasury yields from 6 months before the first Fed tightening until 6 months after*;bp

* Vertical line denotes first Fed tightening on February 11, 1987, February 4, 1994, June 30, 1999 and June 30, 2004

Aside from the varying pace of Fed tightening, market expectations and foreign investor demand offer insights on the degree of yield behavior. First, in 1994, the tightening took the market by surprise: just weeks before the first rate hike, Fed funds futures markets were pricing in only 25bp of tightening in the following three FOMC meetings, while in 2004, the market had already priced in more than 75bp of tightening over the following three meetings. Meanwhile, in 1999, the market was pricing in just 25bp of tightening in the month leading up to the first rate hike, but rates had already begun to rise as the volatility stemming from the 1998 financial crisis subsided. Finally, the muted response of long-term yields to the 2004-2006 tightening cycle was characterized by then-FOMC Chairman Greenspan as a conundrum. In this period, foreign central banks began to grow their dollar reserves

1987 1994 1999 2004Last easing Aug-86 Sep-92 Nov-98 Jun-03First tightening Feb-87 Feb-94 Jun-99 Jun-04Last tightening Sep-87 Feb-95 May-00 Jun-06

On hold period (months) 6 17 8 12Tightening period (months) 7 12 11 24

Starting FF rate 5.875% 3.00% 4.75% 1.00%Ending FF rate 7.375% 6.00% 6.50% 5.25%

Cumulative FF chg (bp) 150 300 175 425

Avg tightening/quarter (bp) 66 74 49 52

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substantially: in 2004, foreign central banks accumulated $20bn Treasuries per month on average, more than twice the rate observed in 2003 and more than four times the rate observed in 2002. This strong demand from foreign investors likely helped depress bond yields after the onset of the tightening cycle.

Looking beyond Treasuries, it is also useful to examine how other fixed income sectors performed in past great rotation periods. However, given data limitations, we will focus only on the 2004 cycle. Figure 15 presents the total returns for a variety of asset classes over 2Q04, when the bulk of the increase in yields occurred. Higher-duration sectors, such as emerging market sovereigns and Treasuries, generally underperformed on a total return basis, while the lower-duration sectors like MBS and high yield outperformed. On a spread basis, emerging markets clearly underperformed, with spreads widening 68bp over 2Q04, while high yield spreads actually tightened 50bp (Figure 16). In contrast, spreads on Agencies, high grade, and MBS were close to unchanged over this period.

Figure 15: In the 2004 sell-off, EM performed the worst, while high yield performed the best, both on a total return basis Index duration as of the end of March 2004, monthly total returns, and total return over 2Q04

Figure 16: and on a spread basis Monthly changes in index spread* and cumulative change over 2Q04; bp

* For MBS, this is the Libor OAS spread; for all others, it is a spread to Treasuries.

This summer, we saw a similar pattern play out on a total return basis. Underperformance was driven by the higher-duration sections like emerging markets and high grade once again (Figure 17). In addition, given that the average duration across sectors is generally higher than in 2004, total returns were more negative than in 2004. On a spread basis, however, the current cycle looks considerably different: both emerging market and high yield spreads widened significantly, while spread widening across the other sectors was more muted (Figure 8).

Figure 17: In this years sell-off, EM also underperformed the most, while high yield performed the best Index duration as of the end of April 2013, monthly total returns, and total return over May-August 2013

Figure 18: but both EM and high yield underperformed on a spread basis, with spreads widening across all sectors Monthly changes in index spread* and cumulative change over May-August 2013; bp

* For MBS, this is the Libor OAS spread; for all others, it is a spread to Treasuries.

Tightening cycles have accompanied significant changes to the Feds communication policies

Fed communication has evolved since the FOMC first began the practice of issuing statements after its meetings during the 1994-95 tightening cycle. It first announced the outcome of a meeting in February 1994, when it first raised rates in that cycle, and the statement noted Chairman Greenspan decided to announce this action immediately so as to avoid any misunderstanding of the Committees purposes, given the fact that this is the first firming of reserve market conditions by the Committee since early 1989. After the last tightening in the cycle in February 1995, the Committee indicated in the minutes that it would immediately communicate all changes in the stance of monetary policy through a press release, though it would not necessarily issue a statement if no policy change was made. In January 2000, in the middle of the 1999-2000 tightening cycle, the Fed announced that it would issue a statement after every regularly scheduled meeting, regardless of whether a policy change had been made or not. In December 2004, in the middle of the 2004-2006 tightening cycle, the Fed changed the release schedule for FOMC meeting minutes. From February 1993 until that date, the minutes for a given meeting had been published about 3 days after the subsequent meeting. Starting in December 2004, however, the minutes were released 3 weeks after the meeting.

Apr 04 May 04 Jun 04 2Q cumEM 5.8 -5.4% -1.5% 1.5% -5.5%Tsy 5.8 -3.4% -0.4% 0.4% -3.3%Agy 4.1 -2.8% -0.5% 0.4% -2.9%IG 6.2 -2.9% -0.5% 0.6% -2.9%MBS 2.6 -1.8% -0.2% 0.9% -1.2%HY 3.8 -0.2% -1.5% 1.5% -0.3%GABI 4.3 -2.7% -0.4% 0.6% -2.5%

Mar 04 dur'n (yrs)

Total returns over:

Apr 04 May 04 Jun 04 2Q04 cumEM 53 26 -11 68Agy 1 6 -2 5IG -4 7 -1 2MBS 4 -1 -4 -1HY -59 31 -22 -50

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In recent years, although we have not been in a tightening cycle, several additional changes have been made to improve transparency under Chairman Bernankes tenure. First, in October 2007, the FOMC began releasing the Summary of Economic Projections (SEP) produced by the FOMC meeting participants in the meeting minutes. Second, in April 2011, the Chairman began holding post-meeting press conferences after selected FOMC meetings. At these meetings, an advance version of the SEP is released in conjunction with the press conference.

In addition to changing the Feds communication policies, the Bernanke Fed has also expanded the FOMCs monetary policy toolbox. Since 2008, the Fed has initiated several rounds of large-scale asset purchases (LSAP), as detailed in Figure 19. Since 2011, the Fed has also included guidance on the future stance of monetary policy, first by forecasting how long it would stay on hold (calendar guidance) and then by introducing explicit macroeconomic scenarios (thresholds) that would determine how long the Fed would stay on hold (Figure 20).

Figure 19: Summary of the Federal Reserves large-scale asset programs

Figure 20: Summary of the Federal Reserves forward guidance

Announced Program Name Description11/25/2008 QE1 Announced it will purchase up to $100bn of Agency debt and up to $500bn of Agency MBS3/18/2009 QE1 Increased purchases to $200bn of Agency debt, $1250bn of Agency MBS, and $300bn of Treasuries8/10/2010 Announced it will reinvest matured Agency debt/MBS into Tresauries11/3/2010 QE2 Announced it will purchase $60bbn Treasuries by end of 2H119/21/2011 Operation Twist Announced it will sell $400bn of front-end Treasuries and buy longer-maturity Treasuries through 2H126/20/2012 Twist 2.0 Extended Operation Twist through end of 2012 (approx imately $267bn of purchases/sales)9/13/2012 QE3 (open-ended) Announced it would purchase $40bn of Agency MBS per month12/12/2012 QE3 (open-ended) Announced it would also purchase $45bn of Treasuries per month

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How emerging markets underperformed developed by 40%

From its relative high in 2010 MSCI EM has underperformed DM by circa 40% (see Figure 21). Partly this is a function of low DM expectations in 2010; US fiscal challenge, questions on EU solvency and Japan off-the radar screen. These all improved. While in EM there were four phases of deteriorating fundamentals:

2011: Policy makers fighting inflation EM policy after the GFC was too simulative. This combined with strong commodity demand from China, poor harvests globally, and QE2 drove inflation. All policy makers, except in Indonesia and Australia, tightened. Higher interest rate and lower growth resulted in the usual P/E derating.

2012: Lower potential GDP growth in the BRICs Investors woke up to the decline in potential GDP in the BRIC countries. In India, J.P. Morgan economists forecasts potential growth falling to 6%-6.5% from the 2003-07 average of 8%-8.5% underpinned by declining corporate investment (Indias falling potential growth). In China, our economists forecasts growth to average 8.3% in 2013-15 and 6.6% in 2016-20, compared to average growth of 10.4% in 2001-2011 (Chinas growth trend to slow below 7%). In Brazil, our economists downgraded expectations of potential GDP growth between 3.0%-3.5%, down from 3.5%-4.0% (Brazil: Reality Bites - revising GDP down and inflation up for 2014). Recently, Russia cut its long-term growth forecast to 2.5% to 2030, down from 4.3% in April (Source: Financial Times).

2013: Cyclical weak 1H13 EM equities 2013 peak was on 3 January. They correctly signaled a deceleration in 1H13 growth. Weaker US economic growth due to higher-than-forecast fiscal drag hit exports. Malaysia disappointed as the May general election delayed investment. In Thailand aggressive pro-consumption policies boosted 2012 demand at the expense of 2013. The planned boost from investments did not occur due to political delays on project approval.

2013: Tapering fears and IMF article IV FED minutes for the 30 April meeting released on 22 May which referred to tapering bond purchase led to EM sell off. Current account deficit markets bore the brunt of declines. The IMF article IV discussion on China released on 17 July 2013 estimated that Debt/GDP expanded by 50% in the past four years, with the corresponding estimate of an augmented fiscal deficit in the order of 14% of GDP in 2012.

Figure 21: Pricing in poorer fundamentals: EM relative to DM

Source: Bloomberg, 14 November 2013

Figure 22: EM 12M fwd P/E (Inverted) and inflation: P/E de-rating impact of higher inflation in 2011

Source: IBES, MSCI, Datastream, J.P. Morgan

Figure 23: GDP growth (actual and forecast, %oya)

Source: J.P. Morgan economics, Shaded area indicates forecasts, J.P. Morgan forecasts for 2013 and 2014 GDP growth.

Figure 24: EM CAD market weakness post 22 May

Source: Bloomberg, 5 November 2013, MSCI country indices in US dollars. The black line is centered on 22 May 2013 when FED minutes for the 30 April meeting were released

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China: The market discounting structural issues

Economic growth is now debt-dependent. Total social financing increased from 126% of GDP at year-end 2007 to c200% of GDP in 3Q13 (see Figure 25). This year we forecast 22% growth in TSF with just 9% nominal GDP growth. Debt to GDP continues to expand.

The country is fiscally challenged. The IMF calculates the augmented fiscal deficit at 10% of GDP in 2012 (excluding railroads). Local government financing is weak. Their dependence on revenue from property sales is high. The property bubble continues to inflate. Housing prices are up more than 10% in most cities. This increases financial risks.

Since 2010 the market has been adjusting to pricing in the structural issues (see Figure 27). Asset-based business, including banks and property, de-rated as debt to GDP increased as did FAI-dependent businesses. Those sectors offering thematic long-term growth re-rated; internet, staples and pollution control. We think the market is correctly pricing in the risks to the growth model.

Figure 25: China credit to GDP ratio (%)

Source: J.P. Morgan, September 2013

Figure 26: China: Longest period of PPI deflation (%oya)

Source: Bloomberg, September 2013

Figure 27: Pricing in structural problems: P/E and P/BV relative to 10-year average

Source: MSCI, IBES, Datastream, Note: CS = Consumer Staples, IT = Information Technology, EES=Energy Equipment and Services, CSS = Commercial Services & supplies, TR= Transportation, HC = Healthcare, M= Materials, TE = Telecom, CD= Consumer discretionary, UT= Utilities, EN= Energy, OG= Oil, gas and consumer fuels, ID= Industrials, CG= Capital goods, RE= Real estate, DF= Diversified financials, IN= Insurance, FN= Financials, BA= Banks Red, green and black markers are for financial, energy and industrial subsectors respectively

100

120

140

160

180

200

02 04 06 08 10 12 14

Total social financing

Bank loans

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Valuation: The extremes The analysis is the current valuation of stocks, sectors and regions versus their 10-year average P/E and P/BV. There are diverging trends. This is best demonstrated by scatter charts for China (see Figure 27) and India. Staples are at a significant premium. Our forecast is for growth to broaden in 2014. We think confidence in global growth will lead to compression in premium valuation of staples (see Figure 28). Unilever Indonesia, Colgate Palmolive (India), Big C Supercenter and Hindustan Unilever are expensive and in our stocks-to-avoid list.

There is potentially value in cyclical stocks that are expensive on forward P/E but cheap on P/BV if margins are at their cyclical lows (see Table 14). Tata Steel and Hiwin Technology current margins are in the third quartile (fourth quartile is lowest margin).

Chinese equities are pricing a problem with its economic growth model. FAI sectors (banks, materials, construction) and insurance are cheap versus their history. As noted earlier we think this is justified. Our advice on banks is to trade at P/BV range of 1x-1.4x.

For India, J.P. Morgan economists forecast 2013 GDP growth of just 4.1%oya.The problem, in our view, is more cyclical than structural. Banks, diversified financials, and capital goods are cheap (see Figure 29). Materials are cheap on a P/BV basis. From these, ICICI Bank and Tata Steel are our top picks.

We like the Philippines but believe that valuations discount the strong fundamentals.

Table 10: Top 10 expensive and cheap sectors in APxJ Sectors 12 M Trailing Prem/Disc avg. 10Y Fwd PE PB fwd PE PB Expensive Sectors

Thailand Ind. 22.8 3.5 107 211 Thailand Telecom 22.9 16.8 54 147 Philippines CS 26.3 5.6 26 193 Thailand CS 21.7 4.4 57 40 Thailand CD 22.3 7.7 31 51 Philippines Ind. 17.9 3.2 26 71 China CS 24.6 3.8 49 29 India Telecom 25.4 2.0 66 18 Thailand Utilities 12.4 2.6 24 48 Indonesia CS 20.3 4.9 30 22 Cheap Sectors

Singapore CS 11.9 0.9 (24) (63) India Cap Goods 12.9 1.6 (23) (62) China Insurance 12.6 1.9 (38) (43) India Oil & Gas 9.9 1.4 (18) (44) India Utilities 10.7 1.2 (22) (41) India Div. Fin. 9.1 1.5 (43) (33) China Real Estate 7.5 1.2 (32) (33) China Materials 10.5 1.1 (8) (45) Australia Oil & Gas 16.3 1.5 (9) (42) China Cap Goods 10.0 1.1 (22) (31)

Source: MSCI, IBES, Datastream, 4 November 2013. Note: We have excluded sectors which had only one stock as their constituent. We have also excluded sectors which have a dividend yield > 3% (average APxJ div yield).

Figure 28: Staples Prem/ Disc. vs. GDP growth (inverted)

Source: J.P. Morgan economics. Note: 3-year rolling GDP calculated using qoq saar data.

Figure 29: India Premium/ Disc. to 10-year average P/E and P/BV

Source: MSCI, IBES, Datastream. Red, green and black markers are for financial, energy and industrial subsectors respectively. Source: MSCI, IBES, Datastream. CS = Consumer Staples, IT = Information Technology, EES=Energy Equipment and Services, CSS = Commercial Services & supplies, TR= Transportation, HC = Healthcare, M= Materials, TE = Telecom, CD= Consumer discretionary, UT= Utilities, EN= Energy, OG= Oil, gas and consumer fuels, ID= Industrials, CG= Capital goods, RE= Real estate, DF= Diversified financials, IN= Insurance, FN= Financials, BA= Banks

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Table 11: APxJ sector valuation

Sector PE PB % Prem/Disc from 10 Y

avg.

13E 14E 13E 14E Fwd. PE PB

Staples 21.8 19.4 2.8 2.6 21 (5) Materials 15.8 12.9 1.6 1.5 19 (32) Health Care 25.1 21.5 4.5 4.1 10 18 Telecom 14.5 13.8 2.2 2.0 10 (10) Industrials 17.7 14.1 1.4 1.3 7 (24) Utilities 15.7 13.4 1.5 1.4 (0) (3) Cons. Disc. 13.0 11.4 2.0 1.8 (4) (6) Energy 11.6 10.5 1.4 1.3 (6) (43) Financials 12.0 11.0 1.4 1.3 (11) (22) Info Tech 12.0 10.7 2.1 1.8 (17) (14) APxJ 13.4 12.0 1.6 1.5 (3) (20) Source: MSCI, IBES, Datastream, J.P. Morgan. 4 November 2013

Table 12: APxJ country valuation

Country PE PB % Prem/Disc from 10 Y

avg.

13E 14E 13E 14E Fwd. PE PB

Philippines 20.4 18.9 3.2 2.9 36 40 Indonesia 15.6 13.6 3.1 2.8 17 (3) Thailand 13.5 11.8 2.2 1.9 15 8 Australia 15.3 14.1 2.0 1.9 11 (4) Malaysia 16.8 15.5 2.2 2.0 11 8 Taiwan 15.6 14.2 1.8 1.7 4 0 Singapore 15.0 13.8 1.4 1.4 1 (15) India 16.0 13.7 2.5 2.2 (3) (25) Hong Kong 16.4 15.0 1.3 1.3 (3) (14) Korea 10.6 8.8 1.2 1.1 (4) (22) China 9.8 8.9 1.4 1.3 (24) (33) Source: MSCI, IBES, Datastream, J.P. Morgan. 4 November 2013

Table 13: APxJ hindsight (country sector) valuations Index

Value Market Value P/E P/E (x) P/BV (x)

Prem/Disc from 10Y avg EPS Growth DY (%) RoE (%)

MSCI Sector LC US$mn

12M Fwd 13E 14E 13E 14E

FWD P/E P/BV 13E 14E 13E 13E

Taiwan Materials 221 53 20.3 22.5 19.8 1.7 1.7 62 (3) 85 14 2.9 7.5 China CS 1346 44 24.6 28.6 23.9 3.8 3.5 49 29 1 20 1.6 13.4 China IT 218 68 26.7 33.8 25.5 6.1 5.0 44 72 59 33 0.6 18.0 Korea Materials 537 58 11.7 15.7 11.1 1.0 0.9 42 (27) (13) 41 1.5 6.3 Korea Industrials 191 72 13.4 22.7 12.4 1.1 1.0 32 (29) (31) 84 1.1 5.0 Australia Industrials 113 53 20.2 21.4 18.2 2.2 2.1 16 8 2 17 3.5 10.3 Hong Kong CD 375 62 19.5 22.9 19.0 4.5 4.0 16 20 19 21 2.5 19.6 Australia Materials 391 194 12.9 13.5 12.2 2.1 1.9 8 (28) 15 11 3.2 15.2 Australia CS 286 94 17.6 18.1 16.7 2.5 2.4 8 (8) 5 9 4.4 14.0 Singapore Industrials 263 42 14.1 15.3 13.8 1.6 1.5 7 (18) (10) 11 3.9 10.3 Hong Kong Utilities 275 44 15.9 16.8 15.7 2.2 2.0 6 (9) 4 7 3.4 12.8 China CD 235 41 12.5 14.4 12.2 2.2 2.0 (8) (6) 25 19 1.8 15.5 India IT 1000 49 17.2 19.3 16.3 4.9 4.1 (8) (18) 19 19 1.5 25.5 Australia Energy 392 61 16.2 18.3 15.3 1.5 1.5 (9) (42) (1) 19 4.2 8.4 Korea CD 2133 108 7.8 8.6 7.7 1.4 1.2 (10) (12) 8 12 0.8 16.0 China Energy 665 108 8.9 9.3 8.8 1.2 1.1 (12) (42) (1) 6 3.8 13.2 China Industrials 130 45 11.6 12.9 11.3 1.2 1.1 (13) (32) 10 14 2.5 9.1 China Telecom 133 79 11.2 11.2 11.2 1.4 1.4 (14) (41) 2 0 3.8 12.9 Taiwan IT 131 233 13.2 14.3 13.0 1.9 1.8 (14) (4) 37 11 3.1 13.4 India Energy 1147 29 9.9 10.6 9.5 1.4 1.3 (18) (44) 1 12 2.1 13.6 Hong Kong Industrials 193 40 13.1 15.0 12.8 1.0 0.9 (19) (5) 8 17 2.3 6.5 Korea IT 765 231 7.6 8.3 7.5 1.6 1.4 (31) (23) 34 10 0.5 19.8 Australia Financials 161 546 14.2 14.5 13.7 1.8 1.8 13 6 6 6 5 13 Taiwan Financials 86 78 13.0 13.3 12.9 1.3 1.2 (8) (7) 18 3 2 10 Singapore Financials 191 105 13.5 14.4 13.3 1.3 1.2 (4) (12) (1) 8 3 9 India Financials 4548 57 13.5 15.0 12.6 2.2 2.0 (14) (19) 10 19 2 15 Hong Kong Financials 330 224 14.5 15.4 14.5 1.1 1.0 (7) (20) 9 6 3 7 Korea Financials 224 83 10.3 12.3 10.0 0.8 0.7 18 (37) (22) 23 2 6 China Financials 443 289 6.4 6.8 6.3 1.1 1.0 (52) (46) 12 9 4 17 APxJ 484 4,029 12.1 13.4 12.0 1.6 1.5 (3) (15) 8 12 3.0 12.2 Source: MSCI, IBES, Datastream, 4 November 2013. Note: Table sorted by premium/discount to 10-year average P/E. For financials, we sort by premium/discount to 10-year average price to book

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Table 14: 40 cheapest (based on price to book) cyclical stocks in APxJ

Stock BBG Code Country Sector Reco

FF Mcap (US$bn)

12M fwd PE

Trailing PB

Prem/Disc from 10 y av. Fwd. PE PB

3M return YTD

*Quartile for OP. Margins

Htc Corp 2498 TT Taiwan IT UW 3.7 240.3 1.5 122 (80) 8 (50) 4th Acer Inc 2353 TT Taiwan IT UW 1.6 70.4 0.7 378 (61) (15) (28) 4th Oci Co Ltd 010060 KS S.Korea Materials NC 3.0 37.5 1.6 206 (54) 19 16 4th Samsung Engineer 028050 KS S.Korea Industrials UW 2.1 34.5 2.1 183 (65) (8) (55) 4th U-Ming Marine 2606 TT Taiwan Industrials N 0.7 35.8 1.7 171 (19) 10 6 4th Feng Hsin Iron 2015 TT Taiwan Materials NC 0.8 23.1 2.1 109 (1) 3 2 4th Hanwha Chem 009830 KS S.Korea Materials UW 1.8 15.2 0.8 106 (9) 26 25 4th Irpc Pcl IRPC TB Thailand Energy NC 1.1 21.4 1.0 81 (12) 6 (20) 4th China Steel Corp 2002 TT Taiwan Materials N 10.0 21.6 1.4 62 (22) 2 (7) 4th Orient Overseas 316 HK Hong Kong Industrials OW 1.1 12.6 0.7 60 (31) (8) (19) 4th Formosa Petroche 6505 TT Taiwan Energy NR 3.1 27.4 3.3 58 (7) 0 (10) 4th Formosa Plastic 1301 TT Taiwan Materials NR 10.9 19.2 2.0 57 (3) 1 1 4th Lotte Chemical C 011170 KS S.Korea Materials UW 3.3 12.1 1.2 55 (8) 24 (15) 4th Yanzhou Coal-H 1171 HK China Energy UW 2.0 15.6 0.8 55 (63) 48 (38) 4th Mmc Corp Bhd MMC MK Malaysia Industrials NR 0.6 22.5 1.2 50 (5) 4 (1) 4th Tabcorp Hldgs TAH AU Australia CD OW 2.5 18.3 1.9 49 (6) 14 6 4th Tsrc Corp 2103 TT Taiwan Materials UW 1.1 13.8 2.8 46 (2) 1 (10) 4th Shangri-La Asia 69 HK Hong Kong CD NC 2.9 33.6 0.9 43 (31) 15 (8) 4th Hyundai Steel 004020 KS S.Korea Materials OW 4.6 11.0 0.8 42 (25) 27 1 4th Lcy Chemical Cor 1704 TT Taiwan Materials NC 0.7 18.0 1.4 40 (22) (2) 4 4th Powertech Techno 6239 TT Taiwan IT NC 1.0 12.1 1.2 39 (53) (17) (3) 4th Doosan Infracore 042670 KS S.Korea Industrials N 1.4 17.2 1.0 38 (59) 18 (14) 4th Korea Zinc Co 010130 KS S.Korea Materials NC 2.5 10.4 1.4 38 (12) 14 (23) 4th Au Optronics Cor 2409 TT Taiwan IT UW 2.8 16.4 0.6 35 (56) (13) (28) 4th Indorama Venture IVL TB Thailand Materials OW 1.1 17.4 2.1 35 (39) 32 (10) 4th Posco 005490 KS S.Korea Materials N 19.5 10.4 0.6 33 (48) 0 (9) 4th Qantas Airways QAN AU Australia Industrials UW 1.3 33.5 0.5 219 (53) 5 (24) 3rd Hyundai Heavy 009540 KS S.Korea Industrials N 10.1 20.1 0.9 133 (56) 27 7 3rd Unimicron Techno 3037 TT Taiwan IT N 1.0 15.4 0.8 58 (46) (10) (28) 3rd Siemens Ltd SIEM IN India Industrials UW 0.7 37.2 5.0 50 (45) 29 (22) 3rd Jsw Steel Ltd JSTL IN India Materials OW 1.2 10.9 1.1 45 (35) 59 (6) 3rd Boral Ltd BLD AU Australia Materials N 3.6 20.4 1.2 43 (11) 21 2 3rd Tata Steel Ltd TATA IN India Materials OW 1.6 10.5 1.0 41 (60) 65 (30) 3rd Ambuja Cements ACEM IN India Materials UW 2.1 20.1 3.3 38 (15) 9 (17) 3rd Hiwin Technologi 2049 TT Taiwan Industrials OW 1.4 21.6 6.0 36 (9) 24 7 3rd Evergreen Marine 2603 TT Taiwan Industrials OW 1.0 39.4 1.1 155 (6) 4 (3) 2nd Kcc Corp 002380 KS S.Korea Industrials NC 1.8 19.2 0.8 45 (4) 24 40 2nd Guangzhou Auto 2238 HK China CD OW 2.8 12.2 1.4 33 (44) 27 41 2nd Ultratech Cement UTCEM IN India Materials UW 1.1 19.7 3.5 33 (20) 8 (13) 2nd Naver Corp 035420 KS S.Korea IT OW 15.4 28.2 7.4 46 (17) 72 112 1st Source: MSCI, IBES, Datastream, Bloomberg, J.P. Morgan 4 November 2013. NC= not covered. * The stocks whose operating margins are at lowest are highlighted in green and marked as 4th quartile. The analysis for each stocks is done with respect to its historical operating margins.

19



EM credit growth not crunch Expectation of credit crunch Capital flows to EM changed in May. The threat of FED tapering drove up bond yields globally (see Figure 31). EM fixed income flows reversed. India, Brazil and Indonesia increased interest rates to defend their currencies. We and the market feared a credit crunch in EM.

EM credit growth little changed post May The banking system in EM proved resilient. Post May credit growth is in-line with pre-May credit growth. Loan growth is particularly strong in Turkey, Indonesia, Russia, India and Brazil. In Korea and Taiwan loan growth is sub 5%, its normal trend. Corporate lending (India: +16%oya, Indonesia: +29%oya) is impressive. Following factors are supporting this growth:

FAI/GDP in South Asia is at the highest level since the Asian crisis (see Figure 32).

ASEAN central banks reduced sterilization operations to support base money.

Indonesia FX reverses increased by US$4 billion from July end. Chinas FX reserves have increased by US$348 billion YTD.

Indias narrowing trade deficit, good monsoon and pick-up in external demand.

Delay in QE tapering. Our forecast for tapering is that it will start in April 2014.

(For more please read Asia Banks & Credit Supply: Subtle Shifts in Monthly Data for North & South Asia, Klaczek et al., 17 October 2013)

Figure 30: China: FX reserves give flexibility to sustain credit supply

Source: CEIC

Figure 31: Tighter world: EM bond yields rose sharply

Source: Bloomberg, J.P. Morgan, 10 November 2013 Figure 32: ASEAN: Falling rates boost construction capex

Source: CEIC

Figure 33: EM loan growth and forecasts EM Countries 2010 2011 2012 2013* 2014E**

Turkey 34% 28% 16% 28% 14% Indonesia 22% 23% 24% 21% 17% Russia 12% 30% 18% 21% 12% Hong Kong 29% 20% 10% 17% 7% Brazil 21% 19% 16% 16%

India 27% 16% 15% 16% 19% Singapore 13% 24% 10% 15% 11% China 20% 14% 15% 14% 12% Philippines 9% 19% 16% 14% 23% Thailand 15% 8% 19% 12% 10% Mexico 9% 16% 11% 10%

Malaysia 13% 14% 10% 9% 14% South Africa 4% 5% 11% 7% 8% Taiwan 16% 20% 13% 6% 6% Australia 6% 6% 5% 5% 4% Korea 3% 7% 2% 3% 4% Source: CEIC, J.P. Morgan estimates. *The credit growth data is for August 2013. For China, Russia and South Africa it is for September 2013 and for Mexico it is 2Q 13.** The forecast is done using bottom up approach for JP Morgan covered banks in each country. The table is sorted by 2013 credit growth.

20



EM GDP more correlated to Europe than the US

Europe exited a protracted recession in 2H13. This is good news for the bulk of the EM countries whose economic growth is more correlated to Europe than the US or Japan. The current conditions of OK European growth and below-forecast US data are particularly favorable for EM. Poor US data justifies a protracted tapering time-out. Good European growth is good for EM exports. This may last through 1Q14 assuming that a repeat of the debt ceiling debate in January impact US growth.

Methodology Calculate regression coefficient of quarterly GDP

growth (%q/q saar) for each EM country vs. US, Japan and EMU (independent variables) over 40 quarters.

Observations The coefficient for euro areas growth on EM GDP is

higher than that of the US and Japan (EM vs. EMU, US and Japan are at 0.85, 0.67 and 0.37 respectively (see Figure 34). Improvement in euro area growth is sharper than that of the US and Japan, with GDP growth swinging from a contraction at a -0.9% pace in 1Q13 to an expansion of 1.5% by 1Q14.

There is clear divergence in sensitivity of EM growth to DM across EM countries (see Figure 36). Not surprisingly, Turkey is the most sensitive to euro area growth among EM economies followed by Russia and Taiwan. Sensitivity of Turkey growth to EMU increased significantly over the last six years (see Figure 35). Indonesia, Poland, China, Philippines and India are less sensitive to DM growth.

Figure 34: EM rolling regression

Source: J.P Morgan, The regression coefficient represents the rate of change in dependent variable (EM GDP growth) relative to changes in independent variable (EMU, US, Japan GDP growth). Data till 2Q13

Figure 35: Turkey rolling regression

Source: J.P Morgan, The regression coefficient represents the rate of change in dependent variable (Turkey GDP growth) relative to changes in independent variable (EMU, US, Japan GDP growth). Data till 2Q13

Figure 36: EM: Relationship with DM GDP growth (regression coefficients)

Source: J.P Morgan, The regression coefficient represents the rate of change in dependent variable (respective country GDP growth) relative to changes in independent variable (EMU, US, Japan GDP growth). Data till 2Q13

21



Potential returns and earnings estimates End 2014 strategy team index forecasts MSCI APxJ 550 (+15%) Base case Current MSCI APxJ forward P/E of 12x Consensus 2015E MSCI APxJ EPS is 44 Forward P/E is 12.5x, marginal re-rating Pick your methodology To illustrate the impact of different methodologies on potential returns we calculate index targets using six assumptions:

1. Current earnings to bond yield ratio using provisional 2014 yield forecast and end-2015E EPS.

2. Five-year average earnings to bond yield ratio using provisional 2014 yield forecast and end 2015E EPS.

3. Current forward P/E multiplied by 2015E EPS based on the lower of 2015E EPS growth or potential nominal GDP

4. Current forward P/E multiplied by 2015E EPS

5. Three-year average P/E multiplied by 2015E EPS

6. Gordon Growth model theoretical P/E multiplied by 2015E EPS. This generates P/E in excess of 30 for six markets as local bond yields in these countries are very low relative to nominal GDP growth and RoE.

Statistical warning EM equity markets valuations trend rather than mean-revert. Indices also evolve with sector composition changing. The growth characteristics of stocks also change and thus their valuations. Prior to the mid-90s current account crisis fixed exchange rates and high nominal growth supported high valuations. Investors should be suspicious of statistical justification for index targets.

2013 and 2014 earnings revised down by c6% year to date. It is important to forecast accurate earnings to calculate index target.

Table 15: Current forward P/E with standard deviation ranges Index Current

Fwd PE Avg 10Y

+1 SD -1 SD Top Decile

Bottom Decile

APxJ 11.7 12.5 13.9 11.0 14.7 10.9 EM Asia 10.4 11.5 13.2 9.8 14.0 9.6 US 14.9 14.1 15.7 12.4 16.1 11.9 Europe 12.9 12.0 13.9 10.0 14.7 9.6 Japan 13.8 16.0 19.8 12.3 19.6 11.8 Australia 14.7 13.3 15.0 11.6 15.2 10.9 China 8.7 12.0 14.9 9.0 15.4 8.7 Hong Kong 14.7 15.7 17.6 13.7 17.8 13.6 India 14.2 14.9 17.4 12.3 18.0 11.8 Indonesia 13.6 11.9 14.2 9.6 14.4 8.4 Korea 8.7 9.5 11.0 8.0 11.7 7.9 Malaysia 15.5 14.1 15.2 13.0 15.4 12.8 Philippines 18.4 14.2 16.5 11.8 17.4 11.5 Singapore 13.9 13.9 15.4 12.3 15.9 12.2 Taiwan 13.9 13.7 17.0 10.5 16.2 11.6 Thailand 11.6 10.5 11.7 9.3 12.0 9.4 Source: MSCI, IBES, Datastream, 8 November 2013.

Table 16: Consensus earnings growth forecast (%) Index Consensus Earning Growth (%) EPS growth

13E 14E 15E CAGR 14/ 09 APxJ 8.1 12.2 10.4 10.4 US 6.6 10.1 10.7 15.3 Europe (2.5) 12.8 11.0 8.0 Japan 34.3 69.6 8.8 25.4 Australia 1.5 7.9 7.8 4.7 Hong Kong 9.9 9.5 10.7 11.5 Singapore (2.6) 8.7 10.3 6.3 Korea 11.4 20.4 9.5 14.9 Taiwan 31.3 9.8 10.0 13.8 China 10.4 9.2 11.4 13.3 India 8.8 17.4 15.2 11.7 Malaysia (0.6) 7.6 9.0 11.0 Thailand 12.2 14.2 11.6 13.6 Indonesia 9.0 14.5 15.3 11.8 Philippines 9.3 7.2 17.4 12.1

Source: MSCI, Datastream, IBES, J. P. Morgan, 8 November 2013

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Table 17: Pick your methodology and thus your return: Percentage return to end 2014 targets based on multiple methodologies Index

Level (LC)

(1) Current EY/BY

(2) 5yr avg EY/BY

(3) FWD PE

2015 EPS = GDP

(4) Current FWD PE

(5) 3year

average FWD PE

Median Max Min Range of returns

(6) Gordon Growth

PE APxJ 471 8 1 13 14 10 10 14 1 13 143 Australia 1106 (4) (12) 8 9 (13) (4) 9 (13) 23 13 China 61 4 1 14 11 16 11 16 1 15 271 Hong Kong 13013 21 (15) 9 18 9 9 21 (15) 36 125 India 796 (0) (1) 14 25 13 13 25 (1) 26 12 Indonesia 5176 13 (0) 12 16 14 13 16 (0) 16 62 Korea 581 20 41 9 17 22 20 41 9 32 311 Malaysia 648 9 1 10 13 2 9 13 1 13 113 Philippines 1067 26 56 11 20 4 20 56 4 52 93 Singapore 368 18 (6) 7 10 10 10 18 (6) 25 136 Taiwan 291 10 (8) 8 10 9 9 10 (8) 18 142 Thailand 506 8 (12) 9 14 4 8 14 (12) 26 99 Source: MSCI, IBES, Datastream, Bloomberg, J.P. Morgan. 8 November 2013 Note: All index levels and returns are in local currency; please email [email protected] for the assumptions

Table 18: Consensus EPS estimates and revisions since the beginning of 2013 Index Actual Current Consensus EPS Consensus EPS beginning of this Year Revision in Consensus EPS (%)

11 12 13E 14E 15E 13E 14E 15E 13E 14E 15E APxJ (US$) 33 33 36 40 44 39 43 48 (7.0) (6.6) (7.4) APxJ 32 33 36 40 44 37 41 46 (3.7) (3.2) (4.1) US 91 97 103 114 126 105 118 131 (2.0) (3.6) (3.5) Europe 121 120 117 131 146 127 141 157 (8.2) (7.1) (7.2) Japan 31 23 29 50 54 31 42 47 (4.6) 18.8 14.6 Australia 69 69 70 75 81 71 78 83 (1.8) (3.0) (2.1) Hong Kong 843 740 813 891 986 809 899 931 0.5 (0.9) 5.9 Singapore 24 25 25 27 30 26 28 30 (4.9) (5.2) (1.6) Korea 43 52 57 68 75 67 76 90 (15.3) (10.0) (17.1) Taiwan 14.8 15 19 21 23 19 22 26 (0.9) (2.6) (10.0) China 5.68 5.82 6.42 7.01 7.81 6.27 6.96 7.70 2.4 0.7 1.4 India 44 46 50 59 68 55 63 81 (9.2) (6.3) (16.7) Malaysia 35 39 39 42 46 41 45 47 (4.7) (6.6) (2.0) Thailand 32 34 38 44 49 43 48 54 (10.4) (8.0) (9.0) Indonesia 312 311 336 385 443 378 438 458 (11.1) (12.2) (3.2) Philippines 45 50 54 58 69 56 60 65 (3.5) (2.5) 4.9 Source: MSCI, Datastream, IBES, J. P. Morgan, 8 November 2013. Note: All EPS are in local currency

Table 19: Consensus EPS estimates and revisions since the beginning of 2013 Index Actual Current Consensus EPS Consensus EPS beginning of this Year Revision in Consensus EPS (%)

11 12 13E 14E 15E 13E 14E 15E 13E 14E 15E Cons. Disc. 25.5 31.8 33.8 38.4 43.0 38.1 43.1 38.3 (11.3) (10.9) 12.3 Cons. Staples 19.5 18.6 19.3 21.7 24.5 22.4 25.2 28.5 (14.0) (14.0) (14.0) Energy 66.4 57.4 57.6 63.8 69.0 66.8 71.8 72.3 (13.7) (11.2) (4.6) Financials 22.4 22.5 24.1 26.2 28.8 24.6 26.9 29.2 (2.1) (2.6) (1.5) Healthcare 29.0 30.6 34.8 40.6 46.3 37.0 43.2 45.8 (6.0) (6.1) 1.1 Industrials 11.5 9.9 9.4 11.9 13.9 12.1 13.9 13.5 (22.1) (14.4) 3.4 IT 14.6 20.3 27.4 30.7 33.2 26.5 29.9 35.1 3.5 2.6 (5.6) Materials 45.1 32.6 28.7 35.2 39.3 37.1 43.9 47.1 (22.5) (19.9) (16.6) Telecom 8.2 8.1 8.7 9.1 9.7 9.1 9.8 10.0 (4.6) (7.2) (3.1) Utilities 8.5 11.4 14.3 16.5 18.6 14.9 16.8 17.1 (3.6) (1.5) 8.3 Banks 25.0 26.1 27.4 29.2 31.9 27.4 29.7 32.3 0.0 (1.5) (1.3) Div. Financials 25.0 22.1 23.5 27.5 30.7 27.3 30.9 27.7 (13.9) (10.8) 10.9 Insurance 7.6 7.3 10.0 11.7 13.2 10.6 11.9 14.3 (5.9) (2.3) (7.9) Real Estate 13.1 12.0 12.6 13.8 15.2 13.0 14.2 12.7 (2.6) (2.8) 20.2 Capital Goods 14.4 12.2 10.8 13.8 15.9 14.0 15.5 15.2 (22.6) (10.9) 4.5 Transportation 6.7 6.8 8.5 10.8 13.6 10.9 14.1 14.6 (21.4) (23.4) (7.2) Source: MSCI, Datastream, IBES, J. P. Morgan, 8 November 2013. Note: All EPS are in local currency

23



Dissection of Asia Pacific ex-Japan EPS growth The objective Disaggregate the Asia Pacific ex-Japan EPS growth into countries, sectors and key sectors in countries. Note the analysis is of IBES or consensus data.

Main observations on 2014E consensus EPS growth MSCI APxJ weighted and median EPS growth is

12% and 14% respectively. This is inline with our economists 2014 nominal GDP growth forecast of 11%.

Korea earnings growth forecast is 20% and contributes one-third of MSCI APxJ 2014 EPS growth. China and Australia contributes another c35% of EPS growth.

Financials, IT and materials are the highest contributors to 2014E earnings growth (but note Figure 37). The contribution from healthcare and telecom is the lowest (see Table 21).

The forecast rebound in Korean banks 2014 EPS is a combination of gradual NIM recovery and improving corporate credit cost.

Four sectors contribute c20% of MSCI APxJ 2014 EPS growth; Korea semiconductors, China diversified banks, Australia diversified metal & mining and Korea construction & engineering.

Dataset IBES EPS forecasts for MSCI Asia Pacific ex-Japan

constituents

Calculation The index's calendar year EPS is calculated using the profit-weight of the constituents.

Index EPS = I x ( (C-EPS x FFS) / (FFS x P))

Where C-EPS = Index constituents EPS, FFS = free float shares for the constituents, I = index level and P = current market price

The check Median EPS growth of the index constituents: Reviewing the median helps identify sectors in which a single stocks impact on weighted EPS growth is large. This could be due its large weight in the index or moving from loss to profit.

Where J.P. Morgan analysts forecasts differ Higher: China IT, Taiwan Financials, Australia Energy,

Australia Materials Lower: Korea Materials, Australia Ind., HK Financials,

China Telecom, China CS

Figure 37: Korea materials EPS revisions

Source: MSCI, IBES, Datastream, 31 October 2013

Table 20: Asia Pacific ex-Japan consensus earnings growth and contribution Country Mkt Cap Earnings weights (%) Index EPS Growth Median EPS Growth Contribution to Earnings growth (%)

Weight 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 Korea 15.2 18.8 20.4 20.2 11.4 20.4 9.5 4.5 22.5 14.1 18 34 19 China 18.1 25.0 24.4 24.5 10.4 9.2 11.4 10.0 16.3 16.0 29 19 26 Australia 26.1 21.8 21.3 20.7 1.5 7.9 7.8 5.1 9.5 9.3 6 17 15 Taiwan 10.9 9.4 9.2 9.1 31.3 9.8 10.0 16.2 11.7 10.5 29 8 8 Hong Kong 9.3 7.7 7.6 7.7 9.9 9.5 10.7 5.8 10.2 11.4 9 6 9 India 5.9 4.8 4.9 5.1 8.8 17.4 15.2 11.3 16.6 16.8 5 6 7 Singapore 5.0 4.4 4.3 4.3 (2.6) 8.7 10.3 2.1 7.8 9.5 (2) 3 4 Thailand 2.4 2.4 2.4 2.4 12.2 14.2 11.6 13.7 14.7 15.0 3 3 3 Indonesia 2.3 2.0 2.1 2.1 9.0 14.5 15.3 7.8 12.8 15.4 2 2 3 Malaysia 3.6 2.9 2.8 2.8 (0.6) 7.6 9.0 3.5 9.8 9.6 (1) 2 3 Philippines 0.9 0.6 0.6 0.6 9.3 7.2 17.4 16.8 12.1 16.7 1 0 1 APxJ 100 100.0 100.0 100.0 8.1 12.2 10.4 8.1 13.9 12.7 100 100 100 Source: IBES, Datastream, J.P. Morgan calculation. Note: Sorted by 2014E earnings growth contribution.

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Table 21: Asia Pacific ex-Japan sector earnings growth and contribution APxJ Sectors Mkt Cap Earnings weights (%) Index EPS Growth Median EPS Growth Contribution to Earnings growth (%)

Weight 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 Financials 37.4 42.1 40.7 41.0 6.7 8.5 11.6 9.5 11.3 12.1 33 30 43 Information Technology 14.5 15.9 16.0 15.6 35.8 12.1 8.5 15.5 15.4 11.1 52 16 12 Materials 9.4 8.3 8.9 8.8 (1.4) 19.5 10.6 4.7 16.4 12.1 (1) 14 9 Industrials 7.8 6.0 6.7 7.1 (5.7) 26.8 16.4 5.7 17.9 15.2 (4) 13 10 Consumer Discretionary 8.0 8.1 8.2 8.3 6.9 14.1 12.1 9.5 14.2 12.7 6 9 9 Energy 6.1 7.1 7.0 6.9 0.1 10.7 8.2 3.0 11.9 10.2 0 6 5 Consumer Staples 6.4 3.9 4.0 4.1 3.8 13.1 13.5 6.2 16.8 16.2 2 4 5 Utilities 3.1 2.7 2.8 2.8 26.3 16.3 11.7 3.3 6.2 9.1 7 4 3 Telecommunication Services 5.2 4.8 4.5 4.3 6.0 4.9 6.5 8.3 10.4 12.1 3 2 3 Health Care 2.1 1.1 1.2 1.2 12.7 16.8 16.2 15.7 16.9 17.1 2 2 2 APxJ 100 100.0 100.0 100.0 8.1 12.2 10.4 8.1 13.9 12.7 100 100 100 Source: IBES, Datastream, J.P. Morgan calculation. Note: Sorted by 2014E earnings growth contribution.

Table 22: Country sub-industries contributing 65% of APxJ earnings growth Country Sub-Industry Mkt Cap Earnings weights (%) Index EPS Growth Median EPS Growth Contribution to Earnings growth

(%) Weight 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015

Korea Semiconductors 4.6 8.5 8.3 7.7 44.2 9.1 3.6 31.4 15.7 0.1 32 6 3 China Diversified Banks 4.4 10.7 10.1 10.0 8.8 6.2 10.0 9.4 5.9 11.1 11 5 9 Australia Div. Metals & Mining 3.6 3.3 3.4 3.2 (11.0) 14.1 6.5 (10.9) 12.6 7.0 (5) 4 2 Korea Construction & Eng 0.3 0.0 0.4 0.4 NM NM 27.3 19.5 29.4 33.6 (5) 4 1 Australia Diversified Banks 9.5 8.6 8.0 7.6 5.5 4.6 4.9 5.6 4.8 5.1 6 3 4 Taiwan Semiconductors 3.4 2.9 2.9 2.9 16.8 12.4 12.2 17.4 14.6 11.0 5 3 3 Korea Diversified Banks 1.3 1.6 1.7 1.7 (23.2) 19.4 11.5 (17.5) 17.5 13.6 (6) 3 2 China Real Estate Development 1.0 1.7 1.7 1.8 11.4 16.1 18.2 15.2 18.8 18.9 2 2 3 Korea Electric Utilities 0.2 0.0 0.2 0.3 (96.5) NM 42.7 NA NA 42.7 5 2 1 Korea Auto Manufacturers 1.5 2.8 2.7 2.6 6.4 8.9 7.6 4.9 8.6 7.8 2 2 2 Korea Commodity Chemicals 0.6 0.5 0.7 0.7 6.2 41.9 18.6 10.5 83.8 18.3 0 2 1 Korea Steel 0.6 0.6 0.7 0.7 (27.0) 33.9 10.3 (28.9) 20.4 9.8 (3) 2 1 China Life & Health Insurance 0.9 0.8 0.9 1.0 79.8 20.9 18.8 46.3 23.0 19.0 5 1 2 Australia Prop & Casualty Insur 1.1 1.0 1.0 1.1 22.9 17.8 11.5 20.7 17.5 9.4 2 1 1 India IT Consulting & Other svs 1.2 0.8 0.9 0.9 19.4 17.7 16.4 23.4 18.8 15.4 2 1 1 HK Life & Health Insurance 1.5 1.0 1.0 NA 38.5 13.9 NA 38.5 13.9 NA 4 1 NA Korea Oil & Gas Refining & Mkt 0.4 0.4 0.5 0.5 4.4 34.8 10.0 6.1 33.8 8.0 0 1 0 Hong Kong Casinos & Gaming 1.2 0.7 0.7 0.8 34.6 20.7 18.0 15.0 16.5 10.7 2 1 1 China Integrated Oil & Gas 1.1 1.6 1.6 1.5 10.8 8.6 4.3 10.8 8.6 4.3 2 1 1 Thailand Diversified Banks 0.9 1.1 1.1 1.1 16.4 12.7 14.2 13.7 13.5 15.0 2 1 1 HK Div. Real Estate Activities 1.7 1.6 1.6 1.6 4.5 8.1 11.6 8.8 8.0 10.3 1 1 2 China Internet Software & Svs 1.4 0.5 0.6 0.6 29.3 26.6 26.0 29.3 26.6 26.0 1 1 1 Australia Oil & Gas E&P 0.9 0.7 0.7 0.7 (5.6) 18.1 11.9 (2.8) 16.2 23.5 (1) 1 1 Singapore Diversified Banks 1.6 1.8 1.7 1.7 (3.5) 7.0 10.9 (4.1) 7.5 11.3 (1) 1 2 China Automobile Manufacturers 0.6 0.6 0.6 0.6 35.3 20.7 15.6 46.0 23.9 19.6 2 1 1 Korea Industrial Conglomerates 0.4 0.5 0.6 0.6 19.7 22.3 8.7 30.9 23.8 7.5 1 1 0 India Diversified Banks 0.7 0.6 0.6 0.7 10.6 18.1 18.4 (1.8) 13.4 13.0 1 1 1 Korea Construction & Machinery 0.5 0.4 0.4 0.5 (19.3) 28.1 24.4 8.7 30.2 32.4 (1) 1 1 Korea Auto Parts & Equipment 0.6 0.9 0.9 0.9 (2.3) 12.0 8.9 4.7 14.9 11.0 (0) 1 1 Korea Consumer Electronics 0.2 0.1 0.2 0.2 678.6 110.3 23.0 678.6 110.3 23.0 1 1 0 Korea Trading Companies 0.2 0.1 0.2 0.2 (37.5) 106.9 18.8 (21.4) 84.4 17.2 (1) 1 0 HK Industrial Conglomerates 0.8 0.7 0.8 0.7 11.2 13.5 10.3 2.2 13.6 10.2 1 1 1 Australia Steel 0.2 0.4 0.4 0.3 46.1 26.6 (7.7) 46.1 26.6 (7.7) 1 1 (0) Indonesia Diversified Banks 0.8 0.8 0.8 0.8 8.5 12.3 16.9 10.2 12.8 17.5 1 1 1 Korea Electronic Components 0.4 0.3 0.4 0.4 (32.7) 26.6 21.3 10.8 32.1 23.8 (2) 1 1 Korea IB & Brokerage 0.2 0.1 0.2 0.2 NA 110.8 15.3 NA 86.4 11.9 NA 1 0 Korea Diversified Chemicals 0.2 0.0 0.1 0.1 (10.9) 220.2 29.3 43.5 2.7 36.7 (0) 1 0 Korea Prop & Casualty Insuranc 0.3 0.3 0.3 0.4 NA 28.1 13.4 NA 28.3 13.0 NA 1 0 Taiwan Electronic Mftg Svs 0.7 0.9 0.9 0.8 3.8 9.4 4.9 3.8 9.4 4.9 0 1 0 Source: IBES, Datastream, J.P. Morgan calculation. Note: Sorted by 2014E earnings growth contribution.

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Table 23: APxJ hindsight sectors: J.P. Morgan vs consensus EPS growth 2014E EPS Growth (%) Diff in Growth (%) JPM EPS Consensus EPS JPM/Cons EPS (%)

Country/Sector Weights JPM Consensus JPM minus Cons 13E 14E 13E 14E 13E 14E APxJ 100.0 12.8 12.2 0.6 35 40 36 40 (1.3) (0.8) Australia 26.2 11.0 9.3 1.7 68 76 70 76 (1.9) (0.3) Australia Fin. 13.4 6.5 6.4 0.1 11 11 11 12 (2.8) (2.7) Australia Materials 4.9 21.0 15.7 5.3 27 33 27 32 (0.0) 4.6 Australia CS 2.4 8.5 7.8 0.7 15 17 15 17 (0.1) 0.5 Australia Energy 1.5 25.2 16.7 8.5 21 27 22 25 (2.0) 5.2 Australia Ind. 1.3 5.4 9.3 (3.9) 5.1 5.3 5 6 (4.2) (7.6) China 18.3 10.3 9.2 1.0 6.4 7.1 6.4 7.0 0.1 1.0 China Financials 7.2 9.5 8.9 0.7 65 72 65 71 0.7 1.3 China Energy 2.7 6.2 5.5 0.8 72 77 71 75 1.0 1.7 China Telecom 2.0 (3.2) 0.0 (3.2) 12 11 12 12 (1.8) (4.9) China Industrials 1.1 17.2 14.0 3.2 10 11 10 11 (3.0) (0.3) China CS 1.1 19.8 19.8 (0.0) 45 54 47 56 (4.6) (4.6) China IT 1.7 44.0 33.2 10.8 6.7 9.6 6.5 8.6 3.1 11.4 China CD 1.0 18.7 18.8 (0.1) 17 20 16 19 3.5 3.4 Korea 15.2 19.2 20.4 (1.3) 55 65 57 68 (3.1) (4.1) Korea IT 5.7 5.1 10.2 (5.1) 95 100 93 102 2.6 (2.2) Korea Industrials 1.8 116.4 85.2 31.2 7.0 15 8.3 15 (15.8) (1.6) Korea Financials 2.1 22.8 23.5 (0.7) 18 22 18 22 (0.3) (0.9) Korea CD 2.7 16.2 12.0 4.3 237 276 246 276 (3.8) (0.1) Korea Materials 1.5 27.8 41.6 (13.7) 33 43 34 47 (0.4) (10.1) Taiwan 10.8 14.4 9.9 4.5 19 22 19 21 (1.2) 2.8 Taiwan IT 5.7 15.7 10.6 5.0 8.8 10 9.1 10 (3.4) 1.0 Taiwan Financials 2.0 10.3 3.1 7.2 6.7 7.4 6.5 6.7 3.6 10.8 Taiwan Materials 1.3 16.1 13.5 2.6 10 11 10 11 0.1 2.4 India 5.6 19.2 17.4 1.8 48 58 50 59

Asian Year Ahead 2014

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