20121119-JP Morgan-Asian Year Ahead 2013

Asia Pacific Equity Research19 November 2012

Asian Year Ahead 2013Stock Ideas for the Year of the Snake

Chief Asian and Emerging Market Equity Strategist Adrian MowatAC

(852) 2800-8599 [email protected]

Director of Asia Pacific Equity Research Sunil GargAC

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

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

See page 525 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. www.morganmarkets.com

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

Asia Pacific Equity Research 19 November 2012

Asian Year AheadStocks for the Year of the SnakeWhat to own Banks: China and India Consumer: Prefer discretionary vs. staples; product mix improvement stories, expanding modern retail Tech: New product cycles, smartphones and tablet PC Autos: SUVs and luxury segment Infrastructure: China government FAI*, North Asia E&C Insurance: Life insurers with strong agency business Real Estate: Integrated property companies ex China Utilities: Hong Kong, Thailand, China and Korea Telecom: Developed market integrated operators Smaller sectors in countries: Gaming, Chinese internet and healthcare Focus on sectors within countries rather than country recommendations(* There is a conflict between strategy team and sector view. Please see strategy and sector pages for details)

What to avoid Banks: Indonesia*, Thailand*, Hong Kong and Singapore Autos: Low-to-mid-range car segment Real Estate: China Energy: Oil, refining and petrochemicals Utilities: Power equipment makers

The resultant country allocation OW: India, the Philippines and Thailand UW: Australia, China, Korea (downgrade), Singapore (downgrade) and Taiwan (downgrade) For more on our country and sector head views please see country and sector pages (73 to 147)

105 top picks(See pages 157 to 367)Examples of top picksTop picks - examples Siam Commercial Bank Quanta Computer Samsung Electronics Ayala Land ICBC Axis Bank Country Thailand Taiwan South Korea Philippines China India Return to our PT (%) 27 25 33 30 22 15

60 stocks to avoid(See pages 369 to 489)Examples of stocks to avoidStocks to avoid - examples HTC Corp Treasury Wine Estates Limited DongFeng Motor Co., Ltd. Yanzhou Coal Mining - H PetroChina Chimei Innolux Corporation Country Taiwan Australia China China Hong Kong Taiwan Return to our PT (%) (57) (23) (23) (21) (20) (20)

Source: J.P. Morgan estimates. Note: To PT = Returns to analyst price target as at 14 Nov 2012. Stocks with 3m average trading value greater than US$20 million.

Source: J.P. Morgan estimates. Note: To PT = Returns to analyst price target as at 14 Nov 2012. Stocks with 3m average trading value greater than US$20 million.

The year-ahead processThe goal of this document is to present our key strategy themes for 2013 using our most and least favored stocks from the 1097 and 557 stocks in emerging markets and developed Asia 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 2013. Analysts then reviewed their earnings models and presented their top picks and stocks to avoid to both their sector and country strategists. The sector and country teams then produced their list of top long and short ideas. These ideas form the core of this document.2

Table of contentsInvestment strategy ............................................................ 4 Potential surprises for the year of the Snake.................... 25 Economic outlook ............................................................ 47 Economic forecasts .......................................................... 67 Country strategy .............................................................. 73 Sector strategy ................................................................. 97 Summary tables of stock ideas ...................................... 143 Top picks ....................................................................... 157 Stocks to avoid .............................................................. 369 Strategy dashboards ....................................................... 491



Year of the Snake: Growth-scare snakes and QE laddersThe potential drivers1. 2. 3. 4. Demographic dividends and headwinds QE3/infinity = PE multiple inflation Relative EPS revisions drive relative returns Growth scare and policy snakes provide buying opportunities (See page 4 for equity strategy)

Potential returnsMSCI APxJ end-2013 target 500 (+15%) Forward P/E of 12x, a 10% re-rating from 11.3x. Consensus 2014E MSCI APxJ EPS is 43. We fear downgrades for metal and energy companies. To be conservative we assume no EPS growth in material and energy companies. The resultant 2013 and 2014 EPS forecast is 38 and 41 respectively. (See page 10 for range of possible returns)

Investment themes/baskets1. Dividend aristocrats (JPHAPDVA ): analysts top picks with consistent DPS track record and yield >2%. 2. Dividend pretenders (JPHAPDVP ): high yield (> 2%) stocks to avoid with a poor dividend track record. 3. Rotation riders (JPHAPRR1 , JPHAPRR2 ): Around year end, low P/B and rotation quant factors outperform. Top picks are underperformers with low P/B, stocks to avoid are the opposite. 4. Nifty Fifty (JPHAPRWN ): Outperforming growth stocks with a bias for domestic growth + some global leaders. 5. ASEAN growth story (JPHASGRW ) 6. China growth debate (JPHAPCG1 , JPHAPCG2 ): Now that the market is cheap, and confidence in the growth model more realistic, be prepared to adjust exposure as confidence in growth changes. 7. Policy risk (JPHAPPR1 , JPHAPPR2 ): Top picks and stocks to avoid in high policy risk sectors. (See page 29 for derivatives strategy and baskets)

Risks US fiscal cliff Q3 capex slowdown becomes 2013 recession Large Chinese stimulus India slips on policy implementation, including fiscal consolidation, credit rating downgraded to junk New Korean president policy is pro-consumer, Won appreciates Malaysian election outcome disrupts policy continuity China economic debate (between easier money and lower profits) Hong Kong and Singapore management of asset bubbles Geopolitical risk (maritime sovereignty disputes) (See page 24 for details)

Key issues for Snake briefing notes1. 2. 3. 4. 5. 6. China leadership change Korea 18th Presidential elections Malaysia 13th general elections APxJ Nifty Fifty US fiscal cliff MXAPJ view

Market performanceFigure 1: MSCI PxJ and EM Asia index performance600 500 400 300 200 100 0 88 90 92 94 96 98 01 03 05Source: Bloomberg, 14 November 2012

PxJ

EM Asia Life High: PxJ: 594 EM Asia: 571

Technical strategyMXAPJs 11% YTD rise masks the lack of a clear trend and substantial periods of sideways trading, with anemic volumes. The year has been marked much more by rotational trades across countries and across sectors. To establish clear upside direction, we believe we need to see, as a first step, a volume-led breakout above 454 (current 439) and eventually overcome the downtrend line drawn from Nov07 top (See page 39 for details).

Current: PxJ: 455 EM Asia: 416 07 09 11

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Equity strategy: Growth-scare snakes and QE laddersSavers are cornered. Financial repression is forcing them to consider equities. PE multiples are likely to continue to rise. But with 12-month returns low relative to annual drawdown, savers are reluctant buyers of equities. Investor confidence in EPS forecasts is low with the 2013 EPS of MSCI APxJ 11% lower today than 12 months ago. It is a good environment for active managers. The low one-year return and index EPS downgrades hide a large dispersion in country/sector/stock returns and the importance of relative EPS revisions driving relative returns. We continue to believe that relative EPS revisions will drive relative returns (see dissection of EPS growth page 12). The core of this report is our analysts top ideas for 2013. Two pages per stocks provide the high-level investment case. The due diligence is testing the conviction and risk around the 2013/14 forecasts. Our asset class frequently suffers from significant drawdowns. The 2012 peak (453, 29 February) to trough (380, 4 June) range is 20%. The one-year return is just 5%. As strategists, we are better at identifying long-term trends rather than market timing. What can we say? We are buyers on dips. The headline DM GDP forecast for both 2012/13 is 1.2% growth. Analysts should not build in EPS recovery based on stronger DM economies. But the traders should conclude that volatility will remain high. With economies flying so close to zero any indications of a loss of altitude results in a rapid rise in economic risk premium. These growth-scare snakes are often combined with heightened policy risk. Growthscare snakes will remain an issue in China, in our view. Fortunately market confidence in the countrys economic model is more realistic today than a year ago. Quant styles change with the seasons. Around year end, low P/B and rotation factors outperform, while full year EPS and price momentum are more powerful. For fear of trying to be too cute we would recommend rotation baskets now and look to add to Nifty Fifty and other quality growth names mid-1Q (see page 42 for more on quant strategy). The long term Demographic dividends and headwinds QE3/infinity PE multiple inflation Near-term drivers of volatility (APxJ 2012 range 374453 (20%) return 5% (12 months)) DM economic data (including impact of fiscal cliff) China debate Policy risk (Korean presidential election, Brazilian industrial policy, India and Malaysia political development, Hong Kong and Singapore management of asset bubbles) Geopolitical risk (maritime sovereignty disputes) For more on risk please see page 24 Themes and stock baskets Dividend aristocrats: Analysts top picks with the best DPS track record. Dividend pretenders: High-yield stocks to avoid with a poor dividend track record. Nifty fifty or running the winners: Outperforming growth stocks with a bias for domestic growth + some global leaders. Rotation riders: Underperforming top picks with low P/B and the opposite for stocks to avoid. China growth debate: Now that the market is cheap, and confidence in growth model more realistic, be prepared to adjust exposure as confidence in growth changes. Two baskets of top picks and stocks to avoid. ASEAN growth story: Indonesia and the Philippines enjoy a significant demographic dividend. Thailands economic momentum is strong and policy very progrowth. Beyond the political risk Malaysian investment cycle is picking up. For more on ASEAN, please see the country pages. Policy risk: Top picks and stocks to avoid in high policy risk sectors. The aim is to provide baskets of stocks to manage your exposure to policy risk. See valuation basket section on page 14.

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Country asset allocationOverweight: India, the Philippines, and Thailand Underweight: Australia, China, Korea (downgrade), Singapore (downgrade) and Taiwan (downgrade) Neutral: Hong Kong, Indonesia and Malaysia India is our top BRIC. It combines improving policy, easier monetary conditions, and pent-up investment demand with a market that generated EPS growth despite significant macro headwinds in 2012. Add to this a huge demographic dividend and an equity market with low exposure to government sponsored companies. The Philippines and Indonesia enjoy the best demographics in ASEAN, in our view. This combined with policy that does not hinder growth plus generally stable inflation and interest rates supports a long-term structural OW. For now, the cyclical headwind of lower thermal coal prices keeps us neutral on Indonesia. We would look to add to this market as the consensus prices in weaker near term consumption as income in the mining regions fall. We remain OW on the Philippines. Thailands demographics are poor. After growing below potential from 2004 it is now enjoying a period of economic strength. The investment case is robust domestic demand, sustained low interest rates, undemanding valuations and scope for positive EPS revisions. We remain OW on Thailand. Assessing political risk in Malaysia is a challenge. There is a tangible risk that the ruling BN lose the mid-2013 general election. This would increase stock specific risk. Beyond politics economic fundamentals are strong. We remain neutral on Malaysia. The relative call on Australia versus Asia is always a challenge. Volatility via the region was again driven by AUD volatility. Our flat, low picture for global growth is not enough to lift commodity prices; the more defensive sectors of the market look quite fully valued; and the AUD looks more exposed as carry is eroded, the current account worsens and commodity projects attract less new capital. Countering these fundamental headwinds is the inflows into superannuation funds which are underweight equities. Sector performance appears to be driven by displacement investing as one

sector becomes less attractive other sectors rise as capital flows to these less-unattractive sectors. Significant underperformance is only likely if the AUD weakens. We remain UW on Australia. Near term, Korean investors face political and technical risk. The presidential election is on 19 December. It is possible that economic policy swings from pro-export weak won to pro-consumer, resulting in investors switching into domestic sectors, including low growth cheap banks (see page 64 for more on Korean politics). The financial teams Korean top pick is KB Financial. With exporters at two-thirds of benchmark the market is likely to underperform. The technical risk is that the Vanguard EM ETF is switching from MSCI EM to the FTSE Emerging benchmark. The result is a potential US$10 billion of outflows from Korea in 1H13. We downgrade Korea to UW. Taiwan lacks domestic drivers and concern on China import substitution makes us suspicious that the high EPS growth forecast for this market is optimistic. Similar to Korea this is an la carte market in that relative performance is driven by a few stocks. We downgrade Taiwan to UW. Both Hong Kong and Singapore are struggling with property asset bubbles. These threaten the city states relative competitiveness at a time of weak trade growth and a difficult environment for financial services. Declining refining and petrochemical margins are an additional threat to Singapore. Our Singapore bank analysts correctly forecasted strong performance for the banks in 2012. The factors that drove this are reversing. We are downgrading Singapore to UW. For now we maintain Hong Kong at neutral with the view that the property bubble could migrate to the equity market. Policy risk in both markets is high. Our China UW was successful until early September. In 3Q12 monetary conditions improved. More recently activity data stopped deteriorating. We remain modestly UW on China. For more on our China views please see China: Monetary policy vs. profits on page 62. Our key concern is profits as capacity continues to grow faster than demand. We are also worried that more than 45% of MSCI China EPS is from one sector, banks. Another concern is the 10% underperformance of A-shares versus MSCI China in the last three months. What do the locals know that H-share investors do not? Finally stock performance is polarized with key stocks including Tencent considerably outperforming. Selling winners is typical in 4Q.5



Do not ignore demographicsDemographics are the most powerful long-term force. The dispersion of demographic trends in EM is stark. A combination of the one-child policy and a rapid increase in tertiary enrollment in China results in a fast, by demographic standards, decline in the available workforce for manufacturing and construction. It is combining education attainment with demographics that differentiates our analysis. The challenge for policy makers is finding jobs for graduates. Note that Chinas demographics are similar to Japans 20 years ago. Potential GDP growth in Japan decelerated significantly once the working age population stopped expanding. The same may happen in China. In November 2010, China invested considerable time and resources in its census. This clearly demonstrated its economic success in the past 30 years. Post the great leap forward and the Cultural Revolution the economy was in ruins. Reform provided the conditions for an industrious growing population to drive high growth. By November 2010, 72% of the working age population was employed. This is the highest workforce participation rate in any major economy. Full employment in a declining workforce is not consistent with high growth and price stability. As we noted in China Challenged, lessons from other Asian bubbles, Mowat et al, 13 June 2012, the slowdown that Japan and Taiwan suffered in the 1990s may occur in China. In 2005-25 the global working age population will increase by 21%. India accounts for a third of the increase. Other countries with large increases that are difficult to invest in include; Pakistan, Nigeria, Bangladesh, Congo and Ethiopia. More accessible markets include Indonesia, the Philippines, Brazil, Egypt and Mexico. A strong Real and surprisingly tight labor market counter act Brazil demographic dividend. Our preferred structural plays are India, Indonesia, the Philippines and Mexico. Demographics and high energy prices are influencing global trade. As labor cost become competitive with China transoceanic supply chains decline. Trade regionalizes. Be careful with both container and air cargo businesses.

Figure 2: 15-to-39-year-olds without a university degree in China3% 2% 1% 0% -1% -2% -3% -4% -5% -6%1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047Source: PRC, NBS, Ministry of education, US census, J.P. Morgan calculation

%oya

Number

600 500 400 300 200 100 0

Figure 3: Growth in working age population (forecast for China)3 2.5 2 1.5 1 0.5 0 -0.5 -1Source: J PRC NBS, Ministry of Education PRC, US Census, J.P. Morgan calculation. Note: Growth Centered on peak of each equity market; Japan December 1989, Taiwan February 1990 and China October 2007.

Japan

China

Taiwan

Table 1: Change in working age population 2005-2025Country India Pakistan Nigeria Bangladesh Indonesia Congo Ethiopia Philippines Brazil Egypt Mexico Sudan Others TotalSource: J.P. Morgan economics

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-10y -9y -8y -7y -6y -5y -4y -3y -2y -1y 0y 1y 2y 3y 4y 5y 6y 7y 8y 9y 10yAbsolute change (millions) 250 57 43 38 35 28 25 23 19 19 17 16 212 782 Contribution to growth in working age population (%) 32.0 7.3 5.6 4.8 4.5 3.5 3.2 2.9 2.5 2.4 2.1 2.1 27.1 100.0



QE and PE inflationThe powerful medium term force on equity markets is US and EU QE. The scale of monetization and commitment to maintain low rates until unemployment falls is unprecedented. Savers are cornered. If the Fed is successful bond investors may face a capital loss within three years. There is no momentum or fundamental bid in commodities, unlike during QE2. Equities, particularly developed, are already performing well. This is primarily a function of PE expansion. With common ownership across EM and DM valuation are likely to be correlated. Decisions based on valuation relative to history may prove expensive. QE distorts asset valuation. Based on the history of the risk-reward trade-off line it is possible to argue that both DM and EM PEs exceed 50 with current bond yields. MSCI World PE is 12x. There is plenty of head room. It is possible that companies perceived to offer 'sustainable growth' may rerate considerably. Our EM Nifty Fifty theme is based on this concept. We believe that PE inflation will continue but expect volatility (see page 14 for more on valuations). Although ECB purchase of peripheral bonds decreases financial event risk is does not make markets immune to political events in Europe. J.P. Morgans economists forecast 1.2% developed economies GDP growth in 2012 and 13. With no change in full year growth, it is tempting to underplay the significance of economic data. We have two concerns. The first is consensus forecast of a sharp recovery in profits for cyclical sectors (see dissection of EPS on page 12). Economic data will remain a major driver of the volatility. With economies flying so close to zero any evidence that there is a small loss in altitude will continue to unnerve investors driving up risk premiums. Most years in Asian and EM equities suffer a 15%+ fall within a four weeks period. We are buyers on these dips. Currently the US fiscal cliff is an excuse for a buyers strike. As Michael Feroli notes in Six more weeks of fiscal cliff if you dont jump off one first (see page 60) the fiscal cliff is the predominant issue for the economy. Compromise is likely, but may not occur soon. In Europe policy makers struggle with rules that are inconsistent with reality in that Greeces fiscal debt is unsustainable.

Figure 4: QE: Relative value in equities15 13 11 9 7 5 3 1 Aug 08 Aug 09 Jul 10 Jul 11 Jun 12 US Investment grade 10 Year treasury yield QE1 QE2 US High Yield World Equities Operation "Twist" and "LTRO's" QE3

Source Datastream, MSCI, Bloomberg 13 November 2012. Note: The chart represents yields of the asset classes.

Figure 5: Risk-return trade-off line25 20 15 10 5 0 0 CEMBI EMBI Jun-09 Nov-12 MSCI EM Jun-11 60 year average HG S&P500 EM Theoritical PE: 69 H SPX Theoritical PE: 62 USTs 10 15 20 25 Historic vo l % IRR % Mar 09

Cash

5

Source: J.P. Morgan. Global Asset Allocation, 13 November 2012. IRRs are calculated as current yield, minus expected default or downgrade losses in the case of credit. The IRR for equities is earnings yield, based on trend earnings for either operating earnings, plus the expected long-term rate of inflation. The x-axis is historical vol. The slope is calculated by applying a linear regression of the IRR of various assets against their historical vol.

Figure 6: Slope of risk-return trade-off line0.6 0.5 0.4 0.3 0.2 0.1 2E-16 -0.1 53 59 65 71 77 83 89 95 01 07Source: J.P. Morgan. Global Asset Allocation, 13 November 2012. IRRs are calculated as current yield, minus expected default or downgrade losses in the case of credit. The IRR for equities is earnings yield, based on trend earnings for either operating earnings, plus the expected long-term rate of inflation. The x-axis is historical vol. The slope is calculated by applying a linear regression of the IRR of various assets against their historical vol.

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China: Monetary policy vs. profitsThe material sector underperformed significantly in the past year. Chinas investment activity data is weak. The equity strategy team believes that China's demand for commodities may be in secular decline. Stay structurally underweight resources. For fast money, there could be a tradable rally as demonstrated by both Rodolfo Angeles and Daniel Kang's buy calls after the August decline in commodity prices. The economic outlook for China remains uncertain. Monetarists highlight the 20% ytd increase in social financing as evidence that growth will build into 2013. The question is can consumers meaningfully increase their leverage while property restrictions remain. Note that consumption is already robust (retail sales 14%oya and car sales 7%oya). Companies could increase investment spending. Finally local government could add to debt accumulated since the 2008 stimulus. The counter argument is that the decline in profits is evidence of over investment thus free cash and motivation to invest falls. Fixed capital formation is 47% of GDP with corporate capex a third of this. If companies rationally cut capex then the current tight employment market will soften. Wage inflation would fall from mid teens resulting in weaker consumption. Note that fiscal revenue growth is slowing with the decline in corporate profits restricting fiscal flexibility. In 2H13, the economy may be suffering from weak investment, slowing consumption and rising food inflation. As overall growth slows the pace of absorption of excessive capacity decelerates. Both outcomes are scenarios without historical precedent. Track the data. It is likely that investors perception on growth will continue to swing with each data release. Our focus is profits and activity data rather than smoothed GDP. We find leadership change disappointing in that it brings no change in policy. There are fewer bulls on economic growth. This was evident with the powerful rally in MSCI China in September. Our bias is to remain structurally underweight China but willing to manage our relative position. Currently we are modestly UW. China import substitution is a threat to profitability of regional heavy industries. Korean, Japanese and Taiwanese refiners, petrochemical and metal producers exports to China will fall as domestic capacity increases. We fear this may leave these sectors without alternative sources of demand and thus structurally lower capacity

utilization and RoA. Brynjar Bustnes and Sam Lee describe this situation in more detail on page 110 and 112.Figure 7: MSCI China and MSCI EM materials relative to MSCI EM1.1 1.05 1 0.95 0.9 0.85 0.8 Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov 10 11 11 11 11 11 11 12 12 12 12 12 12Source: MSCI, Datastream, 13 November 2012. Note: Indices rebased to 100 as of 13 November 2010.

MSCI China relative to MSCI EM MSCI EM Materials relative to MSCI EM

Figure 8: Strong consumption, weak investment activity60 50 40 30 20 10 0 -10 -20 -30 -40 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Oct-12Source: MSCI, Datastream, 13 November 2012

Steel Production (3mmva, %oya) Commercial vehicles (3mmva, %oya) Clinker Production (3mmva, %oya) Retail Sales (3mmva, %oya)

Figure 9: Falling profits: Will this lead investment?Industrial profits (%oya) 45.0 35.0 25.0 15.0 5.0 -5.0 -15.0 -25.0 Jan-99 Apr-01 Aug-03 Nov-05 Mar-08 Jun-10 Oct-12 EPS Growth (%oya)

Source: CEIC, IBES, MSCI, October 2012. Industrial profits as of September 2012. Note: The axis range is from -25 to +50. The maximum and minimum growth for industrial profits is 598% and -37% in January 99 and January 2009 respectively. The maximum and minimum growth for MSCI China EPS is 71% and -61% in June 2001 and June 2000 respectively.

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Table 2: APxJ Heat Map.Avoid the Red.Focus on the GreenAustralia CS Aus. Indus Australia Energy Australia Others China Banks Australia Materials Australia Financials Korea Others Korea CD Korea Materials Korea IT Korea Financials Korea Industrials HK Indust. HK CD HK Utilities Taiwan IT India Others Taiw. Others India IT Sing. Others China Others Sing. Indus India Financials India Energy Singapore Financials Thailand Philippines Indonesia HK Financials Malaysia

Taiwan Financials Taiwan Materials China Energy

China mat. China CS China CD China Indus. China Fin. China Ex banks Telecom

Source: J.P. Morgan. Red indicates UW positions and green indicates OW positions. Note: In Australia materials, the strategy team is OW on chemicals and neutral on mining

Table 3: Key country and sector recommendations, performance and fundamentalsCountry/Sector Wt Rec Performance (USD Returns) Classification Jan 06 to EM low to 12M date date 42 114 6 32 94 4 DD 18 94 14 GPT 47 110 -14 DD 113 137 9 GPT 28 51 -14 DD -16 49 0 98 112 5 DD 126 95 7 GPT 117 199 -4 DD 117 58 4 50% DD 16 66 3 DD 230 166 5 GPT 41 165 -9 DD 49 139 -7 30 166 6 GC/C 62 272 33 60% DD 24 136 -8 DD -35 50 -4 GC 62 299 -8 GPT 112 169 -14 5 79 2 GC/C -9 74 7 DD -9 86 -1 GPT 51 73 -14 56 100 -1 DD 79 119 10 GC 34 96 -12 GPT 82 44 -16 48 124 16 DD 80 135 19 DD 66 88 7 GC 23 128 17 GPT 3 132 12 66 119 13 DD 63 105 22 GC 92 163 19 119 118 11 239 272 2 118 252 24 168 212 33 Demand PE YTD 11 10 18 -3 15 -4 1 9 10 4 4 6 7 2 0 10 30 -3 2 -1 -7 5 10 2 -9 18 34 -7 8 19 23 10 18 17 20 33 23 8 4 21 34 12E 12.7 14.4 12.9 14.1 16.6 12.3 20.6 10.2 7.4 9.5 12.2 12.7 25.5 13.4 13.4 9.7 10.8 10.2 6.9 7.0 12.9 17.2 17.3 12.0 28.1 15.6 15.4 16.1 11.3 16.1 15.7 17.8 16.8 15.2 13.0 12.2 13.4 15.6 16.5 12.4 18.0 13E 11.3 13.4 11.9 14.1 15.4 15.3 16.1 9.5 7.2 9.6 11.7 10.2 20.8 9.6 12.3 8.2 8.1 9.6 7.6 6.2 10.7 13.6 12.8 11.9 18.7 13.7 12.7 14.8 11.7 14.9 14.9 16.1 14.4 13.3 12.2 11.6 12.6 13.9 13.8 11.1 15.6 EPS Growth (%) 12E 5.6 -2.8 -1.1 -9.7 5.8 10.4 -3.5 1.6 9.0 -4.9 2.1 -10.1 6.0 -34.4 -7.4 33.9 77.5 24.2 -2.6 85.9 -15.4 5.4 13.8 7.5 -43.9 9.7 13.8 15.2 3.1 -14.7 -9.6 2.4 19.4 -51.6 8.2 13.6 14.2 10.8 6.3 14.2 12.4 13E 10.7 -0.3 4.6 -17.0 6.8 11.6 31.9 9.3 5.5 7.0 4.7 20.5 17.6 34.7 21.2 16.9 22.9 15.3 -2.1 11.8 21.4 24.4 31.0 2.3 48.6 14.3 19.7 9.3 6.2 11.2 8.6 9.4 18.1 15.6 4.2 -0.2 6.5 8.3 13.4 17.8 11.7 EPS CAGR (06-12) 39.0 68.3 10.4 28.2 15.2 22.5 5.3 6.3 59.4 78.7 11.8 11.7 56.0 75.4 17.1 67.5 80.3 21.0 26.2 289.3 59.5 19.0 9.1 5.4 11.5 56.4 385.7 46.6 99.8 814.8 21.2 17.4 16.6 12.4 26.4 13.4 19.3 41.7 384.5 45.2 55.9 EPS CAGR by SD 10.7 -0.3 4.6 -17.0 6.8 11.6 31.9 9.3 5.5 7.0 4.7 20.5 17.6 34.7 21.2 16.9 22.9 15.3 -2.1 11.8 21.4 24.4 31.0 2.3 48.6 14.3 19.7 9.3 6.2 11.2 8.6 9.4 18.1 15.6 4.2 -0.2 6.5 8.3 13.4 17.8 11.7 PEG Ratio 0.4 0.2 NM 0.4 1.2 0.8 NM 1.7 0.1 0.1 1.1 1.3 0.5 0.2 0.8 0.2 0.2 0.6 0.3 0.0 0.2 1.1 2.3 2.7 3.0 0.3 0.0 0.4 0.1 0.0 0.7 1.1 1.1 1.1 0.5 0.9 0.7 0.4 0.0 0.3 0.3 DY (%) 13E 3.2 5.0 6.3 3.3 5.0 3.5 4.4 3.3 4.3 3.3 3.7 2.9 2.1 2.3 2.2 1.0 0.7 1.3 2.5 1.0 0.9 3.6 3.6 3.0 3.7 1.7 1.7 1.7 2.1 3.1 2.8 3.4 3.9 3.2 3.9 3.6 4.4 3.4 2.9 3.9 2.7 ROE (%) 13E 12.8 12.1 11.9 13.1 14.4 8.2 10.9 14.2 15.4 14.1 12.8 9.8 15.0 12.1 15.3 13.7 18.1 10.2 8.8 17.3 9.2 11.7 13.6 8.5 8.0 15.1 16.0 22.8 13.7 8.3 7.1 14.6 21.0 6.8 10.7 10.1 11.3 14.2 21.9 17.0 15.8

APxJ Australia Australia Financials Australia Materials Australia CS Australia Energy Australia Industrials China China Financials* China Energy China Telecom China Industrials China CS China Materials China CD Korea Korea IT Korea Industrials Korea Financials Korea CD Korea Materials Taiwan Taiwan IT Taiwan Financials Taiwan Materials India India Financials India IT India Energy Hong Kong HK Financials Hong Kong Utilities Hong Kong CD HK Industrials Singapore Sing Financials Sing Industrials Malaysia Indonesia Thailand Philippines

100.0 25.5 12.2 5.8 2.3 1.5 1.2 18.1 6.7 3.2 2.3 1.2 1.0 0.8 0.9 15.0 5.4 1.8 1.9 2.5 1.6 10.5 5.9 1.5 1.3 6.7 2.0 1.0 0.8 9.0 5.6 1.2 1.1 1.0 5.3 2.6 1.3 3.7 2.8 2.2 0.9

-UW UW N N N UW UW N N N N N UW N UW N N N N UW UW N UW UW OW OW N N N N OW N N UW UW N N N OW OW

Source: MSCI, IBES, Bloomberg, J.P. Morgan, 13 November 2012. Note: Outperformance of more than 2% vs. MSCI APxJ. Underperformance of more than 2% vs MSCI APxJ. DD=Domestic Demand, GPT=Global Price Takers, GC/C=Global Capex/Consumer, GC=Global Consumer, GCP =Global Capex .Note. In Australia materials, we are OW on chemicals and packaging and neutral on mining 9



Potential returns and earnings estimatesEnd-2013 strategy team index forecasts MSCI APxJ 500 (+15%) This assumes 10% re-rating and 5% EPS downgrade Base case Current MSCI APxJ forward PE 11.3x Consensus 2014 MSCI APxJ EPS is 43 (before currency appreciation). The equity strategy teams key call is that Chinas economy will continue to slow. Anecdotal evidence is that companies faced with declining operating rates are reducing capex. This may result in lower growth. We believe the risk of downgrades in EPS forecasts for materials and exporters remains high. Domestic cyclicals and interest rate sensitives may benefit from upgrades. To be conservative, the strategy 2013 and 2014 EPS forecasts are 38 and 41 respectively. This assumes no EPS growth in material and energy companies. Forward P/E is 12x on 2014E EPS of 41 - QE3 driven re-rating of global equities. 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 2013 yield forecast and end 2014 EPS. 2. Five-year average earnings to bond yield ratio using provisional 2013 yield forecast and end 2014 EPS. 3. Current forward PE multiplied by 2014E EPS based on the lower of 2014 EPS growth or potential nominal GDP. 4. Current forward PE multiplied by 2014 EPS forecast. 5. Three year average PE multiplied by 2014 EPS forecast. 6. Gordon Growth model theoretical PE multiplied by 2014 EPS. This generates PE in excess of 30x 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 meanrevert. 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. Analysts 2012 and 2013 EPS forecasts were 10% to high at the start of the year. Our assumption is a 5% EPS downgrade in 2013.Table 4: Current forward P/E with standard deviation rangesIndex APxJ EM Asia Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Current Fwd PE 11.3 10.4 12.7 9.3 14.7 13.5 13.8 8.2 14.1 16.2 12.9 14.0 10.7 Avg 10Y 12.4 11.4 13.4 12.1 15.6 14.6 11.1 9.4 13.9 13.6 13.9 13.8 10.2 +1 SD 13.9 13.2 15.1 14.9 17.6 17.5 13.9 11.0 15.1 15.3 15.5 17.1 11.4 -1 SD 10.9 9.6 11.7 9.2 13.5 11.7 8.3 7.7 12.7 11.9 12.4 10.5 9.1 Top Decile 14.5 14.0 15.2 15.4 17.8 18.0 14.2 11.8 15.3 16.1 15.9 16.2 11.5 Bottom Decile 10.9 9.3 10.9 8.9 13.2 10.9 7.3 7.1 12.3 11.6 12.2 11.6 8.7

Source: MSCI, IBES, Datastream, 12 November 2012.

Table 5: Consensus Earnings growth forecast (%)Index APxJ Australia Hong Kong Singapore Korea Taiwan China India Malaysia Thailand Indonesia Philippines Consensus Earning Growth (%) 12E 13E 14E 5.9 10.8 11.1 (1.2) 5.2 9.1 (13.4) 10.9 10.9 8.6 4.4 9.6 33.3 17.1 10.7 6.3 24.2 13.7 2.0 9.2 10.7 9.9 14.0 13.7 13.1 7.9 9.3 13.3 18.9 10.3 6.1 13.6 15.9 12.4 12.0 10.1 EPS growth CAGR 13/ 08 12.0 2.0 8.5 3.2 24.8 22.2 13.9 13.9 6.2 18.4 12.5 13.4

Source: MSCI, Datastream, IBES, J. P. Morgan estimates, 12 November 2012

10



Table 6: Pick your methodology and thus your return: Percentage return to end 2013 targets based on multiple methodologiesIndex Level (LC) 425 907 59 11908 730 5242 544 585 899 341 262 479 (1) Current EY/BY (7) (34) 3 (35) 24 19 26 1 26 (14) (16) (2) (2) 5yr avg EY/BY 41 0 27 91 27 61 129 12 49 42 15 5 (3) FWD PE 2014 EPS = GDP 14 7 14 9 14 13 10 10 11 8 10 8 (4) Current FWD PE 13 11 10 10 21 19 14 12 18 10 22 11 (5) 3year average FWD PE 21 (1) 22 10 26 11 25 13 9 20 16 7 (6) Gordon Growth PE 173 84 244 121 135 152 310 137 122 168 162 195

APxJ Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand

Median 14 0 14 10 24 19 25 12 18 10 15 7

Max 41 11 27 91 27 61 129 13 49 42 22 11

Min (7) (34) 3 (35) 14 11 10 1 9 (14) (16) (2)

Range of returns 48 45 24 126 13 50 120 12 40 57 38 13

Source: MSCI, IBES, Datastream, Bloomberg, J.P. Morgan estimates. 12 November 2012 Note: All index levels and returns are in local currency; please email [email protected] for the assumptions

Table 7: Consensus EPS estimates and revisions since the beginning of 2012Index APxJ (US$) APxJ Australia Hong Kong Singapore Korea Taiwan China India Malaysia Thailand Indonesia Philippines 10 32 31 65 701 25 51 20.3 5.11 41 32 29 270 43 Actual 11 33 32 69 858 23 43 15 5.69 45 35 34 319 44 Current Consensus EPS 12E 13E 14E 35 39 43 34 38 42 68 72 79 734 814 903 25 27 29 58 68 76 15 19 22 5.80 6.34 7.01 49 56 64 39 42 45 38 45 50 338 384 445 50 56 62 Consensus EPS beginning of this Year 12E 13E 14E 38 43 49 37 42 47 79 87 88 749 843 846 26 28 31 61 70 81 19 24 24 6.34 7.21 7.72 52 60 58 39 43 45 40 46 49 373 431 503 52 57 56 Revision in Consensus EPS (%) 12E 13E 14E (6.8) (8.8) (11.6) (8.9) (10.8) (11.1) (13.6) (16.8) (10.5) (2.0) (3.4) 6.7 (1.0) (6.8) (6.1) (5.8) (3.3) (6.5) (21.2) (19.0) (11.1) (8.5) (12.1) (9.1) (5.2) (6.5) 9.9 (0.3) (2.9) 0.9 (5.7) (0.7) 2.8 (9.3) (10.8) (11.5) (3.0) (1.6) 9.2

Source: MSCI, Datastream, IBES, J. P. Morgan estimates, 12 November 2012. Note: All EPS are in local currency

11



Dissection of Asia Pacific ex-Japan EPS growthThe 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 2013 EPS growth forecasts EPS growth for 2012E is just 6%. Ironically the only sectors with double-digit EPS growth are the defensive sectors of utilities and healthcare. Note in Table 10 analysts forecast EPS growth in all sectors for 2013 and 2014. MSCI APxJ weighted and median EPS growth is 11% and 14%, respectively. This is in line with our economists 2013 nominal GDP growth forecast of 11%. Korea, China, Taiwan and Australia contribute c80% of MSCI APxJ 2013E EPS growth. Note that the Korea 2012 EPS estimate is distorted by the shift to Korean IFRS. Information Technology and Financials are the highest contributors to 2013E earnings growth. The contributions from Healthcare and Telecom are the lowest (see Table 9). Four sectors contribute c20% of MSCI APxJ 2013E EPS growth: Korea Semiconductors; Taiwan Semiconductors; Australia Diversified Banks; and China Life & Health Insurance. Note that the weighted EPS growth for APxJ Materials is high at 18% (primarily due to losses or low profits at China Steel, Iluka Resources, SIMS Metal Management and Hyosung, among others, in 2012E). The median EPS growth is 21%.

Dataset IBES EPS forecasts for MSCI Asia Pacific ex-Japan constituents. Calculation The indexs 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.

Table 8: Asia Pacific ex-Japan earnings growth and contributionCountry Korea China Taiwan Australia Hong Kong India Thailand Indonesia Malaysia Singapore Philippines APxJ Mkt Cap Weight 15.0 18.1 10.6 25.5 9.0 6.7 2.2 2.8 3.7 5.2 0.9 100 Earnings weights (%) 2012E 2013E 2014E 19.3 20.4 20.6 22.7 22.2 22.0 7.8 8.8 9.1 24.3 23.1 22.6 7.1 7.0 7.0 5.5 5.6 5.8 2.2 2.3 2.3 2.3 2.3 2.4 3.1 3.0 2.9 5.0 4.6 4.6 0.7 0.7 0.6 100.0 100.0 100.0 Index EPS Growth (%) 2012E 2013E 2014E 33.3 17.1 10.7 2.0 9.2 10.7 6.3 24.2 13.7 (1.2) 5.2 9.1 (13.4) 10.9 10.9 9.9 14.0 13.7 13.3 18.9 10.3 6.1 13.6 15.9 13.1 7.9 9.3 8.6 4.4 9.6 12.4 12.0 10.1 5.9 10.8 11.1 Median EPS Growth (%) 2012E 2013E 2014E (0.0) 18.8 15.1 3.4 16.7 15.1 1.1 13.0 13.0 1.4 5.5 9.0 4.2 9.1 10.2 13.3 16.7 15.1 19.9 17.2 12.3 9.1 13.3 13.8 7.9 10.7 9.2 5.3 8.2 9.5 13.6 12.5 9.4 5.4 13.6 12.9 Contribution to Earnings growth (%) 2012E 2013E 2014E 105 29 22 11 18 21 9 17 12 (25) 12 18 (49) 6 7 21 6 7 11 3 2 5 3 3 8 2 2 12 2 4 3 1 1 100 100 100

Source: IBES, Datastream, J.P. Morgan calculations. Note: Sorted by 2013E earnings growth contribution.

12



Table 9: Asia Pacific ex-Japan sector earnings growth and contributionMkt Cap Weight 13.7 35.9 11.0 8.2 7.3 6.9 6.5 3.2 5.4 1.8 100 Earnings weights (%) 2012E 2013E 2014E 12.1 13.8 14.3 41.4 38.9 38.2 10.2 10.7 11.1 7.6 7.8 8.2 8.4 8.4 8.4 7.9 7.7 7.3 4.2 4.3 4.3 2.4 2.6 2.7 4.9 4.7 4.6 1.0 1.0 1.1 100.0 100.0 100.0 Index EPS Growth (%) 2012E 2013E 2014E 36.9 27.5 15.9 3.7 5.2 9.5 (23.1) 17.7 15.6 (9.7) 15.6 16.4 13.6 12.0 10.7 (5.9) 9.5 6.4 5.3 13.1 11.6 37.1 23.0 14.3 2.3 8.4 7.9 8.9 15.1 23.3 5.9 10.8 11.1 Median EPS Growth (%) 2012E 2013E 2014E 5.3 17.2 13.2 8.2 9.1 11.1 (8.1) 20.6 15.4 1.5 16.8 16.7 6.1 13.3 11.8 1.3 5.4 8.5 6.4 17.8 13.3 14.7 9.1 8.5 3.4 10.3 13.5 19.8 15.8 15.0 5.4 13.6 12.9 Contribution to earnings growth (%) 2012E 2013E 2014E 136 28 19 62 18 32 (127) 15 14 (34) 10 11 42 9 8 (21) 6 4 9 5 4 27 5 3 5 3 3 3 1 2 100 100 100

APxJ Sectors Information Technology Financials Materials Industrials Consumer Discretionary Energy Consumer Staples Utilities Telecommunication Services Health Care APxJ

Source: IBES, Datastream, J.P. Morgan calculations. Note: Sorted by 2013 earnings growth contribution.

Table 10: Country sub-industry contributing 65% of APxJ Earning growthMkt Cap Weight 4.5 3.2 8.3 1.1 1.2 0.7 0.6 0.8 1.3 0.5 4.1 1.1 0.8 0.9 4.3 0.9 0.9 0.9 0.4 0.4 2.0 1.0 0.6 0.6 0.7 0.4 0.7 0.3 0.2 1.0 0.7 0.4 1.0 1.0 1.1 0.3 1.0 0.8 0.5 0.1 0.2 0.9 0.2 Earnings weights (%) 2012E 2013E 2014E 5.8 6.5 6.4 2.5 2.6 2.6 9.0 8.3 7.9 0.6 0.8 0.8 1.5 1.6 1.5 0.9 1.0 1.0 0.6 0.7 0.8 0.4 0.5 0.6 2.9 2.8 2.7 0.5 0.6 0.6 4.3 4.0 4.1 0.9 1.0 1.0 0.8 0.8 0.9 0.9 0.9 1.0 9.1 8.2 8.1 0.9 1.0 1.0 1.4 1.4 1.4 0.8 0.9 0.9 0.5 0.6 0.6 0.6 0.6 0.6 1.8 1.7 1.7 0.4 0.5 0.5 0.9 0.9 0.9 0.4 0.4 0.5 0.8 0.8 0.8 0.3 0.3 0.4 0.5 0.5 0.5 0.4 0.4 0.4 0.2 0.2 0.2 1.2 1.1 1.1 0.6 0.6 0.6 0.4 0.5 0.5 0.8 0.8 0.8 1.0 0.9 0.9 0.8 0.7 0.8 0.3 0.3 0.3 0.7 0.7 0.7 0.7 0.7 0.6 0.4 0.4 0.3 0.0 0.1 0.1 0.3 0.3 0.3 1.0 1.0 0.9 0.2 0.3 0.3 Index EPS Growth (%) 2012E 2013E 2014E 66.1 25.7 10.7 15.3 15.0 14.3 1.7 3.3 5.0 9.4 49.1 16.5 (4.8) 16.3 7.4 (27.7) 27.5 15.5 (26.1) 37.2 16.6 (56.5) 60.1 17.2 25.2 7.5 9.2 (44.6) 38.0 8.5 (21.9) 4.4 13.4 18.5 19.1 19.1 22.5 23.2 15.0 6.8 20.0 16.7 6.9 1.9 10.1 28.2 16.6 14.5 10.6 9.3 12.0 9.9 15.1 19.3 (7.1) 23.5 16.3 (12.8) 20.5 9.7 (0.6) 6.4 10.0 30.8 26.1 23.4 15.7 11.6 10.6 (2.9) 25.8 27.9 (43.4) 13.0 9.0 10.9 35.2 28.3 31.9 20.0 17.0 (34.0) 23.9 13.4 NM 60.8 11.6 54.7 8.1 8.8 (55.5) 14.9 13.8 (5.2) 19.1 15.7 17.2 10.4 10.7 7.2 8.3 11.2 28.9 10.2 16.4 3.8 26.9 17.7 10.3 10.5 9.9 (0.1) 10.4 4.0 8.7 20.0 0.0 (39.6) 171.0 29.0 74.7 23.5 10.8 10.2 6.3 (0.5) (14.3) 25.8 34.3 Median EPS Growth (%) 2012E 2013E 2014E 66.9 18.6 22.4 12.2 15.2 11.7 1.0 3.3 4.8 17.5 44.4 16.7 (5.4) 17.8 7.4 (3.1) 18.7 18.3 (51.0) 63.4 20.2 (59.1) 45.5 12.5 25.0 7.7 9.2 (23.4) 37.4 5.0 (28.2) 5.0 12.3 16.1 16.6 16.6 3.5 25.0 11.5 6.8 20.0 16.7 8.2 0.0 9.1 48.5 18.4 13.8 16.0 10.0 14.3 8.7 16.7 20.0 (0.0) 28.1 17.1 (28.0) 33.1 15.0 7.7 5.3 11.1 30.8 26.1 23.4 13.6 16.8 13.5 (2.9) 25.8 27.9 (12.7) 11.5 6.9 5.3 33.3 25.0 22.0 13.3 11.8 (30.8) 25.0 15.5 NM 60.8 11.6 35.1 20.1 9.8 (13.0) 9.1 13.8 7.7 20.5 21.1 19.5 10.0 10.3 8.3 8.5 11.5 28.9 10.2 16.4 3.8 26.9 17.7 10.3 10.5 9.9 5.8 6.0 3.3 8.7 20.0 0.0 (18.3) 9.4 27.0 57.7 23.6 14.0 0.0 0.0 0.0 (12.0) 39.3 32.4 Contribution to Earnings growth (%) 2012E 2013E 2014E 96 12 6 14 3 3 6 3 4 2 2 1 (3) 2 1 (14) 2 1 (9) 2 1 (20) 2 1 24 2 2 (18) 2 0 (51) 2 5 6 1 2 6 1 1 2 1 1 24 1 7 9 1 1 6 1 1 3 1 1 (2) 1 1 (4) 1 1 (0) 1 1 4 1 1 5 1 1 (0) 1 1 (24) 1 1 1 1 1 5 1 1 (9) 1 1 11 1 0 17 1 1 (32) 1 1 (1) 1 1 5 1 1 3 1 1 7 1 1 0 1 0 3 1 1 (0) 1 0 1 1 0 (1) 1 0 5 1 0 4 1 (0) (2) 1 1

Country Sub-Industry Korea Semiconductors Taiwan Semiconductors Australia Diversified Banks China Life & Health Insurance China Integrated Oil & Gas Korea Steel Korea Commodity Chemicals Taiwan Commodity Chemicals Korea Auto Manufacturers Korea Oil & Gas R&M Australia Div. Metals & Mining India Diversified Banks Taiwan Computer Hardware Taiwan Electronic Manufacturing China Diversified Banks Thailand Diversified Banks China Real Estate Development Indonesia Diversified Banks Korea Const. & Engineering Korea Industrial Conglomerates HK Div. Real Estate Activities China Internet Software & Svs Korea Auto Parts & Equipment Australia Gold HK Real Estate Development China Integrated Telecom Svs Hong Kong Casinos & Gaming China Construction Materials Korea Consumer Electronics Australia Property Insurance HK Industrial Conglomerates China Automobile Manufacturers India It Consulting & Other Svs Malaysia Diversified Banks HK Life & Health Insurance Australia Investment Banking Australia Hypermarkets Hong Kong Electric Utilities Indonesia Auto Manufacturers Korea Integrated Telecom Svs China IPP & Energy Tra Taiwan Diversified Banks Australia Steel

Source: IBES, Datastream, J.P. Morgan calculations. Note: Sorted by 2013E earnings growth contribution. 13



Valuations analysis dividing the universeThe objective of this section is to highlight cheap and expensive sectors in countries. Sectors are split into five groups based on what drives their long-term growth (for details see pages 17 to 23): Valuations conclusions The domestic growth basket in all countries trades at a premium or a small discount. In China the domestic growth premium is 95%. Domestic growth or good dividend yielding sectors in all countries are expensive (see Table 17). Value is limited in domestic growth sectors to India CD, Taiwan insurance, Korea insurance, HK banks and Australia diversified financials (see Table 18). China growth concerns and policy risks offer maximum value. Over the last 12 months the global demand basket had the largest de-rating (-15%, see Figure 10). But this is due to earnings upgrades in tech. All baskets except domestic growth de-rated on PB over the last year. The de-rating (10%) is largest for the China growth concerns basket (see Figure 11). The China growth concerns basket is more expensive today than 12 months ago. Its underperformance was insufficient to offset EPS downgrades. The policy risk basket in all the countries is at a discount. The PB discount is larger than forward PE discount (See Table 13 to Table 16). Chinese banks PE and PB are more than one standard deviation cheap relative to history. The China growth concerns baskets simple average PE and PB are at a large discount. We have little confidence in the forecast of high EPS growth in 2013 for these stocks (see Table 21). Where we maybe wrong is if companies reported inventory losses in 2012. The others basket trades at a similar valuation as the domestic growth basket. A higher dividend payout ratio results in a higher dividend yield; this valuation factor may be more important than PE and PB. The attempt to generate baskets has issues; big variation in sector valuations in some baskets. Chinese banks are inexpensive and prone to periods of underperformance followed by sharp rallies. Korea and Taiwan have more than half their index value and earnings from global demand. Baskets or groups based on drivers of top-line Policy risk: Sectors which de-rated owing to actual or fear of government policy; i.e. China financials, India materials, India energy, utilities in numerous countries. Domestic growth: Sectors perceived as beneficiaries of domestic growth stories; i.e. consumer discretionary, select financials including India and ASEAN financials. Global demand: Sectors sensitive to global demand; i.e. Korea and Taiwan IT and industrials, Korea CD. China growth concerns: Sectors dependent on Chinese demand. These are dominated by sectors sensitive to fixed investment i.e., materials in Australia, China, Korea and Taiwan. Gaming (Hong Kong consumer discretionary) is also included. Others: Sectors that do not fall into any of the above categories such as telecoms, utilities without perceived policy risk.Table 11: Free float market cap weight of each country sectorPolicy Risks NA 40 35 23 NA 10 13 NA NA NA NA China growth concerns 26 34 13 NA 6 14 NA NA NA 13 NA Domestic Growth 60 20 21 57 77 9 52 75 42 6 68 Global Demand NA NA 11 20 NA 65 11 NA 31 60 25 Others 14 6 21 NA 17 2 23 25 28 22 7

Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand

Source: MSCI, IBES, Datastream, 9 November 2012. Note: For Korea, there has been a change from Korea GAAP to IFRS; the growth number of global demand basket is enhanced as a result of that. The year ending for Australia is June.

Table 12: 2012 EPS contribution of each country sectorPolicy Risks NA 53 39 32 NA 13 14 NA NA NA NA China growth concerns 24 33 11 NA 9 11 NA NA NA 9 NA Domestic Growth 61 NA 22 51 74 6 59 72 47 5 60 Global Demand NA NA 11 18 NA 68 8 NA 31 59 32 Others 14 4 17 NA 17 2 19 28 22 27 8

Index composition observations: Policy risk exposure is the largest in China at 40% market cap and 53% earnings. Domestic growth is more than half the index value and earnings in India, Australia and ASEAN.14

Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand

Source: MSCI, IBES, Datastream, 9 November 2012. Note: For Korea, there has been a change from Korea GAAP to IFRS; the growth number of global demand basket is enhanced as a result of that. The year ending for Australia is June.



12-month forward PE of APxJ basketsFigure 10: Forward PE of each basket (weighted average)21.0 19.0 17.0 15.0 13.0 11.0 9.0 7.0 5.0 Nov 02 Policy Risks China growth concerns Others Domestic Growth Global Demand

Nov 04

Nov 06

Nov 08

Nov 10

Nov 12

Source: MSCI, Datastream, J.P. Morgan calculations, 9 November 2012. Note: Weighted average is calculated as total FF market cap of respective basket divided by total free float 12 month forward earnings

Table 13: 12-month forward PE (weighted average) of each country sector)12 month forward PE China growth Domestic Global concerns Growth Demand 12 13 NA 9 18 NA 15 15 13 NA 14 16 11 14 NA 9 13 8 NA 13 14 NA 17 NA NA 12 13 18 17 13 NA 12 9 11 14 10 Premium to 12 month forward PE China growth Domestic Global concerns Growth Demand (2) 0 NA (0) 95 NA 4 1 (9) NA 7 19 (20) 2 NA 8 64 (4) NA (8) 0 NA 7 NA NA (9) (2) 29 26 (6) NA 12 (20) (3) 20 (12)

Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand APxJ

Policy Risks NA 7 13 10 NA 7 14 NA NA NA NA 9

Others 13 11 18 NA 14 11 17 14 16 13 10 14

Market multiple 13 9 15 13 14 8 14 16 13 14 11 11

Policy Risks NA (21) (9) (22) NA (12) (4) NA NA NA NA (24)

Others 4 21 21 NA 2 40 19 (15) 19 (4) (11) 23

Source: MSCI, IBES, Datastream, 9 November 2012. Note: weighted average is calculated as total market cap of respective country basket divided by total free float forward earning

Table 14: 12 month forward PE (simple average) of each country sector12 month forward PE China growth Domestic Global concerns Growth Demand 13 14 NA 9 19 NA 15 15 13 NA 16 17 11 17 NA 9 14 8 NA 15 16 NA 20 NA NA 16 12 19 17 13 NA 16 9 12 16 12 Premium to 12 month forward PE China growth Domestic Global concerns Growth Demand (8) 1 NA (21) 58 NA (7) (10) (19) NA 7 16 (26) 10 NA (20) 31 (28) NA (2) 1 NA 9 NA NA 9 (18) 16 7 (19) NA 16 (38) (17) 13 (14)


Policy Risks NA 12 13 13 NA 13 14 NA NA NA NA 13

Others 14 10 19 NA 14 11 18 14 16 16 11 15

Market multiple 14 12 16 15 15 11 16 18 15 16 14 14

Policy Risks NA (1) (19) (16) NA 16 (13) NA NA NA NA (14)

Others 2 (13) 16 NA (6) 5 12 (26) 5 (4) (21) 2

Source: MSCI, IBES, Datastream, 9 November 2012. Note: The market multiple is calculated as simple average of all the sector valuations. 15



Trailing PB of APxJ basketsFigure 11: Trailing PB of each basket (weighted average)4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Oct 02 Policy Risks China growth concerns Others Domestic Growth Global Demand

Oct 04

Oct 06

Oct 08

Oct 10

Oct 12

Source: MSCI, Datastream, J.P. Morgan calculations, 9 November 2012. Note: Weighted average is calculated as total FF market cap of respective basket divided by total free float trailing book value

Table 15: Trailing PB (weighted average) of each country sector)Trailing PB Policy Risks NA 1.4 0.8 1.3 NA 0.6 1.6 NA NA NA NA 1.0 China growth concerns 2.2 1.4 3.6 NA 2.7 1.0 NA NA NA 1.6 NA 1.6 Domestic Growth 1.7 3.3 1.9 3.2 4.0 1.8 2.1 2.8 1.5 2.1 2.7 2.1 Global Demand NA NA 1.0 4.6 NA 1.4 2.8 NA 1.5 2.0 1.7 1.6 Others 1.4 1.9 3.0 NA 4.2 0.8 2.4 3.8 1.4 1.4 1.7 1.7 Market multiple 1.8 1.6 1.3 2.6 3.9 1.1 2.1 2.9 1.5 1.8 2.3 1.6 Policy Risks NA (14) (39) (47) NA (52) (25) NA NA NA NA (36) Premium to Trailing PB China growth Domestic Global concerns Growth Demand 20 (2) NA (11) 104 NA 170 46 (28) NA 27 82 (31) 2 NA (15) 56 19 NA 0 30 NA (5) NA NA (0) 1 (7) 20 11 NA 19 (25) 0 28 (3)


Others (19) 21 128 NA 8 (27) 12 30 (1) (21) (25) 4

Source: MSCI, IBES, Datastream, 9 November 2012. Note: weighted average is calculated as total market cap of respective country basket divided by total free float trailing book value

Table 16: Trailing PB (simple average) of each country sectorTrailing PB Policy Risks NA 1.8 0.8 1.3 NA 0.6 1.6 NA NA NA NA 1.3 China growth concerns 2.0 1.4 3.6 NA 2.3 1.1 NA NA NA 1.6 NA 1.7 Domestic Growth 2.5 3.6 1.9 4.5 4.9 2.2 2.1 3.3 4.1 2.7 7.7 3.8 Global Demand NA NA 1.0 4.6 NA 1.3 2.8 NA 1.3 1.7 1.7 2.1 Others 2.1 1.5 3.5 NA 5.2 0.8 3.2 3.8 1.7 2.1 2.3 2.6 Market multiple 2.3 1.9 2.6 3.4 4.5 1.3 2.4 3.4 2.6 2.0 5.6 2.7 Policy Risks NA (7) (68) (62) NA (52) (33) NA NA NA NA (54) Premium to Trailing PB China growth Domestic Global concerns Growth Demand (10) 9 NA (27) 86 NA 39 (25) (63) NA 34 37 (49) 11 NA (14) 73 4 NA (11) 18 NA (4) NA NA 55 (49) (23) 35 (18) NA 38 (69) (38) 38 (23)


Others (7) (24) 36 NA 17 (33) 32 11 (34) 6 (60) (5)

Source: MSCI, IBES, Datastream, 9 November 2012. Note: The market multiple is calculated as simple average of all the sector valuations.

16



Table 17: APxJ expensive sectors (valuations more than one SD above their 10-year average)FF market cap weight EPS Weight 2012 Growth 2013 Growth 12M fwd PE # of st.devs. From long term average Valuations # of st.devs. Trailing PB From long term average 2013 ROE 2013 DY Relative Valuations to respective market Premium 10Y Premium 10Y to 12M Average to trailing Average fwd PE premium to PB premium fwd PE to PB

Domestic Growth

Australia Telecommunication Services China Consumer Staples India Consumer Staples Construction Materials Chemicals Indonesia Health Care Consumer Discretionary Consumer Staples Construction Materials Korea Health Care Malaysia Construction Materials Thailand Telecommunication Services Consumer Staples Consumer Discretionary Construction Materials Philippines Consumer Discretionary Real Estate Banks Diversified Financials

2 6 10 3 1 2 16 12 8 1 1 7 12 2 7 3 16 13 6

2 2 5 2 1 1 15 9 7 0 1 6 5 1 5 2 10 13 5

5 6 23 15 22 12 7 9 20 12 18 61 (8) 34 (7) 11 16 14 41

7 18 19 17 19 17 16 17 18 42 15 9 39 17 30 15 15 12 20

14 22 29 18 17 24 15 18 16 17 20 15 20 21 14 27 26 15 18

0.5 1.8 2.2 1.6 1.4 2.1 1.2 1.1 1.0 0.7 1.2 0.7 2.1 1.7 1.8 1.8 1.3 1.0 0.2

4.4 3.5 11.8 4.1 5.0 7.5 4.9 5.5 5.5 3.0 2.7 12.6 5.6 14.9 3.6 5.4 4.0 2.2 2.5

1.6 0.7 1.7 0.5 (0.0) 2.8 1.5 1.2 1.6 1.0 2.5 2.4 1.3 2.4 0.7 1.4 1.7 1.4 1.3

32 15 35 19 23 27 29 25 27 16 13 90 26 67 20 18 14 12 13

6.8 2.1 1.9 1.4 1.6 2.1 3.0 2.6 2.3 0.5 4.2 7.0 3.2 4.7 3.7 1.2 1.6 1.6 0.9

9 134 121 33 31 72 7 32 15 104 39 43 89 100 27 69 63 (4) 14

(3) 36 46 (7) (12) 14 (7) 29 24 45 13 36 22 61 3 31 48 3 31

149 120 361 62 97 91 26 41 41 161 26 449 144 547 58 83 36 (24) (15)

71 26 170 1 62 17 (11) 18 (4) 53 (38) 127 58 205 46 44 11 (23) (8)

Global DemandMalaysia Energy 4 3 11 23 19 1.9 3.0 1.1 15 1.8 31 (17) 41 3

Others

Malaysia Telecommunication Services Philippines Utilities Taiwan Telecommunication Services Energy Thailand Utilities

12 12 5 1 1

9 14 5 0 1

1 21 (1) (50) 64

14 9 8 160 45

21 13 17 30 13

3.2 0.9 1.7 2.1 2.0

4.9 4.0 2.8 4.0 3.0

2.6 1.4 2.0 1.0 3.2

24 24 16 13 21

4.9 3.0 5.6 2.7 3.8

51 (19) 23 115 21

14 (29) (6) 30 (9)

129 35 58 130 31

33 (19) 6 92 (17)

Source: MSCI, Datastream, 9 November 2012. Note: Trailing PB is used for capital intensive sectors such as energy, metals and mining, telecom, financials and utilities. For other sectors fwd PE is used.

17



Table 18: APxJ value sectors (valuations less than one SD from their 10-year average)FF market cap weight EPS Weight 2012 Growth 2013 Growth 12M fwd PE # of st.devs. From long term average Valuations Trailing # of st.devs. PB From long term average 2013 ROE 2013 DY Premium to 12M fwd PE Relative Valuations to respective market 10Y Average Premium to 10Y Average premium to trailing PB premium to fwd PE PB

Domestic Growth

Australia Diversified Financials Hong Kong Banks India Consumer Discretionary Korea Insurance Taiwan Insurance

1 9 9 3 3

2 12 11 3 3

(21) 2 (3) 10 37

13 1 15 12 (8)

12 13 10 10 16

(0.4) (0.8) (1.2) (0.8) (0.8)

1.1 1.8 3.4 1.2 1.4

(1.2) (1.3) (0.5) (1.3) (1.8)

8 14 27 11 8

5.4 4.5 1.8 2.8 1.7

(6) (14) (25) 27 15

(3) (8) (9) 31 42

(37) 36 33 6 (21)

0 61 17 38 32

Global Demand

India Information Technology Korea Consumer Discretionary Thailand Energy

15 16 25

14 24 32

15 87 3

9 12 16

15 6 9

(1.2) (1.3) (0.4)

4.7 1.3 1.7

(1.0) (0.7) (1.0)

25 19 18

2.0 1.0 4.4

10 (20) (20)

31 (9) (10)

85 12 (25)

101 2 20

China growth concernsAustralia Metals & Mining China Metals & Mining Korea Metals & Mining Taiwan Metals & Mining 20 2 5 3 19 1 5 1 (10) (37) (9) (56) (20) 41 16 55 12 12 9 25 (0.0) 0.2 0.4 2.8 2.3 1.2 0.7 1.4 (1.2) (1.0) (1.5) (1.0) 13 9 9 5 2.9 2.1 2.3 2.6 (6) 31 5 86 (10) (6) (18) (15) 26 (28) (37) (20) 61 (12) (21) (6)

Policy Risks

China Banks India Metals & Mining Energy Korea Banks Telecommunication Services

24 5 12 8 1

41 10 15 13 0

10 10 3 (7) (19)

1 15 6 (5) 44

6 7 11 6 9

(1.3) (0.8) (0.3) (1.0) (0.2)

1.2 0.9 1.7 0.6 0.8

(1.5) (1.4) (1.0) (1.6) (1.2)

18 12 13 9 10

5.5 1.8 1.9 2.9 4.9

(37) (49) (16) (24) 6

(6) (45) (18) (17) (4)

(26) (64) (35) (49) (27)

(4) (39) (22) (20) 1

Others

Australia Energy Malaysia Utilities Taiwan Diversified Financials Banks

6 10 3 9

5 10 3 12

11 39 (29) 17

12 (11) 9 4

15 14 13 11

(0.9) (0.3) (0.6) (0.8)

1.4 1.5 1.1 1.0

(1.4) (1.0) (1.2) (1.1)

10 10 8 9

3.7 2.6 3.1 3.0

15 (5) (8) (18)

33 0 4 (4)

(19) (31) (39) (45)

22 (13) (25) (32)

Source: MSCI, Datastream, 9 November 2012. Note: Trailing PB is used for capital intensive sectors such as energy, metals and mining, telecom, financials and utilities. For other sectors fwd PE is used. 18



Table 19: APxJ domestic growth basketFF market cap weight China Insurance Information Technology Consumer Staples India Diversified Financials Consumer Discretionary Banks Industrials Chemicals Construction Materials Consumer Staples Korea Insurance Consumer Staples Health Care Taiwan Insurance Consumer Staples Indonesia Banks Industrials Consumer Discretionary Construction Materials Consumer Staples Health Care Malaysia Diversified Financials Consumer Discretionary Banks Consumer Staples Construction Materials Real Estate Thailand Banks Construction Materials Telecommunication Services Consumer Staples Consumer Discretionary 7 7 6 4 9 25 6 1 3 10 3 6 1 3 3 33 4 17 8 13 2 3 10 27 11 1 1 40 7 7 12 2 EPS Weight 2012 Growth 2013 Growth 12M fwd PE # of st.devs. From long term average (1.0) 0.6 1.8 (0.9) (1.2) (0.4) (0.4) 1.4 1.6 2.2 (0.8) 0.9 0.7 (0.8) 0.5 0.5 0.3 1.2 1.0 1.1 2.1 (1.1) (0.6) (0.8) 0.6 1.2 1.0 (0.4) 1.8 0.7 2.1 1.7 Valuations # of st.devs. Trailing PB From long term average 2.4 4.8 3.5 1.9 3.4 2.8 2.5 5.0 4.1 11.8 1.2 2.3 3.0 1.4 4.1 3.2 3.0 4.9 5.5 5.5 7.5 1.7 1.9 2.1 2.6 2.7 1.8 2.0 3.6 12.6 5.6 14.9 (0.9) 0.6 0.7 (0.7) (0.5) (0.1) (0.9) (0.0) 0.5 1.7 (1.3) (0.0) 1.0 (1.8) 1.9 0.5 (0.0) 1.5 1.6 1.2 2.8 0.4 (0.2) (0.1) (0.4) 2.5 0.7 0.9 0.7 2.4 1.3 2.4 2013 ROE 2013 DY Relative Valuations to respective market Premium 10Y Premium 10Y to 12M Average to trailing Average fwd PE premium to PB premium fwd PE to PB 56 125 134 (18) (25) 2 8 31 33 121 27 92 104 15 39 (13) 2 7 15 32 72 (23) (15) (14) 16 39 39 (8) 27 43 89 100 69 55 36 4 (9) 3 11 (12) (7) 46 31 39 45 42 35 (4) 16 (7) 24 29 14 (4) (3) (5) 10 13 11 1 3 36 22 61 50 200 120 (26) 33 9 (4) 97 62 361 6 101 161 (21) 132 (19) (23) 26 41 41 91 (22) (9) (0) 20 26 (14) (14) 58 449 144 547 53 73 26 (17) 17 (17) 26 62 1 170 38 58 53 32 37 (23) (22) (11) (4) 18 17 (29) (2) 6 37 (38) (28) (20) 46 127 58 205

4 3 2 5 11 22 5 1 2 5 3 3 0 3 2 36 5 15 7 9 1 3 12 32 10 1 1 43 5 6 5 1

15 (3) 6 14 (3) 13 7 22 15 23 10 17 12 37 18 10 (2) 7 20 9 12 8 1 6 (16) 18 22 30 (7) 61 (8) 34

35 30 18 15 15 20 14 19 17 19 12 14 42 (8) 11 14 8 16 18 17 17 11 8 10 17 15 16 18 30 9 39 17

14 21 22 11 10 13 14 17 18 29 10 16 17 16 19 12 14 15 16 18 24 11 12 12 16 20 20 10 14 15 20 21

15 20 15 15 27 19 15 23 19 35 11 12 16 8 34 22 19 29 27 25 27 14 14 16 15 13 9 18 20 90 26 67

1.7 0.9 2.1 1.9 1.8 1.8 1.3 1.6 1.4 1.9 2.8 1.5 0.5 1.7 2.8 2.0 2.9 3.0 2.3 2.6 2.1 4.1 2.4 4.4 3.4 4.2 1.9 3.4 3.7 7.0 3.2 4.7

Source: MSCI, Datastream, 9 November 2012

19



Table 20: APxJ domestic growth basket (contd)FF market cap weight Philippines Industrials Banks Diversified Financials Consumer Staples Real Estate Consumer Discretionary Singapore Banks Consumer Discretionary Diversified Financials Hong Kong Banks Insurance Australia Banks Diversified Financials Real Estate Telecommunication Services Consumer Discretionary Consumer Staples Health Care 30 15 5 5 18 3 31 8 2 9 12 33 1 8 2 2 9 4 EPS Weight 2012 Growth 2013 Growth 12M fwd PE # of st.devs. From long term average 0.1 1.0 0.2 (0.1) 1.3 1.8 (1.2) (0.1) 0.3 (0.8) 1.6 (0.3) (0.4) (0.1) 0.5 (0.3) (0.4) (0.4) Valuations # of st.devs. Trailing PB From long term average 2.5 2.2 2.5 3.3 4.0 5.4 1.3 2.3 8.6 1.8 2.0 1.7 1.1 1.1 4.4 1.3 2.4 5.2 1.4 1.4 1.3 2.9 1.7 1.4 (0.9) (0.7) 0.1 (1.3) (0.7) (0.8) (1.2) (0.3) 1.6 (0.9) (0.6) 1.3 2013 ROE 2013 DY Relative Valuations to respective market Premium 10Y Premium 10Y to 12M Average to trailing Average fwd PE premium to PB premium fwd PE to PB (12) (4) 14 19 63 69 (17) 20 67 (14) 16 (10) (6) 9 9 13 22 47 (4) 3 31 50 48 31 (8) 14 47 (8) 6 (11) (3) 6 (3) 16 23 51 (15) (24) (15) 11 36 83 (14) 59 486 36 54 (3) (37) (38) 149 (29) 34 193 (17) (23) (8) (14) 11 44 (14) 59 358 61 350 (6) 0 (46) 71 (19) 27 59

39 13 5 4 10 2 39 7 1 12 11 38 2 8 2 1 8 3

12 14 41 44 16 11 18 (11) (2) 2 33 1 (21) (2) 5 (22) 6 7

13 12 20 18 15 15 (2) 12 3 1 10 3 13 (3) 7 (27) 7 15

14 15 18 19 26 27 11 16 22 13 17 11 12 14 14 14 15 19

16 12 13 18 14 18 11 15 37 14 11 15 8 8 32 8 15 24

2.0 1.6 0.9 2.3 1.6 1.2 2.3 3.3 4.1 4.5 1.4 6.5 5.4 5.5 6.8 4.4 5.0 2.5


20



Table 21: APxJ China growth concerns basketsFF market cap weight China Industrials Metals & Mining Real Estate Chemicals Energy Construction Materials Korea Metals & Mining Energy Chemicals Taiwan Metals & Mining Construction Materials Chemicals Indonesia Metals & Mining Energy Hong Kong Consumer Discretionary Australia Metals & Mining Chemicals Industrials 7 2 6 1 17 2 5 3 5 3 2 8 1 5 13 20 2 5 EPS Weight 2012 Growth 2013 Growth 12M fwd PE # of st.devs. From long term average (0.8) 0.2 (1.0) (0.9) (0.3) (0.9) 0.4 (0.2) 0.6 2.8 0.3 1.4 0.3 0.2 (0.6) (0.0) (0.6) (0.8) Valuations # of st.devs. Trailing PB From long term average 1.1 1.2 1.3 1.5 1.6 1.7 0.7 1.2 1.3 1.4 1.5 1.8 1.6 3.0 3.6 2.3 2.1 1.8 (0.8) (1.0) (0.4) (0.4) (0.9) (0.8) (1.5) (0.7) (0.3) (1.0) 0.5 (0.5) (0.7) (0.5) (0.3) (1.2) (0.8) (0.6) 2013 ROE 2013 DY Relative Valuations to respective market Premium 10Y Premium 10Y to 12M Average to trailing Average fwd PE premium to PB premium fwd PE to PB 11 31 (19) (3) 1 (5) 5 (2) 17 86 7 20 (20) (20) 4 (6) (10) 23 11 (6) (10) 2 (15) 14 (18) (6) (14) (15) (0) (11) (14) (18) 8 (10) (5) 30 (29) (28) (19) (9) 2 8 (37) 5 14 (20) (16) 0 (60) (24) 170 26 16 2 (25) (12) (29) (25) 1 39 (21) 7 2 (6) (31) 3 (19) 34 150 61 30 (7)

5 1 7 0 18 2 5 3 4 1 2 5 1 8 11 19 2 4

(10) (37) 9 (31) (5) (36) (9) (43) (23) (56) (13) (47) (48) (24) 21 (10) (7) (3)

20 41 12 60 7 24 16 33 28 55 12 59 43 5 18 (20) 16 33

10 12 7 9 9 9 9 8 10 25 15 16 11 11 15 12 11 16

10 9 15 15 15 17 9 13 13 5 10 10 13 20 21 13 16 11

2.8 2.1 3.3 3.8 3.6 1.8 2.3 2.5 1.3 2.6 5.0 4.1 4.2 4.4 3.5 2.9 4.1 4.1


21



Table 22: APxJ policy risk basketFF market cap weight China Banks Health Care Telecommunication Services Utilities India Energy Telecommunication Services Real Estate Utilities Metals & Mining Korea Banks Telecommunication Services Utilities Malaysia Industrials Hong Kong Real Estate 24 1 13 3 12 2 1 4 5 8 1 2 13 35 EPS Weight 41 0 10 2 15 1 1 5 10 13 0 -1 14 39 2012 Growth 10 21 2 47 3 9 36 13 10 (7) (19) 20 (21) 2013 Growth 1 21 5 19 6 44 27 8 15 (5) 44 8 10 12M fwd PE 6 19 12 11 11 17 17 12 7 6 9 23 14 13 # of st.devs. From long term average (1.3) 0.3 (0.4) (0.8) (0.3) 0.6 0.0 (0.3) (0.8) (1.0) (0.2) (0.0) (0.3) (0.8) Valuations Trailing PB # of st.devs. From long term average 1.2 2.6 1.8 1.7 1.7 1.3 1.0 1.5 0.9 0.6 0.8 0.4 1.6 0.8 (1.5) 0.0 (0.8) (0.5) (1.0) (0.3) (0.7) (0.8) (1.4) (1.6) (1.2) (0.7) (1.2) (0.8) 2013 ROE 2013 DY Relative Valuations to respective market Premium 10Y Average Premium to 10Y Average to 12M fwd premium to trailing PB premium to PE fwd PE PB (37) 102 26 22 (16) 26 27 (9) (49) (24) 6 181 (4) (9) (6) 44 8 11 (18) (9) 6 (10) (45) (17) (4) 168 2 (0) (26) 60 9 5 (35) (50) (62) (40) (64) (49) (27) (67) (25) (39) (4) 19 16 (14) (22) (55) 44 (38) (39) (20) 1 (69) (6) (35)

18 12 14 13 13 8 6 12 12 9 10 2 12 6

5.5 1.3 3.7 2.9 1.9 0.5 1.0 2.0 1.8 2.9 4.9 0.6 3.1 2.9


Table 23: APxJ global demand basketFF market cap weight India Information Technology Health Care Korea Consumer Discretionary Information Technology Industrials Taiwan Industrials Information Technology Malaysia Chemicals Energy Thailand Energy Singapore Industrials Consumer Staples Hong Kong Industrials 15 5 16 36 12 4 56 8 4 25 25 6 11 EPS Weight 14 4 24 33 11 3 56 5 3 32 25 6 11 2012 Growth 15 18 87 77 24 15 20 11 3 16 (18) (52) 2013 Growth 9 8 12 23 16 31 7 23 16 6 21 15 12M fwd PE 15 20 6 8 9 13 13 13 19 9 13 11 13 # of st.devs. From long term average (1.2) 0.2 (1.3) (0.7) (0.3) (0.2) (0.2) (0.6) 1.9 (0.4) 0.2 (0.7) (0.8) Valuations Trailing PB # of st.devs. From long term average 4.7 4.4 1.3 1.6 1.0 1.3 2.0 2.7 3.0 1.7 1.6 1.0 1.0 (1.0) (1.0) (0.7) (0.9) (0.6) 0.1 (0.4) (0.7) 1.1 (1.0) (0.8) (0.6) (0.8) 2013 ROE 2013 DY Relative Valuations to respective market Premium 10Y Average Premium to 10Y Average to 12M fwd premium to trailing PB premium to PE fwd PE PB 10 53 (20) 1 7 (3) (6) (11) 31 (20) 3 (17) (9) 31 37 (9) 19 1 2 8 2 (17) (10) (6) 9 7 85 74 12 38 (9) (26) 14 25 41 (25) 12 (29) (28) 101 67 2 37 (6) (33) 14 45 3 20 14 40 (27)

25 15 19 19 12 9 14 18 15 18 12 9 7

2.0 0.9 1.0 0.6 1.4 3.4 3.6 4.0 1.8 4.4 3.2 2.3 3.1

Source: MSCI, Datastream, 9 November 2012 22



Table 24: APxJ others basketFF market cap weight China Consumer Discretionary Diversified Financials Paper & Forest Products Korea Diversified Financials Taiwan Banks Energy Telecommunication Services Real Estate Consumer Discretionary Diversified Financials Indonesia Telecommunication Services Utilities Malaysia Telecommunication Services Utilities Thailand Utilities Chemicals Philippines Telecommunication Services Utilities Singapore Telecommunication Services Real Estate Hong Kong Telecommunication Services Information Technology Utilities Diversified Financials Australia Energy Insurance Information Technology Construction Materials Utilities 5 0 0 2 9 1 5 1 4 3 12 5 12 10 1 6 12 12 12 16 0 1 13 6 6 6 0 1 1 EPS Weight 2012 Growth 2013 Growth 12M fwd PE # of st.devs. From long term average (0.5) (0.6) (0.6) 0.1 (0.8) 2.1 1.7 (0.2) (0.1) (0.6) 1.2 0.3 3.2 (0.3) 2.0 0.1 2.0 0.9 (0.1) 0.1 (0.1) 1.8 0.8 (0.1) (0.9) (0.8) (0.7) 0.8 (0.6) Valuations # of st.devs. Trailing PB From long term average 2.2 1.0 1.1 0.8 1.0 4.0 2.8 1.8 2.1 1.1 3.7 6.7 4.9 1.5 3.0 1.5 3.7 4.0 2.3 1.1 2.6 2.3 2.5 6.6 1.4 1.3 4.3 2.0 1.4 (0.2) (0.6) (0.4) (0.9) (1.1) 1.0 2.0 0.4 1.0 (1.2) (0.1) (0.1) 2.6 (1.0) 3.2 (0.1) (0.0) 1.4 0.1 (0.2) 0.1 (0.8) 0.2 (0.6) (1.4) (0.9) (0.2) (0.5) (0.4) 2013 ROE 2013 DY Relative Valuations to respective market Premium 10Y Premium 10Y to 12M Average to trailing Average fwd PE premium to PB premium fwd PE to PB 23 9 6 40 (18) 115 23 (35) 3 (8) 2 2 51 (5) 21 (17) (10) (19) 2 37 (19) 79 10 52 15 (11) 17 34 10 10 58 6 20 (4) 30 (6) (21) 7 4 3 14 14 0 (9) (16) (21) (29) (3) 26 229 5 (5) 45 33 (3) 36 12 17 40 (37) (30) (27) (45) 130 58 4 21 (39) (6) 72 129 (31) 31 (33) 25 35 59 (23) 96 70 89 399 (19) (24) 143 13 (23) 7 (34) (17) (15) (32) 92 6 (15) (4) (25) 12 92 33 (13) (17) (26) 64 (19) 34 (32) 36 134 64 666 22 (6) 112 8 (30)

4 0 0 2 12 0 5 1 5 3 12 5 9 10 1 7 13 14 12 11 1 0 12 4 5 6 0 0 1

(7) (19) (10) 22 17 (50) (1) (10) 31 (29) 19 18 1 39 64 (13) (10) 21 4 1 14 (93) 3 (9) 11 (10) (13) (43) 7

21 23 27 (0) 4 160 8 (21) 6 9 9 14 14 (11) 45 21 5 9 6 9 5 1206 9 11 12 33 14 21 7

11 10 10 11 11 30 17 9 14 13 14 14 21 14 13 9 14 13 13 18 12 26 16 22 15 11 15 17 14

17 9 10 7 9 13 16 12 15 8 22 36 24 10 21 15 27 24 17 6 27 8 14 27 10 12 25 4 9

2.1 2.8 2.7 2.5 3.0 2.7 5.6 6.1 3.6 3.1 4.6 3.9 4.9 2.6 3.8 4.6 6.8 3.0 5.6 2.6 5.7 1.9 3.4 3.2 3.7 5.9 3.3 2.8 5.7


23



Risks to our strategyUS fiscal cliff It is odd to call it a risk if it is becoming a consensus view. If the US were to fall off the fiscal cliff, the full impact would be 4% of GDP. This is higher than our core US GDP growth assumption of 3.7%. A recession is a real risk. With limited policy flexibility this is a significant risk. But this report is the Year Ahead rather than just the Quarter Ahead and the near-term risks into and around the year-end are significant. Note that both sides wiggle room is greater post-1Jan when all the Bush tax cuts expire. A deal to extend some of them would allow higher revenue but still let the GOP not vote for a tax hike. We look for increased volatility around the fiscal cliff, but for markets to rebound after any budget deal. 3Q slowdown in capex becomes 2013 recession US capital goods data is consistent with US recessions. For now, consumption is driving growth. Our base case is that consumption slows from 2.5% to 0.5% in 1H13 as higher taxes hit household income. The hope is that a recovery in capex offset the slowdown in consumption. Numerous Middle Eastern trouble spots Where to start? Syrian civil war may drag in neighbors. US and Israeli military response to Irans nuclear ambitions. New governments in Libya and Egypt struggle to achieve post dictatorship stability. Large Chinese stimulus A large RRR cut is a significant risk to our structurally bearish view on China. Another risk is opaque local government finances and cash-rich SoEs which may continue to invest in infrastructure. The final risk is that households decide (possible with policy support) to return to the property market. None of these risks appear likely but the market is very sensitive to easing speculation. Leadership change adds to uncertainty. India slips on implementation of proposed reforms In the past two months, the Indian government positively surprised investors with a series of policy measures such as hike in retail diesel price, allowing 51% FDI in multibrand retail, increased FDI limit in aviation from 26% to 49%, reduction in withholding tax from 20% to 5% on ECBs & FCCB, SEB (State Electricity Boards) debt restructuring etc. The Union Cabinet approved the increase in the FDI limit in the insurance sector from 26% to 49%, opening up the pension sector to FDI in24

line with the insurance sector and the Companies Bill 2011. These measures boosted investor sentiment and resulted in a sharp rally in the INR and Indian equities. The test now is can reform pass parliamentary scrutiny. India fiscal consolidation; potential rating downgrade The threat of a credit rating downgrade remains. Policy reform is back on the table. The next step is a reduction in the fiscal deficit. A busy political calendar in the next two years makes achieving the targets challenging. The implementation of the goods and services tax (GST) is key to achieving fiscal consolidation. Korean politics and Won policy The Korean presidential election is on 19 December. The key issue is will the new governments economic policy remain pro-exporters (weak Won) or move proconsumers (strong Won). This could drive investors to switch into domestic sectors such as low growth cheap banks. Malaysia election disrupts policy continuity The last day for the dissolution of parliament in Malaysia for this electoral term is 27 April 2013, which marks the deadline for the government to call for elections. The key market concern is policy continuity and whether PM Najib will be challenged from within. A less than 55% majority for BN will be negative for the market and could potentially hamper the continuity of ETP projects. AUD strength continues Positive carry and high investment grade continue to attract capital. Key central banks, including Swiss National Bank and the PBOC, are buying AUD to prevent their currencies appreciating again other cross rates.



Potential surprises for 2013None of these scenarios reflect an official J.P. Morgan view; they are intended to stimulate discussion Strong developed-world growth Better than the EM bond bubble Strong developed-world growth. Cash-rich DM companies put the US fiscal-cliff and -crisis fears behind them and invest again. Low rates push housing starts and consumer lending up. Europe sees growth as the financial systems in the periphery return to life. Global equities rally 30% and EM outperforms. Reality check: if thats all the return, I should take a punt. Sub-5% CEMBI yields too low to compensate for risk; investors switch to EM equities. EM equity income funds see major inflows. Markets with good dividend yields (Brazil, Taiwan, South Africa, the Philippines, and Poland) outperform. Europe breaks the vicious cycle of weaker-than-forecast GDP, driving deeper budget cuts which further depress GDP via coordinated spending plans from Germany and the rest of the solvent core (the Netherlands, Finland, Switzerland, and Sweden). SX7E doubles but still trades below book value. Like Thelma and Louise, US politicians dare each other off the fiscal cliff. The US enters a recession with zero interest rates and no fiscal flexibility. The monetary ladder is before the over-investment snake. In the first three quarters of 2012, total social financing in China expanded. Individuals, companies, and local governments seize cash, consume, and invest. Growth accelerates and finally A-shares rally. Finally the city states deal with their property supply shortage. Hong Kong increases land zoned for residential property by 50% (currently only 3.7% of the SARs land is for urban residential use). Land premium system modified and new developers introduced to disrupt the market. Property prices fall 50%. Demographic destiny + cyclical certainty. Chinas trend growth falls significantly as demographic change bites. Add a profit recession. The 2H13 conclusion is declining consumption and weak fixed capital, which feeds back into weaker household income growth and thus consumption. South China Seas territorial disputes dominate the news. The complexity plus the conviction of each country on their claim is a dangerous combination. There are no official sanctions but intra-Asian trade falls as consumers boycott their neighbors products. Bye-bye BN and powerful political families. Evolution or revolution in Indian and Malaysian politics. BN loses elections. Markets fall initially but little changes. Indian politics emerges from powerful political families. Congress reinvents itself as the leader of a secular pro-reform capitalist nation. The decline of AUD. Faced with a rapid slowdown in mining investment and a weak economy in NSW and Victoria, the RBA cuts the cash rate to 1.5%. The low in the GFC was 3%. International carry-investors panic. AUD falls to 75 US cents. This nearly 30% decline would still leave it above the GFC low of 60 US cents. Asian savers finally appreciate equities. Companies respond with a commitment to progressively increase DPS each year through the cycle. Asian equities enter the golden years of healthy returns and low volatility.25

Different European policy

US politicians dare each other off the fiscal cliff; the US enters recession Monetary ladder before the over-investment snake

Bubbles can bursteven in city states when money is cheap

China's trend growth falls significantly as demographic change bites. Add a profit recession

South China Sea territorial disputes, intra-Asian trade falls

Evolution or revolution in Indian and Malaysian politics

Australian economy decelerates AUD falls rapidly

Finally savers are safer



JapanEra of domestic risk moneyDecline in cost of capital and comeback of Japanese shares In last years Year Ahead 2012, we wrote that Japan is approaching a once-in-20-years turning point, because we saw the possibility of an escape from deflation. We still stand by this assessment. In the past year, however, Japanese stocks have recorded another disappointing performance. In early spring, stocks showed some sparkle for a moment on the back of receding European credit risk, rather than the BoJs additional monetary easing, but this did not last long. What sticks out in our memory is rather the stock market slump in the second half of the year. Figure 12 compares Japanese, U.S. and German share prices (as measured by TOPIX, the S&P 500 and the DAX), with a value of 100 assigned to the index readings one year ago (first week of November 2011). From around May 2012, we notice a clear gap between the price performance of U.S. and German shares on the one hand and Japanese stocks on the other. The market theme for 2013 is whether this gap will become entrenched or narrow. We think the gap will narrow because the severe distortions (ECB President Mario Draghi) that are at the heart of this gap will continue to be corrected, in our view. First, let us conduct a simple review of the background of this gap. Along with the widening gaps between share prices, we have observed widening gaps between longterm interest rates in Japan and the U.S. and Germany. Figure 13 compares changes in interest rates from their levels one year ago, with a value of zero assigned to those levels. A look at the margin of decline in the yield on each countrys 10-year government bond between the fourth week of April, which was just before the Greek general election, and the third week of July, when ECB Governor Draghi announced that the ECB would do whatever necessary, reveals 48bp for the U.S., 54bp for Germany, but only 15bp for Japan. This means that U.S. and German real interest rates turned negative. Only in Japan did the real interest rate stay at the high level of around 1.5%.

Hajime KitanoAC(81-3) 6736-8655, [email protected] Bloomberg JPMA KITANO JPMorgan Securities Japan Co., Ltd.

Figure 12: Share price indices for Japan, U.S. and Germany in the past year130 120 110 100 90 26-Mar-06 TOPIX S&P500 DAX

21-Sep-08

21-Oct-08

20-Nov-08

20-Dec-08

Source: AURORA, J.P. Morgan.

Figure 13: Long-term Interest rates for Japan, U.S. and Germany in the past year%0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 26-Mar-06 21-Sep-08 21-Oct-08 20-Nov-08 20-Dec-08 Japan U.S. Germany


Figure 14: Nominal GDP


Figure 15: Japan CPI nationwide (%oya)

Source: Bloomberg

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What lies behind this fall in U.S. and German interest rates is probably not just monetary policy measures but also demand for hedges against European credit risk. In fact, on July 24, when the yield on the 10-year Spanish government bond hit a fresh 2012 high of 7.62%, the yield on the U.S. 10-year Treasury note recorded a fresh 2012 low of 1.38%. Be that as it may, we think that the P/E gap between Japan and the U.S. and Germany widened because the sharp decline in nominal interest rates pushed U.S. and German real interest rates into negative territory. Of the 10.3% increase in the S&P 500 between May and October, 8.9% was accounted for by a rise in P/E. Meanwhile, of the 2.0% decrease in TOPIX over the same period, only 1% was attributable to a rise in P/E. This suggests that expectations for earnings growth run high in countries with a negative real rate of interest, which also boosts P/E. Of course, this gap between interest rates has narrowed since August, but Japanese share prices have so far failed to reflect this, because the territorial dispute between Japan and China, which turned serious in August, has begun to have a particularly adverse impact on the earnings of Japanese companies. However, shares have increasingly been pricing in the narrower gap, as illustrated by the relative share prices of the auto sector, which had taken the worst hit, bottoming out at the end of September. After all, the focal point is whether or not normalization of the European credit risk, and of U.S. and German long-term interest rates, which are inversely correlated with it, will make further progress. What this will require is not government initiatives but a working market mechanism. In Europe, we now see the opposite of the vicious circle of rising interest rates causing a rise in the default rate, which in turn causes interest rates to rise further. In the U.S. and Europe, negative real interest rates have the effect of stimulating the economy. As a result, the markets there expect a change for the better in corporate and household sentiment. In that case, U.S. and German interest rates are likely to undergo upward adjustment in one stroke. In the foreign exchange market, the yen should depreciate against a stronger dollar and euro. We expect these kinds of correction to continue into the first half of 2013.

Incidentally, what we found interesting when trying to figure out the next once-in-20-years turning point in Japan was the acquisition of Sprint by Softbank. Worthy of note in this context is the procurement of the funds for the acquisition in the form of bank loans. Expectations rest on a decline in the cost of capital, which is Japans chronic ailment. Japans deflation can be explained by the following two simultaneous equations: (1) the Japanese inflation rate equals the U.S. inflation rate minus 2%, and (2) the U.S. inflation target is less than 2%. As long as the U.S. succeeds in keeping its rate of inflation down, Japans rate of inflation is bound to remain negative by virtue of equation (1). The problem is equation (1), and in particular the constant gap of 2% with the U.S. inflation rate. We have always maintained that Japans relatively high cost of capital has the same effect as monetary tightening and thus translates into a decline in inflationary expectations. What keeps the cost of capital high is the fact that Japan in effect depends on foreign capital for risk money. One factor behind the dependence on foreign capital, despite being asked a high return compared with the expected rate of return in the Japanese stock market, is a stagnating banking sector. As a result, financial leverage has been on a long-term downward trend. However, while there is still no confirmation of change in the relevant statistics, the banks have recently boosted their market presence, as evidenced by the provision of finance to Sharp, and above all to Softbank, as mentioned earlier. It is generally said that stock prices fall when there is competition. This is probably also true for the price of risk money (interest). The correction of distorted European credit risk should come as a positive for Japanese shares in the short term. Meanwhile, the decline in the cost of capital represents a once-in-20-years change. We think the prospects are bright that these two changes will come into alignment with one another in 2013.

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APxJ Nifty FiftyWinners, value and hedge bets The US Nifty-Fifty was a group of stocks that outperformed through to the 1973 stock market crash. Strangely there is no official list of the Nifty-Fifty but investors recall a small group of stocks that one had to own despite their price. These stocks outperformed the market through the 1960s. The stocks included Avon, Disney, McDonalds, Polaroid, and Xerox, among others. The P/E ranged from 49x to 91x. We screened for an APxJ Nifty-Fifty. To be consistent with history we do not have 50 stocks. Track JPHAXN50 Index on Bloomberg for the J.P. Morgan APxJ Nifty-Fifty. The case for a narrow group of expensive

20121119-JP Morgan-Asian Year Ahead 2013

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