Guide to the Markets Quarterly 3Q_2012

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    Q3 | 2012As at 30 June 2012

    GTTM: A guide to global financial marketsEUROPE

    For professional investors* only. Not for retail use or distribution

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    1

    Table of contents

    16WORLD 46

    27UNITED STATES

    36JAPAN

    40

    53

    EUROPE

    60

    European Market Strategy Team

    Dan Morris [email protected]

    Paola Toschi [email protected]

    Tom Elliott [email protected]

    Kerry Craig [email protected]

    FIXED INCOME

    OTHER ASSET CLASSES

    DEMOGRAPHICS

    EMERGING MARKETS

    2

    Home

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    2

    EUROPE

    3MSCI Europe Index at inflection points (local currency)

    7Contribution to German GDP

    4Europe equity valuations

    5Europe returns by style (EUR)

    6Eurozone GDP and inflation

    8Eurozone unemployment, retail sales and confidence indicators

    9Europes vicious circle

    10Employment by age and sex

    11European labour costs

    12Government deficits by country

    13Interbank lending rates and peripheral exposure

    14Eurozone crisis impact on markets

    15Eurozone countries economic divergences

    TOC

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    Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

    600

    800

    1.000

    1.200

    1.400

    1.600

    1.800

    60

    80

    100

    120

    140

    160

    180

    Europ

    e

    3

    MSCI Europe Index at inflection points (local currency)

    Note: Earnings index is derived from the forward P/E. Source: I/B/E/S, J.P . Morgan Asset Management.

    MSCI Europe Index

    16 July 2007

    1.641

    12 March 2003

    676

    4 September 20001.623

    9 March 2009

    714

    1.034

    -58% +143% -56%

    +72%

    30 June 2012

    18 February 2011

    1.230

    Earnings index

    Earnings

    TOC

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    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    2

    4

    6

    8

    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    8

    12

    16

    20

    24

    28

    4

    Europe equity valuations

    Note: The ten-year EMU bond yield is represented by the BofA Merrill Lynch Euro Government (7-10Y) index. 75% of the value of the index is comprised of bonds fromFrance, Germany, Italy, Spain, Netherlands, and Belgium, Source: BofA Merrill Lynch, I/B/E/S, J.P. Morgan Asset Management.

    Forward P/E ratio MSCI Europe Index

    30 June 20129,5

    Average since 1999

    14,9

    MSCI Europe Index dividend yield and ten-year EMU bond

    30 June 2012

    Dividend yield

    Ten-year EMU bond yield

    One year

    earnings

    growthforecast:

    12%

    %

    3,5%

    4,1%

    Europ

    e

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    Europe returns by style (EUR)

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

    20102004 2005 2006 2007 2008 Q2 20122009 2011

    Europ

    e

    YTD

    MSCIEurope

    Small Cap

    23,7%

    MSCIEurope

    Small Cap

    37,6%

    MSCIEurope

    Small Cap

    30,4%

    DJ Stoxx 50

    9,6%

    MSCIEurope

    Growth

    -40,5%

    MSCIEurope

    Small Cap

    60,3%

    MSCIEurope

    Small Cap

    30,4%

    MSCIEurope

    Growth

    -6,3%

    MSCIEurope

    Small Cap

    10,5%

    MSCIEurope

    Growth

    -2,3%

    MSCI

    Europe

    Value

    16,3%

    MSCI

    Europe

    Value

    28,9%

    MSCI

    Europe

    Value

    23,1%

    MSCI EMU

    8,5%

    DJ Stoxx 50

    -42,4%

    MSCI

    Europe

    Value

    34,6%

    MSCI

    Europe

    Growth

    18,5%

    MSCI

    Europe

    -7,5%

    MSCI

    Europe

    Growth

    7,4%

    MSCI

    Europe

    -2,5%

    MSCI EMU

    13,4%

    MSCI

    Europe

    26,7%

    MSCI EMU

    22,8%

    MSCI

    Europe

    Growth

    8,2%

    MSCI

    Europe

    -43,3%

    MSCI

    Europe

    32,5%

    MSCI

    Europe

    11,7%

    MSCI

    Europe

    Value

    -8,7%

    MSCI

    Europe

    5,4%

    MSCI

    Europe

    Value

    -2,8%

    MSCI

    Europe

    12,6%

    MSCI EMU

    26,3%

    MSCI

    Europe

    20,2%

    MSCI

    Europe

    3,2%

    MSCI EMU

    -44,3%

    MSCI

    Europe

    Growth

    30,5%

    MSCI

    Europe

    Value

    4,9%

    MSCI EMU

    -14,1%

    MSCI EMU

    3,8%

    MSCI

    Europe

    Small Cap

    -4,5%

    DJ Stoxx 50

    9,4%

    MSCI

    Europe

    Growth

    24,3%

    DJ Stoxx 50

    18,0%

    MSCI

    Europe

    Value

    -1,8%

    MSCI

    Europe

    Value

    -46,1%

    MSCI EMU

    28,7%

    MSCI EMU

    3,3%

    DJ Stoxx 50

    -14,1%

    MSCI

    Europe

    Value

    3,1%

    MSCI EMU

    -5,5%

    MSCIEurope

    Growth

    8,9%

    DJ Stoxx 50

    24,3%

    MSCIEurope

    Growth

    17,3%

    MSCIEurope

    Small Cap

    -7,2%

    MSCIEurope

    Small Cap

    -51,6%

    DJ Stoxx 50

    25,6%

    DJ Stoxx 50

    -2,8%

    MSCIEurope

    Small Cap

    -17,1%

    DJ Stoxx 50

    0,7%

    DJ Stoxx 50

    -6,2%

    TOC

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    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    -4

    -2

    0

    2

    4

    6

    6

    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    0

    1

    2

    3

    4

    5

    Source: Eurostat, Bloomberg consensus forecast, J.P. Morgan Asset Management.

    Eurozone GDP and inflation

    Real GDPchange year on year

    Inflationchange year on year

    Average

    1,5%

    First quarter

    2012

    -0,1%

    Core CPI

    May 2012

    1,6 %

    Headline CPI

    May 2012

    2,4%

    %%

    Forecast

    headline CPI

    2012: 2,4%2013: 1,8%

    Forecast

    GDP

    2012: -0,4%2013: 0,8%

    Europ

    e

    TOC

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    -0,4

    -0,2

    0,0

    0,2

    0,4

    0,6

    0,8

    1,0

    1,2

    -0,4

    -0,2

    0,0

    0,2

    0,4

    0,6

    0,8

    1,0

    1,2

    7

    Source: Federal Statistics Office, J.P. Morgan Asset Management.

    Contribution to German GDP

    First quarter 2012change quarter on quarter

    Europe

    Fixed

    capital

    formation

    InventoriesNet

    exports

    HouseholdGovernment

    -0,2%

    0,5%

    Fourth quarter 2011change quarter on quarter

    Fixed

    capital

    formation

    InventoriesNet

    exports

    Household

    Government

    % %

    Total

    Total

    Europ

    e

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    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11-6

    -4

    -2

    0

    2

    4

    6

    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    8

    9

    10

    11

    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    -40

    -30

    -20

    -10

    0

    10

    20

    30

    40

    8

    Eurozone unemployment, retail sales and confidence indicators

    Source: Eurostat, OECD, J.P. Morgan Asset Management.

    May 2012

    11,1%

    May 2012

    -1,7%

    Unemployment

    Retail sales growth (y/y)

    Confidence indicators

    Services sector

    confidence

    June 2012

    -7,4

    Consumer

    confidence

    June 2012

    -19,8

    Industrial

    confidence

    June 2012

    -12,7

    Indexle

    vel

    %

    %

    Europ

    e

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    Europes vicious circle

    9

    How do you solve one problem without making the others worse?

    High bank debt

    eg Spain, Ireland

    Highsovereign debt

    (deficit and/or debt to GDP)

    eg Italy, Greece, Portugal

    Low growth

    eg Italy, Portugal

    Europ

    e

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    10

    Employment by age and sex

    Note: *2010 figure. Effective retirement age is the average retirement age for males over the period 2004 2009. Official retirement age listed in parenthesis,

    subject to variations between public and private sector, length of service etc. Youth unemployment is those aged less than 25 years. Source: OECD,

    Eurostat J.P. Morgan Asset Management.

    European employment and retirement ages

    Employmentrates of 55 64

    2011 (b)

    Female

    employment rate2011 (c)

    Youthunemployment

    rate 2011 (d)

    Total score

    (a + b + c - d)

    Europ

    e

    Japan 70 (64) 65* 60 8 187

    Sweden 66 (65) 72 72 23 187

    Germany 62 (65) 60 68 9 181

    Netherlands 62 (65) 56 70 8 180

    Denmark 64 (65) 60 70 14 180

    US 66 (66) 60* 62 17 171

    UK 64 (65) 57 65 21 165

    Austria 59 (65) 42 67 8 160

    Portugal 67 (65) 48 60 30 145

    Ireland 63 (66) 50 55 29 139

    France 59 (62) 41 60 22 138

    Italy 61 (65) 38 47 29 117

    Spain 62 (65) 45 52 46 113

    Greece 62 (65) 39 45 44 102

    Retirement ageeffective (official)

    (a)

    TOC

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    100

    110

    120

    130

    140

    150

    160

    170

    180

    Dez 90 Dez 92 Dez 94 Dez 96 Dez 98 Dez 00 Dez 02 Dez 04 Dez 06 Dez 08 Dez 10

    11

    Note: Greece, Ireland, Italy, and Spain labour cos t index is average of each countrys index. Source: OECD, J.P. Morgan Asset Management.

    European labour costs

    Labour cost indices for Europe

    Greece, Ireland, Italy, Spain

    US

    Euro area

    Germany

    Euro

    launch

    Europ

    e

    UK

    TOC

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    -2

    0

    2

    4

    6

    8

    10

    0 20 40 60 80 100 120 140 160 180 200220 240

    Government deficits by country

    *The EU/IMF bailout package for Greece targets a debt to GDP ratio of 120% by 2020. Note: The debate on the euro crisis considers countrys gross debt levels.Source: IMF World Economic Outlook, J.P. Morgan Asset Management.

    12

    % of GDP

    2011 (estimated)

    2014 (estimated)

    Deficit(%

    o

    fGDP)

    Gross debt (% of GDP)

    Ireland

    Spain

    US

    Portugal

    Maastricht

    treaty

    criteria

    UKGreece*

    Italy

    Japan

    China

    India

    Brazil

    Germany

    France

    Mexico

    Europ

    e

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    0 100 200 300 400 500 600 700

    13

    Interbank lending rates and peripheral exposure

    Last data December 2011. Source: BIS, J.P. Morgan Asset Management.

    Bank peripheral debt exposure

    Germany

    UK

    France

    US

    Italy

    Spain

    Portugal

    Ireland

    Greece

    USD bn

    Note: For the eurozone, UK, and Switzerland the spread is the difference between the three month

    Libor/Euribor and the overnight index swap rate. The US is the spread between 3 month Libor and

    the 3 month Treasury bill. The spread can be interpreted as an indicator of the willingness of banks

    to lend to each other. Source: Bloomberg, J.P. Morgan Asset Management.

    Location of banks

    Country of issuance

    Q4 2010

    Q4 2011

    Q4 2010

    Q4 2011

    Q4 2010

    Q4 2011

    Q4 2010

    Q4 2011

    Europ

    e

    0

    100

    200

    300

    400

    500

    Dez 07 Dez 08 Dez 09 Dez 10 Dez 11

    bps UK

    Eurozone

    US

    Switzerland

    Interbank short-term lending rates

    TOC

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    1

    2

    3

    4

    5

    6

    7

    8

    Dez 08 Dez 09 Dez 10 Dez 11 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12

    700

    750

    800

    850

    900

    950

    1.000

    1,5

    2,0

    2,5

    3,0

    3,5

    4,0

    14

    Eurozone crisis impact on markets

    Note: EFSF is the European Financial Stability Facility. The EFSF bond shown is the EUR 5 billion

    ten-year 3,375% note, issued in July 2011, to raise funds towards the EU/IMF EUR 78 billion

    bailout for Portugal. Source: J.P. Morgan Asset Management.

    US Treasuries and global equitiesTen-year bond yields

    Note: MSCI World Index price return in local currency.

    Source: J.P. Morgan Asset Management.

    %%Ten-year US Treasury yield (rhs)

    MSCI World Index (lhs)

    Europ

    e

    Italy

    Spain

    EFSF

    UK

    GermanyDenmark

    TOC

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    15

    Latest data May 2012. Source: Markit, Eurostat, J.P . Morgan Asset Management.

    Eurozone countries economic divergences

    Europe

    Manufacturing PMI Unemployment

    Dec 96 Dec 98 Dec 00 Dec 02 Dec 04 Dec 06 Dec 08 Dec 10

    5

    10

    15

    20

    25

    %

    25

    30

    35

    40

    45

    50

    55

    60

    65

    Dez 06 Dez 07 Dez 08 Dez 09 Dez 10 Dez 11

    Germany

    Italy

    France

    Spain

    Germany

    Italy

    France

    Spain

    TOC

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    16

    WORLD

    17World stock market returns (EUR and local currency)

    21

    Risk appetite and volatility

    18World equity market cumulative returns (EUR)

    19MSCI World Index by sector (EUR)

    20

    22

    Income: Dividend growth (EUR)

    23

    Income: Reinvested dividends

    Income: Equities and bonds

    24

    25

    World economic data

    26

    World economic momentum

    Credit and money supply growth

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    17

    World stock market returns (EUR and local currency)

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

    20102004 2005 2006 2007 2008

    EUR

    Local

    EUR

    Local

    EUR

    Local

    EUR

    Local

    EUR

    Local

    Q2 20122009 2011

    World

    YTD

    16,9%

    MSCI EM

    16,4%

    55,0%

    MSCI EM

    35,8%

    20,2%MSCI

    Europe

    19,6%

    26,7%MSCI Asia

    ex Japan

    38,0%

    -23,0%Japan

    TOPIX

    -40,6%

    73,4%

    MSCI EM

    62,8%

    28,3%MSCI Asia

    ex Japan

    15,6%

    5,5%

    US S&P 500

    2,1%

    12,0%

    US S&P 500

    9,5%

    2,0%

    US S&P 500

    -2,8%

    12,6%

    MSCI

    Europe

    12,7%

    45,3%

    Japan

    TOPIX

    45,2%

    19,6%

    MSCI Asia

    ex Japan

    28,6%

    26,1%

    MSCI EM

    33,5%

    -33,7%

    US S&P 500

    -37,0%

    67,2%

    MSCI Asia

    ex Japan

    67,2%

    27,5%

    MSCI EM

    14,4%

    -7,5%

    MSCI

    Europe

    -8,8%

    8,5%

    MSCI Asia

    ex Japan

    6,1%

    -2,1%

    MSCI Asia

    ex Japan

    -5,3%

    9,2%

    MSCI Asiaex Japan

    11,9%

    41,9%

    MSCI Asiaex Japan

    24,1%

    18,6%

    MSCI EM

    28,9%

    3,2%

    MSCIEurope

    6,5%

    -43,3%

    MSCIEurope

    -38,5%

    32,5%

    MSCIEurope

    28,6%

    23,9%

    JapanTOPIX

    1,0%

    -9,6%

    JapanTOPIX

    -17,0%

    6,5%

    MSCI EM

    5,1%

    -2,3%

    JapanTOPIX

    -9,7%

    8,1%

    Japan

    TOPIX

    11,3%

    26,7%

    MSCI

    Europe

    25,5%

    3,6%

    US S&P 500

    15,8%

    -4,9%

    US S&P 500

    5,5%

    -49,8%

    MSCI Asia

    ex Japan

    -47,7%

    22,5%

    US S&P 500

    26,5%

    23,1%

    US S&P 500

    15,1%

    -14,3%

    MSCI Asia

    ex Japan

    -14,6%

    5,6%

    Japan

    TOPIX

    7,0%

    -2,5%

    MSCI

    Europe

    -3,6%

    2,9%

    US S&P 50010,9%

    20,9%

    US S&P 5004,9%

    -8,7%

    Japan

    TOPIX3,0%

    -14,5%

    Japan

    TOPIX-11,1%

    -50,8%

    MSCI EM-45,7%

    1,5%

    Japan

    TOPIX7,6%

    11,7%

    MSCI

    Europe7,5%

    -15,4%

    MSCI EM-12,5%

    5,4%

    MSCI

    Europe3,9%

    -4,3%

    MSCI EM-5,1%

    TOC

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    Dec 91 Dec 93 Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11Dec 91 Dec 93 Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    MSCI Emerging Markets 8,2% p.a.

    FTSE 100 6,5% p.a.

    MSCI Europe ex UK 7,8% p.a.

    TOPIX Japan -0,9% p.a.

    Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

    5050

    100100

    150150S&P 500 2,2% p.a.

    MSCI Europe ex UK -4,9% p.a.

    MSCI Emerging Markets 4,0% p.a.

    TOPIX Japan -4,2% p.a.

    18

    World equity market cumulative returns (EUR)

    Note: Total return indices. On a log scale the distance between tick marks shows the same percentage change. Source: J.P. Morgan Asset Management.

    Five years to June 2012, log scale

    20 years to June 2012, log scale

    800

    400

    200

    100

    FTSE 100 -1,6% p.a.

    S&P 500 7,8% p.a.

    World

    800

    400

    200

    100

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    19

    MSCI World Index by sector (EUR)

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

    Energy Materials Industrials

    Consstaples Health Financials

    Infotech

    Telecomservices Utilities

    MSCIWorld

    Consdisc

    MSCI Worldweight %

    Q2 2012 return%

    YTD return%

    Dividend yield%

    Forward P/E

    Historic P/E

    10,6 6,8 10,9 10,8 11,0 10,7 18,6 12,6 4,2 3,8 100,0

    -2,9 -6,1 -1,7 -1,3 5,7 6,3 -2,5 -3,4 10,1 5,7 -0,2

    -1,8 0,9 7,4 13,4 10,1 11,8 12,5 13,1 8,4 4,9 8,7

    3,1 2,7 2,8 2,0 3,0 2,7 3,5 1,3 5,8 4,7 2,9

    9,5 11,9 14,0 16,2 17,4 15,8 12,0 14,9 15,9 21,4 13,7

    9,3 9,7 11,1 12,1 14,5 11,8 9,3 11,4 11,9 14,9 11,0

    World

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    -6

    -4

    -2

    0

    2

    4

    6

    Dez 95 Dez 97 Dez 99 Dez 01 Dez 03 Dez 05 Dez 07 Dez 09 Dez 11

    Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    20

    40

    60

    80

    100

    20

    Risk appetite and volatility

    Volatility

    Cheap money

    Asian

    crisis

    Russian

    crisis

    Tech

    bubble

    Gulf

    war 2

    Credit

    crunch

    VIX

    VDAX

    Eurozone debt

    crisis

    Credit Suisse Global Risk Appetite Indicator

    VIX and VDAX

    Euphoria

    Distress

    Numberofstandarddeviations

    30 June 2012

    -0,4World

    30 June 2012

    21,5

    17,1

    (Top) Note: The Credit Suisse Global Risk Appetite Indicator compares aggregated risk-adjusted returns across 64 markets (both equity and fixed income). It compares six

    month excess returns over cash with 12 month volatility for each asset. Source: Credit Suisse, J.P. Morgan Asset Management. (Bottom) Note: VDAX is the name given to

    the Deutsche Brse equivalent of the VIX, based on the DAX. Source: Bloomberg, Chicago Board Options Exchange, Deutsche Brse, J.P. Morgan Asset Management.

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    Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

    100

    150

    200

    250

    21

    Income: Dividend growth (EUR)

    Note: Regular dividends only. Source: J.P. Morgan Asset Management.

    MSCI AC World Index dividend growth

    Annualised change Payout ratioAsia ex Japan 6,8% 31,2%

    Japan 5,7% 32.8%

    Europe ex UK 5,1% 46.2%

    US 2,5% 28,5%

    UK 1,0% 42,9%

    World

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    5,1%

    4,3%3,9%

    3,7%

    3,1%2,9%

    2,6%2,2%

    0

    1

    2

    3

    4

    5

    6

    7

    6,0% 5,9% 5,7%

    5,2% 5,0%

    4,2% 4,1%

    3,5%

    0

    1

    2

    3

    4

    5

    6

    7

    22

    (Top chart) Note: Total return index is S&P 500 until 1960s then the MSCI Europe Index. Source: Standard & Poors, Ibbotson, J.P. Morgan Asset Management. (Bottom left)

    Note: Yields shown are that of the appropriate FTSE NARIET REIT index, which excludes property development companies. Source: NARIET, J.P. Morgan Asset

    Management. (Bottom right) Note: Yields shown are than of the appropriate MSCI index. Source: MSCI, J.P. Morgan Asset Management.

    Income: Reinvested dividends

    REIT dividend yields Equity dividend yields

    4,7% 5,4% 6,0% 5,1% 3,3% 4,8% 4,2% 2,6% 3,0% 4,6%

    13,9%

    -5,3%

    3,0%

    13,6%

    4,4%0,2%

    16,0%12,9%

    -2,9%

    5,2%

    -10

    -5

    0

    5

    10

    1520

    25

    1926 - 1929 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 1926 - 2011

    Total returns: Dividends and capital appreciationAverage annualised returns

    %

    Capital appreciation

    Dividends

    Ten-year government

    bond yield

    %

    Sing. France Austlia Canada Japan Global UK US

    %

    Austlia France UK Switz. Canada ACWI Japan US

    Ten-year government

    bond yield

    World

    TOC

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    0

    1

    2

    3

    4

    Dez 05 Dez 06 Dez 07 Dez 08 Dez 09 Dez 10 Dez 11

    0

    1

    2

    3

    4

    5

    Dez 05 Dez 06 Dez 07 Dez 08 Dez 09 Dez 10 Dez 11

    Ratio

    0

    1

    2

    3

    4

    Dez 05 Dez 06 Dez 07 Dez 08 Dez 09 Dez 10 Dez 11

    Income: Equities and bonds

    23

    1,0%

    1,6%

    3,3%

    4,1%

    5,4%

    7,8%

    0

    1

    2

    3

    4

    5

    6

    7

    8

    9

    (Left) Note: European corporate is BarCap European Aggregate Credit Corporate Index, emerging market debt is the EMBI+, high yield is the BofA/Merrill Lynch High Yield

    Master II, MSCI Europe is the dividend yield. I nflation is year on year change in the eurozone CPI. Source: Tullett Prebon, Merrill Lynch, J.P. Morgan Asset Management.

    (Right) Note: Europe uses the MSCI Europe Index, US the S&P 500, and UK the FTSE 100. The government bond yield is the generic ten-year bond yield for that country.

    Source: J.P. Morgan Asset Management.

    %

    Eurozone CPI

    Inflation

    (May 2012)

    Cash Bunds MSCI

    Europe

    European

    corporate

    EM

    debt

    High

    yield

    Dividend yields compared to the government bond yieldsSources of incomeYields

    World

    Europe

    Average 1,5x

    Average 1,3x

    Average 1,6x

    Ratio

    Ratio

    UK

    US

    9,1 4,0 7,9 4,8Duration

    TOC

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    World economic data

    Note: The Misery Index was devised by US economist ArthurOkun to illustrate the combination of unemployment and inflation. A higher number indicates a worse

    economic climate, and vice versa. India GDP estimates from J.P Morgan.

    Source: Bloomberg, national statistical agencies, CIA, J.P . Morgan Asset Management.

    24

    GDP estimate y/y% Inflation y/y%current (a)

    Unemployment %

    current (b)Policy rate

    currentMisery index

    (a+b)

    G7 and selected countries

    20132012

    World

    Switzerland 0,5 1,5 -1,0 3,0 0,00 2,0

    Japan 2,5 1,5 0,2 4,4 0,10 4,6

    China 8,2 8,4 3,0 4,1 6,31 7,1

    Netherlands -0,8 1,2 2,1 6,2 1,00 8,3

    Canada 2,1 2,2 1,2 7,3 1,00 8,5

    Germany 0,9 1,4 1,7 6,8 1,00 8,5

    Sweden 0,6 2,1 1,0 8,1 1,50 9,1

    United States 2,2 2,4 1,7 8,2 0,25 9,9

    Brazil 2,8 4,5 5,0 5,8 8,50 10,8

    United Kingdom 0,2 1,7 2,8 8,2 0,50 11,0

    France 0,3 0,9 2,0 9,6 1,00 11,6

    Italy -1,8 0,0 3,3 9,8 1,00 13,1

    India 6,0 6,5 7,6 9,8 7,00 17,4

    Greece -5,2 -0,9 1,4 22,6 1,00 24,0

    Spain -1,7 -0,5 1,9 24,4 1,00 26,3

    TOC

    W ld i

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    25

    World economic momentum

    Note: The Citigroup Economic Surprise Index is defined as the weighted historical standard deviations of data surprises (actual releases versus survey median).Source: Citigroup, J.P. Morgan Asset Management.

    Wor

    ld

    Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

    -150

    -100

    -50

    0

    50

    100

    150

    Economic surprise indices, US, eurozone and UK Economic surprise indices, China and Latam

    Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

    -100

    -50

    0

    50

    100

    150

    EurozoneUS

    UK

    Latin AmericaChina

    TOC

    C dit d l th

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    -2

    26

    10

    14

    18

    Dez 05 Dez 06 Dez 07 Dez 08 Dez 09 Dez 10 Dez 11

    Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

    -6

    -4

    -2

    0

    2

    4

    6

    8

    10

    26

    Credit and money supply growth

    Real credit growth (y/y)

    %

    Latest data is April 2012 for the US, and May 2012 for Europe and UK.

    Note: Year on year growth in outstanding loans, excluding mortgages less

    core inflation. Source: Federal Reserve, Bank of England, ECB,

    J.P. Morgan Asset Management.

    UK

    US

    Eurozone

    Latest data is May 2012 for the US, and April 2012 for the UK and eurozone. Note: UK broad

    money supply is M4 until July 2010 then M4 adjusted (M4 excluding other intermediate financial

    corporations) onwards. Source: Federal Reserve, OECD, Bank of England, J.P. Morgan Asset

    Management.

    Broad money supply growth (y/y)

    US (M2)%

    Wor

    ld

    UK (M4 adjusted)

    Eurozone (M3)

    %

    %

    0

    4

    8

    12

    Dez 05 Dez 06 Dez 07 Dez 08 Dez 09 Dez 10 Dez 11

    -2

    2

    6

    10

    14

    Dez 05 Dez 06 Dez 07 Dez 08 Dez 09 Dez 10 Dez 11

    TOC

    UNITED STATES

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    27

    UNITED STATES

    28US S&P 500 Index at inflection points (USD)

    29US equity valuations

    30US returns by style (USD)

    31Market returns after consecutive down years S&P 500 Index (USD)

    32US corporate balance sheet

    33US GDP and inflation

    34Contribution to US GDP

    35Federal finances

    TOC

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

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    Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

    600

    800

    1.000

    1.200

    1.400

    1.600

    60

    80

    100

    120

    140

    160

    28

    Note: Earnings index is derived from the forward P/E. Source: I/B/E/S, J .P. Morgan Asset Management.

    S&P 500 Index

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

    27 March 2000

    1.524

    9 October 2002

    777

    9 October 2007

    1.565

    +101%

    9 March 2009

    677

    -49% -57%

    30 June 2012

    1.362

    +98%

    18 February 2011

    1.343UnitedStates

    Earnings index

    Earnings

    TOC

    US equity valuations

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    Dec 89 Dec 91 Dec 93 Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    2

    4

    6

    8

    10

    Dec 89 Dec 91 Dec 93 Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    10

    15

    20

    25

    29

    30 June 2012

    US equity valuations

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

    Forward P/E ratio S&P 500 Index 31 January 200024,4

    Average since 1989

    15,8

    S&P 500 Index dividend yield and ten-year US Treasury yield

    Ten-year US Treasury yield

    Dividend yield

    One year

    earnings

    growth

    forecast:12%

    %

    UnitedStates

    30 June 2012

    11,8

    1,7%

    2,1%

    TOC

    US returns by style (USD)

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    30

    US returns by style (USD)

    2010

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

    2004 2005 2006 2007 2008 2009 2011

    UnitedStates YTD

    Russell2000

    18,3%

    S&P 400Mid Cap

    12,6%

    S&P 500Value

    20,8%

    Nasdaq

    10,7%

    Russell2000

    -33,8%

    Nasdaq

    45,3%

    Russell2000

    26,9%

    S&P 500Growth

    4,7%

    Nasdaq

    13,3%

    S&P 500Growth

    -2,0%

    S&P 400

    Mid Cap

    16,5%

    S&P 500

    Value

    5,8%

    Russell

    2000

    18,4%

    S&P 500

    Growth

    9,1%

    S&P 500

    Growth

    -34,9%

    S&P 400

    Mid Cap

    37,4%

    S&P 400

    Mid Cap

    26,6%

    S&P 500

    2,1%

    S&P 500

    Growth

    10,0%

    S&P 500

    -2,8%

    S&P 500

    Value

    15,7%

    S&P 500

    4,9%

    S&P 500

    15,8%

    S&P 400

    Mid Cap

    8,0%

    S&P 400

    Mid Cap

    -36,2%

    S&P 500

    Growth

    31,6%

    Nasdaq

    18,0%

    S&P 500

    Value

    -0,5%

    S&P 500

    9,5%

    Russell

    2000

    -3,5%

    S&P 500

    10,9%

    Russell

    2000

    4,6%

    S&P 500

    Growth

    11,0%

    S&P 500

    5,5%

    S&P 500

    -37,0%

    Russell

    2000

    27,2%

    S&P 500

    Value

    15,1%

    Nasdaq

    -0,8%

    S&P 500

    Value

    8,9%

    S&P 500

    Value

    -3,6%

    Nasdaq

    9,1%

    S&P 500

    Growth

    4,0%

    Nasdaq

    10,4%

    S&P 500

    Value

    2,0%

    S&P 500

    Value

    -39,2%

    S&P 500

    26,5%

    S&P 500

    15,1%

    S&P 400

    Mid Cap

    -1,7%

    Russell

    2000

    8,5%

    Nasdaq

    -4,8%

    S&P 500Growth

    6,1%

    Nasdaq

    2,1%

    S&P 400Mid Cap

    10,3%

    Russell2000

    -1,6%

    Nasdaq

    -40,5%

    S&P 500Value

    21,2%

    S&P 500Growth

    15,1%

    Russell2000

    -4,2%

    S&P 400Mid Cap

    7,9%

    S&P 400Mid Cap

    -4,9%

    Q2 2012

    TOC

    Market returns after consecutive down years S&P 500 Index (USD)

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    UnitedStates

    31

    Market returns after consecutive down years S&P 500 Index (USD)

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

    1929-1932

    1940-1941

    1973-1974

    1933-1936

    1942-1945

    1975-1976

    09/10/02 -

    08/10/07

    24/03/00 -

    08/10/0209/10/07 -

    08/03/09

    09/03/09 -

    18/02/11

    +107%

    Great Depression World War II Oil crisis Bubble burst Credit crunch

    +121%

    +66%

    +122%

    -65%

    -17%

    -38%-47%

    -55%

    +190%

    TOC

    US corporate balance sheet

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    4

    5

    6

    7

    8

    9

    10

    11

    12

    0

    200

    400

    600

    800

    1.000

    1.200

    1.400

    1.600

    2000 2002 2004 2006 2008 201050

    100

    150

    200

    250

    300

    350

    400

    450

    500

    2000 2002 2004 2006 2008 2010 20125

    6

    7

    8

    9

    10

    32

    US corporate balance sheet

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

    UnitedStates

    Cash balancesS&P 500 ex financials

    Sales and profit marginsS&P 500 ex financials

    USD bn % Index %

    Note: Sales indexed to Q1 2000. Latest data Q4 2011. Source:

    Worldscope, J.P. Morgan Asset Management.

    Sales (lhs)

    Margin (rhs)

    Cash and equivalents (lhs)

    % total assets (rhs)

    TOC

    US GDP and inflation

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    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    -4

    -2

    0

    2

    4

    6

    33

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

    Real GDPchange year on year

    Inflationchange year on year

    Average

    2,1%

    First quarter

    2012

    2,0%

    US GDP and inflation

    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    0

    2

    4

    6

    Core CPI

    May 2012

    2,3%

    Headline CPI

    May 2012

    1,7%

    % %

    Forecast

    headline CPI

    2012: 2,2%

    2013: 2,0%

    Forecast

    GDP

    2012: 2,2%

    2013: 2,4%

    UnitedStates

    USD 685

    bn of output

    lost

    USD 850 bn

    of output

    recovered

    TOC

    Contribution to US GDP

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    0

    1

    2

    3

    4

    5

    0

    1

    2

    3

    4

    5

    -2.000

    0

    2.000

    4.000

    6.000

    8.000

    10.000

    12.000

    14.000

    16.000

    34

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

    First quarter 2012change quarter on quarter annualised

    Contribution to US GDP

    Household

    Inventories

    Business

    investment

    Government

    Residential

    investment

    Net

    exports

    3,0%

    1,9%Household

    InventoriesBusiness

    investment

    GovernmentResidential

    investment

    Net

    exports

    %

    %

    Total

    Total

    UnitedStates

    Fourth quarter 2011change quarter on quarter annualised

    Components of GDPFirst quarter nominal GDP, billions USD

    10,9%

    Business investment

    71,2%

    Household

    19,5%

    Government

    2,3%

    Residential investment

    - 3,9% Net exports

    TOC

    Federal finances

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    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    100

    Mrz 04 Mrz 06 Mrz 08 Mrz 10 Mrz 12

    35

    (Left top and bottom) Note: The Federal Budget for 2012 is based on the March 2012 baseline scenario from the CBO. The alternative scenario is based on the CBOs

    alternative scenario for spending and President Obamas budget for revenues (assuming avoidance of the fiscal cliff). Years s hown are fiscal years (Oct. 1 through Sep.

    30). Top chart on the left displays federal surplus/deficit (revenues outlays). (Bottom left) US convention is to use net debt levels rather the gross debt. Source: US

    Treasury, BEA, CBO, J.P. Morgan Asset Management. (Right) *58% of assets on the Feds balance sheet. **Other includes US deposit institutions, households, state and

    local government etc. Data as at April 2012. Source: US Treasury, J.P. Morgan Asset Management.

    Federal budget surplus/deficit% of GDP, 1990 - 2022

    US Treasuries ownership

    United

    States

    -12

    -10

    -8

    -6

    -4

    -2

    0

    2

    4

    1990 1994 1998 2002 2006 2010 2014 2018 2022

    CBO Baseline

    Alternative

    Forecast

    Baseline Alt.

    2011 actual -8,7% -8,7%

    2012 estimate -7,6% -7,8%

    2013 projection -3,8% -6,6%

    20

    40

    60

    80

    100

    1990 1994 1998 2002 2006 2010 2014 2018 2022

    CBO Baseline

    Alternative 2011 actual:

    67,7%

    2022: 80,0%

    2022: 61,3%

    Forecast

    %

    %

    Federal debt% of GDP, 1990 - 2022

    %

    12%

    11%

    2%

    3%

    26%

    Japan USD 1.066 bn

    China USD 1.146 bn

    Other countries USD 2.479 bn

    30%

    OPEC

    UK

    Other US domestic USD 2.779bn**

    17%US Fed USD 1.667 bn*

    TOC

    JAPAN

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    36

    JAPAN

    37Japan TOPIX Index at inflection points (JPY)

    38Japan equity valuations

    39Japan GDP and inflation

    TOC

    Japan TOPIX Index at inflection points (JPY)

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    Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

    400

    600

    800

    1.000

    1.200

    1.400

    1.600

    1.800

    2.000

    40

    60

    80

    100

    120

    140

    160

    180

    200

    Jap

    an

    26 February 2007

    1.817

    Note: Earnings index is derived from the forward P/E. Source: I/B/E/S, J.P . Morgan Asset Management.

    p p ( )

    TOPIX Index

    28 April 2003

    773 13 March 2009

    724

    -60%+135%

    +35%

    37

    21 February 2011975

    Earnings index

    Earnings

    30 June 2012

    770

    TOC

    Japan equity valuations

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    Dec 89 Dec 91 Dec 93 Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    2

    4

    6

    8

    10

    Dec 89 Dec 91 Dec 93 Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    20

    40

    60

    80

    38

    Note: Earnings growth forecast excludes negative earnings. Source: I/B/E/S, Tullett Prebon Information, J.P. Morgan Asset Management.

    MSCI Japan Index dividend yield and ten-year JGB yield

    Forward P/E ratio Japan, Topix Index

    31 March 1994

    72,7

    Average since 1989

    30,2

    Ten-year JGB yield

    Dividend yield

    30 June 2012

    One year

    earnings

    growth

    forecast:16%

    %

    Jap

    an

    0,8%

    2,6%

    30 June 2012

    10,7

    TOC

    Japan GDP and inflation

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    39

    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    -2

    -1

    0

    1

    2

    3

    Source: Ministry of Internal Affairs and Communications, Economic & Social Research Institute, Bloomberg consensus forecasts, J.P. Morgan Asset Management.

    Real GDPchange year on year

    Inflationchange year on year

    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    -8

    -6

    -4

    -2

    0

    2

    4

    6

    Average

    0,8%

    % %

    Forecast

    headline CPI

    2012: 0,1%

    2013: 0,1%

    Forecast

    GDP

    2012: 2,5%

    2013: 1,5%

    Jap

    an

    First quarter

    2012

    2,7%

    Headline CPI

    May 2012

    0,2%

    Core CPI

    May 2012

    -0,6%

    TOC

    EMERGING MARKETS

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    40

    41MSCI Asia ex Japan Index and emerging market valuations

    42Emerging market returns (EUR and local currency)

    43Emerging markets GDP growth and inflation

    44China: Cyclical indicators

    45China: Monetary policy and housing

    TOC

    MSCI Asia ex Japan Index at inflection points (local)

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    Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

    200

    300

    400

    500

    600

    700

    800

    20

    30

    40

    50

    60

    70

    80

    41

    Note: Earnings index is derived from the forward P/E. Source: I/B/E/S, J .P. Morgan Asset Management.

    12 May 2003218

    1 November 2007

    750

    MSCI Asia ex Japan Index

    20 November 2008

    299

    +250%

    +122%

    -60%

    21 April 2011

    664

    Emerging

    Markets

    Earnings index

    Earnings

    30 June 2012

    560

    TOC

    Emerging market returns (EUR and local currency)

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    Emerging

    Markets

    42

    Note: Total return MSCI indices. EM EMEA is EM Europe plus Egypt, Morocco and South Africa. World is MSCI Developed Market (DM) World Index.

    Source: J.P. Morgan Asset Management.

    2004 2005 2006 2007 2008

    EUR

    Local

    EUR

    Local

    EUR

    Local

    EUR

    Local

    EUR

    Local

    2010

    EUR

    Local

    2009 Q2 20122011 YTD

    29,6%

    EM Latin

    America32,2%

    74,2%

    EM Europe

    59,2%

    28,3%

    EM Latin

    America37,6%

    35,9%

    EM Latin

    America35,6%

    -37,2%

    World

    -38,3%

    97,8%

    EM Latin

    America63,2%

    32,4%

    EM EMEA

    19,2%

    -1,8%

    World

    -5,0%

    9,6%

    EM Europe

    6,4%

    -0,2%

    World

    -4,0%

    29,3%

    EM EMEA

    24,5%

    73,3%

    EM Latin

    America

    38,0%

    22,2%

    EM Europe

    32,8%

    27,7%

    EM Asia

    39,1%

    -48,8%

    EM Latin

    America

    -37,7%

    80,4%

    EM Europe

    73,6%

    27,6%

    EM Asia

    14,9%

    -14,4%

    EM Asia

    -14,2%

    8,9%

    EM EMEA

    6,6%

    -2,7%

    EM Asia

    -5,5%

    26,6%

    EM Europe

    25,8%

    59,9%

    EM EMEA

    50,4%

    19,2%

    EM Asia

    27,7%

    26,1%

    Emerging

    Markets

    33,5%

    -50,3%

    EM Asia

    -47,1%

    73,4%

    Emerging

    Markets

    62,8%

    27,5%

    Emerging

    Markets

    14,4%

    -15,4%

    Emerging

    Markets

    -12,5%

    8,7%

    World

    6,8%

    -3,7%

    EM EMEA

    -2,2%

    16,9%

    Emerging

    Markets

    16,4%

    55,0%

    Emerging

    Markets

    35,8%

    18,6%

    Emerging

    Markets

    28,9%

    17,6%

    EM Europe

    22,3%

    -50,8%

    Emerging

    Markets

    -45,7%

    68,8%

    EM Asia

    68,1%

    25,2%

    EM Europe

    18,9%

    -16,4%

    EM Latin

    America

    -9,8%

    7,6%

    EM Asia

    5,4%

    -4,3%

    Emerging

    Markets

    -5,1%

    7,0%

    EM Asia

    8,0%

    46,9%

    EM Asia

    28,5%

    11,1%

    EM EMEA

    25,8%

    16,1%

    EM EMEA

    21,9%

    -53,3%

    EM EMEA

    -48,6%

    62,9%

    EM EMEA

    50,3%

    22,9%

    EM Latin

    America

    9,2%

    -17,5%

    EM EMEA

    -9,1%

    6,5%

    Emerging

    Markets

    5,1%

    -5,8%

    EM Europe

    -3,9%

    6,9%World

    11,8%

    26,8%World

    16,3%

    7,9%World

    16,1%

    -1,2%World

    5,2%

    -66,3%EM Europe

    -64,0%

    26,7%World

    26,5%

    20,1%World

    10,6%

    -20,8%EM Europe

    -16,4%

    1,9%

    EM Latin

    America

    3,4%

    -8,8%

    EM Latin

    America

    -6,3%

    TOC

    Emerging markets GDP growth and inflation

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    -3

    0

    3

    6

    9

    12

    15

    18

    -3

    0

    3

    6

    9

    12

    15

    Dez 99 Dez 01 Dez 03 Dez 05 Dez 07 Dez 09 Dez 11

    43

    Emerging

    Markets

    India

    Russia

    BrazilInflation %GDP %

    China

    Inflation %GDP %Inflation %GDP %

    Inflation %GDP %

    Note: Real GDP growth and inflation are year on year change. Source: (top left) IBGE, (top right) India Central Statistics Organisation, Press Information Bureau of India,

    (bottom left) National Bureau of Statistics, (bottom right) Federal Service of State Statistics , J.P. Morgan Asset Management.

    Average

    7,3%

    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    -3

    0

    3

    6

    9

    12

    15

    -3

    0

    3

    6

    9

    12

    15

    18

    Average

    5,4%

    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    -3

    0

    3

    6

    9

    12

    15

    -3

    0

    3

    6

    9

    12

    15

    18

    Average

    3,6%

    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    -3

    0

    3

    6

    9

    12

    15

    -3

    0

    3

    6

    9

    12

    15

    18

    Average

    9,6%

    TOC

    China: Cyclical indicators

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    -10

    0

    10

    20

    30

    40

    50

    60

    70

    Dez 99 Dez 01 Dez 03 Dez 05 Dez 07 Dez 09 Dez 11

    44

    (Left) Source: National Bureau of Statistics China, Markit, J.P. Morgan Asset Management. (Top right) Source: China Association of Automobile Manufacturers,

    J.P. Morgan Asset Management. (Bottom right) Source: J.P. Morgan Global Economics Research, J.P. Morgan Asset Management.

    Auto salesManufacturing PMIs

    May 2012

    1,5%

    Index level, reading above 50 indicates expansion Year-on-year growth of 12-month rolling sum

    Emerging

    Markets

    46

    48

    50

    52

    54

    56

    58

    Mai 09 Nov 09 Mai 10 Nov 10 Mai 11 Nov 11 Mai 12

    NBS Mfg. PMI

    HSBC Mfg. PMI

    June 2012 48,2

    May 2012 50,4

    15

    20

    25

    30

    35

    40

    1990 1994 1998 2002 2006 2010

    %

    US Consumption % of globalEM Consumption % of global

    Share of global nominal consumption

    TOC

    China: Monetary policy and housing

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    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 114

    6

    8

    10

    12

    14

    16

    18

    20

    22

    24

    Dec 02 Dec 04 Dec 06 Dec 08 Dec 10

    6.0

    6.5

    7.0

    7.5

    8.0

    8.5

    45

    Reserve requirement ratioHome prices

    Chinese currency

    Source: (Top left) National Bureau of Statistics China, J.P. Morgan Asset Management. (Right) The Peoples Bank of China, J.P . Morgan Asset Management. (Bottom left)

    J.P. Morgan Asset Management.

    Emerging

    Markets

    Renminbi per USD

    Minimum reserves requirement

    %

    June 2012

    20,0%

    June 2012

    6,31%

    Large depository institutions

    One-year working capital rate

    May 2012

    6,35June 2005 July 2008: +17,5%

    May 2010 June 2012: +7,0%

    Indexed to 100 in January 2007

    80

    130

    180

    230

    280

    2007 2008 2009 2010 2011 2012

    Beijing/Shanghai

    averageJan 2012

    141,4NBS 70-city

    average

    Jan 2012

    271,1

    TOC

    FIXED INCOME

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    46

    47Fixed income returns

    52Emerging market sovereign debt and index weightings

    48International yield curves

    49ECB and Bank of England policy and real rates

    50US Fed and Bank of Japan policy and real rates

    51Corporate bonds

    TOC

    Fixed income returns

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    52,6%

    US HY57,5%

    23,2%

    US HY15,2%

    12,5%

    EM debt9,2%

    9,5%

    US HY7,1%

    7,7%

    EM debt2,8%

    22,8%

    EM debt

    25,9%

    18,8%

    EM debt

    11,8%

    9,2%

    Global agg

    5,6%

    9,2%

    EM debt

    6,9%

    6,8%

    US HY

    1,8%

    16,0%

    FI alloc.

    17,5%

    12,9%

    Global agg

    5,5%

    7,9%

    US HY

    4,4%

    5,9%

    FI alloc.

    5,0%

    5,6%

    Global agg

    0,6%

    15,7%Euro corp

    15,7%

    8,4%FI alloc.

    5,4%

    5,0%FI alloc.

    3,6%

    5,7%Euro corp

    5,7%

    2,6%FI alloc.

    0,6%

    8,1%

    IL

    8,1%

    4,7%

    Euro corp

    4,7%

    3,4%

    Euro govt

    3,4%

    5,0%

    IL

    5,0%

    0,2%

    Euro govt

    0,2%

    4,3%

    Euro govt

    4,3%

    1,1%

    Euro govt

    1,1%

    1,5%

    Euro corp

    1,5%

    4,0%

    Euro govt

    4,0%

    0,0%

    Euro corp

    0,0%

    3,6%

    Global agg

    6,9%

    -0,4%

    IL

    -0,4%

    -2,3%

    IL

    -2,3%

    3,8%

    Global agg

    1,5%

    -1,2%

    IL

    -1,2%

    FixedIncome

    47

    2009 2010

    Euro

    Local

    Euro

    Local

    Euro

    Local

    Euro

    Local

    Euro

    Local

    Q2 20122011 YTD

    Fixed income sector returns Government fixed income returns

    2009 2010 Q2 20122011 YTD

    Euro

    Local

    Euro

    Local

    Euro

    Local

    Euro

    Local

    Euro

    Local

    Euro

    Local

    Euro

    Local

    (Left) Note: IL is Barclays Euro Govt All Markets Inflation-linked Index, Euro govt is Barclays Euro Aggregate Government Treasury Index, EM debt is the EMBI+, US HY isthe Merrill Lynch High Yield Master II, Euro corp is the Barclays Euro Aggregate Credit Corporate Index, Global agg is the Barclays Global Aggregate Index. The F Iallocation assumes the following weights; 15% in index linked, 35% in euro government bonds 15% in EM debt, 15% in high yield, 10% in euro corporates, and 10% inglobal bonds. Source: Barclays Capital, Bank of America Merrill Lynch, J.P. Morgan Asset Management. (Right) Source: JPMorgan Global Bond indices, J.P. Morgan AssetManagement.

    Euro

    Local

    8,3%

    Italy

    8,3%

    25,8%

    Japan

    2,5%

    19,9%

    UK Gilts

    16,8%

    8,9%

    Italy

    8,9%

    9,4%

    Japan

    1,1%

    7,8%

    UK Gilts

    -1,0%

    13,8%

    Global

    4,2%

    13,6%

    US

    9,9%

    5,1%

    UK Gilts

    1,8%

    8,1%

    US

    3,0%

    1,8%

    Germany

    1,8%

    13,5%

    US

    6,1%

    11,4%

    Japan

    2,3%

    4,0%

    US

    1,7%

    7,1%

    UK Gilts

    3,9%

    -1,3%

    Global

    0,7%

    11,5%

    UK Gilts

    7,5%

    10,8%

    Global

    6,3%

    2,7%

    Global

    2,1%

    6,3%

    Global

    1,8%

    -4,8%

    Japan

    0,9%

    6,4%

    Germany

    6,4%

    9,8%

    Germany

    9,8%

    1,9%

    Germany

    1,9%

    1,6%

    Germany

    1,6%

    -6,8%US

    -3,8%

    -0,6%Italy

    -0,6%

    -5,9%Italy

    -5,9%

    -0,0%Japan

    1,4%

    -2,2%Italy

    -2,2%

    TOC

    International yield curves

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    0

    1

    2

    3

    0

    1

    2

    3

    3 53 103 153 203 253 303 3533M 2Y 5Y 10Y 30Y

    Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12

    1

    2

    3

    4

    48

    Source: Tullet Prebon Information, Bloomberg, J.P. Morgan Asset Management.

    Government yield curves

    %

    Germany 1,59%

    UK 1,73%US 1,65%

    Japan 0,84%

    Ten-year yieldsUK

    US

    Germany

    Japan

    Maturity

    %

    %

    FixedIncome

    TOC

    ECB and Bank of England policy and real rates

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    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    -2

    0

    2

    4

    6

    49

    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    -2

    0

    2

    4

    6

    Bank of England

    Note: Real interest rates are calculated using core CPI and repo rate. Source: ECB, Bloomberg

    consensus forecasts, J.P. Morgan Asset Management.

    European Central Bank

    Note: Real interest rates are calculated using core CPI and base rate.

    Source: Bank of England, ONS, B loomberg consensus forecasts,

    J.P. Morgan Asset Management.

    Real interest rate

    May 2012

    -0,58%

    Repo rate

    30 June 2012

    1,00%

    Real interest rate

    May 2012

    -1,71%

    Base rate

    30 June 2012

    0,50%

    % %

    Forecast

    Base rate

    2012: 0,50%

    2013: 0,50%

    Forecast

    Repo rate

    2012: 0,75%

    2013: 0,75%

    FixedIncome

    TOC

    US Fed and Bank of Japan policy and real rates

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    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    -2

    0

    2

    4

    6

    8

    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    0,0

    0,5

    1,0

    1,5

    2,0

    50

    Note: Real interest rates are calculated using core CPI and Fed Funds rate. Source: US Federal

    Reserve Bank, Bloomberg consensus forecasts, J.P. Morgan Asset Management.

    Note: Real interest rates are calculated using core CPI and call rate.

    Source: Bank of Japan, Bloomberg consensus forecasts,

    J.P. Morgan Asset Management.

    Bank of JapanUS Federal Reserve Bank

    Real interest rate

    May 2012

    -2,01%

    Fed Funds

    30 June 2012

    0,25%

    Real interest rate

    May 20120,69%

    %%

    Forecast

    Call rate

    2012: 0,10%

    2013: 0,10%

    Forecast

    Fed Funds

    2012: 0,25%

    2013: 0,25%

    FixedIncome

    Call rate

    30 June 2012

    0,10%

    TOC

    Corporate bonds

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    0

    4

    8

    12

    16

    20

    24

    Dez 99 Dez 01 Dez 03 Dez 05 Dez 07 Dez 09 Dez 11

    (Top) Source: Merrill Lynch, J.P. Morgan Asset Management.

    (Bottom) Note: BarCap Global High Yield Index in USD. Figures

    may not sum due to rounding. Source: BarCap, J.P. Morgan Asset

    Management.

    Note: Investment grade based on Merrill Lynch Investment Grade, mortgages is the Barclays

    Capital Aggregate US MBS index, and corporate high yield is the Merrill Lynch High Yield Master

    Index II. Source: Merrill Lynch, BarCap, J.P. Morgan Asset Management.

    Investment grade and high yield bonds

    Mortgages(MBS)

    US corporate

    high yield

    51

    US investment

    grade7,8%

    3,4%

    2,5%

    %

    US corporate high yield and default rate

    Spread over Treasuries (lhs): 644

    Default rate (rhs): 1,1%

    bps over Treasuries

    FixedIncome

    %

    Yield to maturity

    Global high yield by region

    United

    States56%

    Europe

    26%

    Asia 6%

    Canada 2%

    Other Europe 14%

    UK 4%

    France 3%

    Germany 3%

    Italy 2%Latin America 6%

    Other 3%

    0

    2

    4

    6

    8

    10

    12

    0

    400

    800

    1.200

    1.600

    2.000

    2.400

    Dec 99 Dec 02 Dec 05 Dec 08 Dec 11

    TOC

    Emerging market sovereign debt and index weightings

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    Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 110

    4

    8

    12

    16

    52

    Note: Emerging Markets Sovereign is the EMBI+. The local currency is the JPMorgan GBI-EM

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

    (Top) Note: The EMBI+ track total returns on USD denominated debt.

    Figures may not sum due to rounding. Source: J.P. Morgan Asset

    Management. (Bottom) Note: EMBI+ is representative of the sovereign

    debt market. Source: J.P. Morgan Asset Management.

    EMBI+ weighting (USD denominated)US and emerging market sovereign debt yields

    Emerging market

    sovereign (USD)

    Ten-year US Treasury

    Fed funds rate

    Emerging

    market

    sovereign

    (local currency)

    %

    FixedIncome Yield to maturity

    EM external debt spreads and average credit rating

    0

    300

    600

    900

    1200

    1500

    Sep 96 Sep 99 Sep 02 Sep 05 Sep 08 Sep 11

    Emerging market crises

    Developed market crises

    bps over Treasuries Credit rating (inverted)

    EMBI+ (lhs)

    Rating (rhs)

    CCC+

    B-

    B

    B+

    BB-

    BB+

    BBB-

    Latin

    America

    51%Europe

    30%

    Asia

    16% Mexico 14%

    Brazil 12%

    Venezuela 10%

    Other Latin America 10%Africa 3%

    Indonesia 7%

    Philippines 10%

    Other Europe 5%

    Turkey 13%

    Russia 14%Colombia 6%

    TOC

    OTHER ASSET CLASSES

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    53

    54Currencies

    55Commodities

    56Oil, gas and gold

    57Correlation of returns (EUR)

    58Property

    59Cumulative returns on US assets

    TOC

    Currencies

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    54

    Note: REER is the real effective exchange rate of a currency against a basket of its main trading partners currencies. REER is rebased to 100 at December 1980

    Source: J.P. Morgan Asset Management.

    EUR trade weighted indexUSD trade weighted index

    Yen trade weighted indexGBP trade weighted index

    OtherAss

    etClasses

    USD REER

    10 year moving average

    -1,5sd

    +1,5sd

    EUR REER

    10 year moving average

    -1.5sd

    +1.5sd

    GBP REER10 year moving average

    -1,5sd

    +1,5sd

    JPY REER

    10 year moving average

    -1,5sd

    +1,5sd

    80

    90

    100

    110

    120

    130

    140

    150

    Dez 80 Dez 84 Dez 88 Dez 92 Dez 96 Dez 00 Dez 04 Dez 08

    80

    90

    100

    110

    120

    130

    Dez 80 Dez 84 Dez 88 Dez 92 Dez 96 Dez 00 Dez 04 Dez 08

    50

    60

    70

    80

    90

    100

    110

    Dez 80 Dez 84 Dez 88 Dez 92 Dez 96 Dez 00 Dez 04 Dez 0870

    80

    90

    100

    110

    120

    130

    140

    150

    Dez 80 Dez 84 Dez 88 Dez 92 Dez 96 Dez 00 Dez 04 Dez 08TOC

    Commodities

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    25

    50

    100

    200

    400

    800

    1600

    Dez 69 Dez 79 Dez 89 Dez 99 Dez 09

    0

    50

    100

    150

    200

    250

    300

    0

    50

    100

    150

    200

    250

    300

    1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

    55

    (Top) Note: Pfaffenzeller until 2003, IMF commodity prices indices thereafter. Nominal prices adjusted using US consumer price index. Source: Pfaffenzeller, IMF,

    J.P. Morgan Asset Management. (Bottom left) Note: On a log scale the distance between tick marks shows the same percentage change. Source: Bloomberg,

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

    Timber

    Copper

    Wheat

    Cotton

    Inflation adjusted commodity indices rebased to 1900 = 100

    Metals (lhs)

    Agriculturalproducts (lhs)

    Chinese steel production (rhs)

    Chinesesteelproduction

    (millionsmetrictons

    )

    Met

    alsan

    dagricu

    ltura

    lindices

    OtherAss

    etClasses

    Commodity indices and Chinese steel productionGold price (log scale)Inflation adjusted31 January 1980

    USD 1.908

    30 June 2012

    USD 1.597

    USD/oz

    Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    100

    200

    300

    400

    10

    20

    30

    40

    50

    60

    70

    TOC

    Oil and gas supply

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    Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

    0

    20

    40

    60

    80

    100

    120

    140

    160

    0

    2

    4

    6

    8

    10

    12

    14

    56

    Crude oil and Henry Hub LNG prices Middle east energy production & chokepointsPercent of global liquid fuel production, 2010

    USD/bbl

    OtherAss

    etClasses

    Libya

    2,1%Egypt

    0,8%

    Sudan0,6%

    Saudi Arabia

    11,7%

    Iran

    4,9%

    Iraq

    2,8%

    Kuwait

    2,9%

    UAE

    3,3%

    Syria

    0,5%

    Strait of

    Hormuz

    18,0%

    Suez Canal2,1%

    Bab el-Mandeb

    3,7%

    Saudi Arabia 12% China 5% US 22% India 4%

    Russia 12% Iran 5% China 11% Russia 3%

    US 11% Canada 4% Japan 5% Saudi Arabia 3%

    Major producers Major consumers

    Percent of global total, 2010 Percent of global total, 2010

    Brent

    WTI30 June 2012

    USD 85

    30 June 2012

    USD 93

    Natural gas30 June 2012

    USD 2,7

    USD/MMBtu

    Note: WTI is the West Texas Intermediate the US benchmark for oil prices, Brent is the Europeancrude oil benchmark. Henry Hub is the standard US domestic benchmark. Source: J .P. Morgan

    Asset Management.

    Note: Global liquid fuel production excludes liquefied natural gas(LNG). Source: EIA, J.P. Morgan Asset Management.

    TOC

    Correlation of returns (EUR)

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    Note: Pan Europe bonds is the Citigroup Europe World Government Bond Index (WGBI). Emerging market debt is the JPMorgan EMBI Global. High yield bonds is the

    JPMorgan Domestic High Yield. Ten year correlation values are calculated for period 12 July 2002 to 22 June 2012. Correlation measures the direction and degree of linear

    association between two variables. All indices are total return based on weekly return data in euros. Source: Bloomberg, J.P. Morgan Asset Management.

    57

    MSCI

    Europe

    MSCI

    JapanS&P 500 MSCI EM

    MSCI Asia

    ex Japan

    MSCI

    World

    Pan

    Europebonds

    EM debtHigh yield

    bonds

    MSCIEurope 1,00 0,46 0,79 0,79 0,68 0,93 -0,18 0,47 0,55

    MSCIJapan 1,00 0,47 0,56 0,62 0,59 -0,02 0,17 0,35

    S&P 500 1,00 0,68 0,62 0,94 -0,21 0,30 0,41

    MSCI EM 1,00 0,94 0,84 -0,16 0,57 0,53

    MSCI Asiaex Japan 1,00 0,77 -0,12 0,44 0,47

    MSCI World 1,00 -0.19 0,42 0,53

    Pan Europe

    bonds 1,00 0,10 -0,03

    EM debt 1,000,56

    High yield

    bonds 1,00

    OtherAss

    etClasses

    Correlation of

    weekly returns over

    previous ten years

    TOC

    Property

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    0

    50

    100

    150

    200

    250

    300

    Dez 00 Dez 02 Dez 04 Dez 06 Dez 08 Dez 10

    Spain

    Japan (shifted 17 years)

    UK

    Ireland

    US

    58

    GPR250 Property Index

    MSCI World Index

    229

    99

    30 June 2012

    Note: Total return indices, rebased to 100 at 31 December 2000.

    Source: GPR250 Property Shares Index, J.P. Morgan Asset

    Management.

    Note: Japan: Land Underlying Buildings and Structures; US: Household Real Estate Assets; UK: Residential

    Buildings; Spain: Residential Household Wealth; Ireland: Dwellings. Source: OECD, Japan Land and Water Bureau,

    Ministry of Land, Infrastructure and Transport, Cabinet Office (Government of Japan), US Federal Reserve,

    S&P/Case-Shiller, OFHEO, UK Office for National Statistics, Bank of Spain, Ireland Central Statistics Office,

    Permanent TSB/ESRI, J.P. Morgan Asset Management.

    Ratio

    OtherAssetClasses Residential property values to GDP ratio MSCI World Index (EUR) vs GPR250 Property Index (EUR)

    0

    1

    2

    3

    4

    5

    6

    1977 1987 1997 2007 2017 2027

    TOC

    Cumulative returns on US assets

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    0

    1

    10

    100

    1.000

    10.000

    Dec 1899 Dec 1909 Dec 1919 Dec 1929 Dec 1939 Dec 1949 Dec 1959 Dec 1969 Dec 1979 Dec 1989 Dec 1999 Dec 2009

    59

    Total return of USD 1 in real terms, log scale

    Note: J.P. Morgan estimate from 2010, equities are represented by S&P 500 Total Return, bonds by BarCap US Treasury 20+ Year Total Return Index, and bills by BarCap USTreasury Bills Total Return Index. Log scale accurately represents percentage changes in index levels. Source: Shil ler, Siegel, J.P. Morgan Asset Management.

    Annualised real returns

    1899 2011 2000 Q1 2012Equities 6,3% -0,8%

    Bonds 2,2% 5,8%

    Bills 0,7% -0,3%

    Equities

    USD 952

    Bonds

    USD 12

    Bills

    USD 2

    1905 - 1923

    1928 - 1942

    1965 - 1982

    1999 USD 1.136

    OtherAssetClasses

    TOC

    DEMOGRAPHICS

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    60

    61Demographics, savings and current accounts

    62Population by age

    63Education

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    Demographics, savings and current accounts

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    -5

    0

    5

    -8

    -6

    -4

    -2

    0

    2

    4

    6

    8

    0-4

    5-9

    10-14

    15-19

    20-24

    25-29

    30-34

    35-39

    40-44

    45-49

    50-54

    55-59

    60-64

    65-69

    69+

    61

    Lifecycle of individual savings

    Demographics

    Age profile

    Source: GS Global ECS Research, US Census Bureau, J.P. Morgan Asset Management.

    Higher

    Lower

    Netsaving/dissaving

    3

    6

    9

    0-4

    5-9

    10-14

    15-19

    20-24

    25-29

    30-34

    35-39

    40-44

    45-49

    50-54

    55-59

    60-64

    65-69

    %

    Age group distribution

    %

    Current account balance% of GDP

    ChinaMedian age 35,5 years

    USMedian age 36,4 years

    JapanMedian age 44,8 years

    Japan

    US

    China

    TOC

    Population by age

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    0

    10

    20

    30

    40

    50

    60

    0-19

    20-39

    40-59

    60-79

    80+

    Note: Based on mid-year 2012 population estimate, ordered by s ize of youngest age group. Total fertility rate is the average number of children born per woman overnatural life time. Source: US Census Bureau, J.P. Morgan Asset Management.

    India USNigeriaAge Brazil China UK Italy Japan

    2,6 2,15,4 2,2 1,5 1,9 1,4 1,4

    Germany

    1,4Total fertility

    rate

    Percentage of population, by age cohort

    54% 39% 34% 27% 25% 23% 19% 18% 18%

    Demographics

    62

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    Education

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    Source: OECD, Program for International Student Assessment (PISA), J.P. Morgan Asset Management.

    PISA education survey: comparing performance of selected countriesScores for 15 year olds

    Rank Reading Maths Science

    1 556 Shanghai-China 1 600 Shanghai-China 1 575 Shanghai-China

    2 539 Korea 2 562 Singapore 2 554 Finland

    3 536 Finland 3 555 Hong Kong-China 3 549 Hong Kong-China

    8 520 Japan 9 529 Japan 5 539 Japan

    17 500 United States 16 513 Germany 13 520 Germany

    20 497 Germany 22 497 France 16 514 United Kingdom

    22 496 France 28 492 United Kingdom 23 502 United States

    25 494 United Kingdom 31 487 United States 27 498 France

    53 412 Brazil 57 386 Brazil 53 405 Brazil

    63 370 Peru 63 365 Peru 63 373 Azerbaijan

    64 362 Azerbaijan 64 360 Panama 64 369 Peru

    65 314 Kyrgyzstan 65 331 Kyrgyzstan 65 330 Kyrgyzstan

    Topthree

    Selected

    others

    Bottom

    three

    Demographics

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    Meet the team

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    64

    Tom Elliott. executive director, is a global strategist within the Investment Marketing Team at J.P. Morgan AssetManagement, responsible for investment communications through the Guide to the Markets suite of products. An

    employee since 1995, he worked in the Global Multi-Asset Group (GMAG) until 2006 and before that he was head of the

    Investment Writing Team. Previously. he worked at Euromoney Publications as a feature writer for a year and prior to thathe spent four years at Greig Middleton & Co. as a graduate trainee and securities analyst. Tom obtained a BA in History

    from Sussex University and an MSc in Economic History from the London School of Economics.

    [email protected]

    Dan Morris. executive director, is a strategist responsible for delivering market analysis and insight to clients in Europe,

    the Middle East, and Africa. Prior to joining J.P. Morgan Asset Management, Dan was the Senior Equity Strategist atLombard Street Research and before that part of the Institutional Investor-ranked portfolio strategy team at Banc of

    America Securities in New York. Dan began his career covering Latin American equity markets at BT Alex. Brown and

    Dresdner Kleinwort Benson. He holds an MBA from the Wharton School and a Masters in International Relations from

    Johns Hopkins' School of Advanced International Studies. His undergraduate degree is in Mathematics from Pomona

    College and he is a CFA charterholder.

    [email protected]

    Maria Paola Toschi. executive director, is a market strategist at J.P. Morgan Asset Management in the Milan Office, incharge of communications to domestic retail and institutional clients. She worked from 1986 to 2003 as a sell-side equity

    analyst in different Italian Banking Institutions and has spent the last eight years in Banca IMI, Intesa Sanpaolo Banking

    Group, mainly covering small-mid Industrial companies and following several IPOs. In 2003 she became responsible for

    the retail investment communications team dedicated to the Sanpaolo Retail and Private Banking network. She graduated

    in Economics at the Milan L. Bocconi University and has been a Member of the Italian Financial Analysts Association

    since 1989. She joined J.P. Morgan Asset Management Milan in November 2008.

    [email protected]

    The full suite of the Guide to the Market publications can be accessed by visiting the Insight Portal:

    www.jpmorganassetmanagement.com/insightTOC

    J.P. Morgan Asset Management

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    *ProfessionalInvestors corresponds to professional clients and eligible counter parties as defined within the European Union Directive 2004/39/EC on Markets in Financial Instruments (MiFID).

    Any forecasts, figures, opinions or investment techniques and strategies set out, unless otherwise stated, are J.P. Morgan Asset Managements own at date of publication. They are considered to be

    accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. They may be subject to change without reference or notification to you.

    The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support aninvestment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance wi th market conditions and taxation agreements and investors may not get

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    and its affili ates worldwide.

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    Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

    Unless otherwise stated, all data is as at 30/06/2012.

    Prepared by:Kerry Craig, Tom Elliott , Paola Toschi and Dan Morris

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