Key Trade and Risk June 21 2010
Key Trade and Risk June 21 2010
Key Trade and Risk June 21 2010
Equity Research
21 June 2010
• Equities are fundamentally attractive. Global growth in our view is Emerging Markets Equity Strategy
sustainable. This growth is combined with low inflation and interest Adrian Mowat
AC
• The main risk to our view is that financial market stress results in
Figure 1: MSCI EM relative performance
weaker European growth than a bearish consensus. For more on risks
see page 8. 140
120
• Key asset allocation calls:
OW: Taiwan, Korea, India, Mexico, South Africa, Turkey and the 100 v s World
Philippines
80
OW: Technology and industrial cyclicals (i.e. transportation)
60
UW: China and Brazil
UW: Commodities, energy, telecoms and Utilities 40 v s USA
20
• For our ‘Key Trade’ stock ideas, click here to download the Bloomberg
96 98 00 02 04 06 08 10
sheet.
Source: Bloomberg, 14 June 2010.
See page 90 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.
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
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(852) 2800-8599 21 June 2010
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Summer Swings
There is a conflict in our strategy. This is a serious economic advantages. It helps address China’s strained
conflict that could damage performance. Investors in our social contract by increasing household income as a share
view are too, and increasingly pessimistic, on the of GDP at the expense of corporate profits (see risk
sustainability of the recovery. Our base case remains that section on page 8). There is a leveraged impact on
the global recovery is led by the private sector and is discretionary income. Economists may argue that a
sustainable. Economic growth combined with falling stronger currency would indirectly boost real income due
core inflation is a strong fundamental backdrop for to lower inflation but there are higher tangible benefits to
equities. Note that J.P. Morgan's economists just pushed workers of higher wages rather than a lower cost of
out the first increase in Fed Funds rate to 4Q11 (See A imported goods.
change to our Fed call, Michael Feroli et al, 17 June
2010). But EM investors need to consider the risk of the Figure 2: Monitor European PMIs
correlation between EM equities and commodities. In our 65 Germany
view commodity investors are not pricing in China's 60
changing growth model. Euro area
55
50
Recognizing the conflict and risk, we are setting an
45
artificial time limit on the fear of a correction in
40 Spain
commodities. The time limit is September 2010. By then Greece
we believe that the decline in bulk commodity prices will 35
"scare" the new investors in commodities to redeem, 30
generating a broader correction. 25
Jun-07 May -08 Apr-09 Mar-10
Market confidence in a sustainable economic recovery is
Source: J.P. Morgan Economics, May 2010
waning. It is the risk of too rapid a fiscal consolidation
that is hitting confidence. We agree this risk has Figure 3: Domestic Savings as a percent of GDP in China
increased but we also believe that financial investors are
25 1997-99 2005-07 21 22
over estimating their influence on the real economy. Post
18
the sub-prime crisis, business and consumer respect for 20
financial institutions and markets has declined. In 13
15
responding to the conflicting signals of weaker capital 9
10
markets and stronger than expected demand (see Figure 3
2) manufacturers should be more influenced by their 5 1 1
customer orders than stock market levels. This is 0
Institutions
Enterprises
Households
Government
Financial
3
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With such a clear policy to boost consumption investors Commodity markets are technically weak. Investor
will desire exposure. But only 11% of MSCI China is confidence in the asset class is falling due to poor returns
consumer companies. High growth and low free floats and a diminished diversification benefit. A broad
result in high relative valuations. There is a similar trend correction in commodity prices would require these
in US where the EPS CAGR, since 1973, for consumer investors to reverse a long standing trend to increase
discretionary at 10.5% is a premium to the market's asset allocation to commodities (See Figure 15 and
7.5%. Its long term average PE at 20 is also a premium to Figure 16).
the market average of 15.
Figure 5: China iron ore spot and contract prices
A recent Xinhau news article was critical of state owned 200
enterprises. It noted that SoEs’ scale and influence on the China iron ore spot price
Chinese economy may hinder economic growth. The 150
government controls these companies and can accelerate
the shift of GDP from corporate to household. Note that 100
80% of MSCI China is SoEs.
50
There is a Mexican stand-off in the property market.
Landed cost of contract iron ore in China
Successive anti-asset-price-inflation measures have 0
discouraged buyers who now expect prices to fall. But Apr 02 Apr 04 Apr 06 Apr 08 Apr 10
cash rich property companies and home owners mean a
lack of forced sellers. The result is a sharp decline in Source: Bloomberg. Note: The landed cost of contract iron ore are Vale's SSF cost +
freight costs from Brazil to China. For 3Q10 forecasts, Vale's SSF costs are calculated as
property transactions. This in turn would lead to a fall in the average of the spot prices from Mar 10 to May 10. The freight costs in 3Q10 are
construction activity. Infrastructure spending is assumed to remain unchanged at today's levels.
decelerating. Bank loans funded the bulk of last year’s
stimulus program. Greater regulatory scrutiny of lending Figure 6: MSCI EM Energy relative to MSCI EM
to local government funding vehicles is likely to lead to 130
less capital for infrastructure. These measures are
consistent with a policy to rebalance growth from 120
investment to consumption.
110
130
Weak steel and aluminum prices may already be
indicating a slowdown in FAI. If our rebalancing thesis is 120
correct then steel prices should continue to fall. It is this 110
signal that we believe could lead to a broader correction 100
in commodity markets. The numerous presentations on
90
China’s significant demand for commodities at our China
conference this month reflects China’s key role in the 80
commodity super-cycle debate. Evidence of slowing Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10
Chinese demand when combined with increased supply
could lead to disproportionate corrections in commodity Source: Bloomberg. Note: Index rebased to 100 from January 2007.
prices.
4
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(852) 2800-8599 21 June 2010
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If the commodity market corrects then EM equities are Figure 8: MSCI Korea Forward PE relative to MSCI EM
likely to decline led by Brazil and Russia. This 1.3
potentially would lead to redemptions in EM funds
1.2
leading to a broader correction (See Figure 11and Figure
12). We would view this event as an exceptional buying 1.1 +1SD
opportunity.
1.0
Av g
Upgrading Korea to overweight 0.9
IDR
TWD
PHP
THB
CHF
HUF
AUD
USD
KRW
BRL
RUB
CLP
CZK
CNY
TRY
ZAR
PLN
MXN
EUR
We are more positive on global growth than the
pessimistic consensus. This, plus a competitive currency Source: J.P. Morgan.
5
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
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Key asset allocation calls Figure 11: S&P GSCI Industrial Metals Index
• OW: Taiwan, Korea, India, Mexico, South Africa, 2500
Turkey and the Philippines
2000
• OW: Technology and industrial cyclicals (i.e.
transportation)
1500
• UW: China and Brazil
1000
• UW: Commodities, energy, telecoms and Utilities
Our key trades ranked by conviction are: 500
1. CEMBI Surfers; OW India and Turkey Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10
Jun
Aug
Sep
Jul
May
Nov
6
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EM inflation and speed of policy normalization Tension between the two Koreas
Our base case is that inflation plateaus mid-year as the On 20 May, the South Korean government released a
base effect becomes more favorable. If we are wrong and multinational combined intelligence task force report that
inflation continues to rise then this is bearish for equities. concluded that the South Korean navy warship was
The EM dashboard has a sheet designed to help monitor torpedoed by a DPRK submarine on 26 March. The
inflation across EM countries. Remember modeling Korean Won has weakened by 5% in the last one month
inflation in emerging economies is difficult due to the to KRW/USD1213.
short history of floating exchange rates and large
weighting of food and other primary products. Thai political unrest
The Thai market and baht are remarkably resilient
Lack of G3 policy flexibility considering the violence in Bangkok.
High fiscal deficits and record-low interest rates limit
policymakers’ ability to respond to a relapse in growth. A Figure 15: Oil forward curve ($/bbl)
growth relapse is not our base case. If it occurred, it 95 Crude Oil, WTI : 6/9/2010
would be a serious blow to risk assets. Credit spreads
could widen and equities would fall. 90
85
Central banks target asset prices
Central banks are targeting asset prices in EM, notably in 80
China. These policies introduce economic and sector
specific risk. Note how poorly real estate stocks have 75
performed in EM despite low interest rates.
70
9
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
Election-induced volatility $2
Brazilian elections in October 2010 are likely to be a
source of volatility rather than a change in macro- $1
economic policy.
$0
2009 2010
Source: J.P. Morgan. Global bond supply and demand 2009 and 2010 in $tr, demand and
supply figures are annualized, supply is calculated by the change in bond out standings at
face value, demand is calculated by the change in bond out standings at market value.
$6
$5
$4
$3
$2
$1
$0
2009 2010
Source: J.P. Morgan. Global bond supply and demand 2009 and 2010 in $tr, demand and
supply figures are annualized, supply is calculated by the change in bond out standings at
face value, demand is calculated by the change in bond out standings at market value.
10
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Figure 19: Public Debt and Fiscal Balance as a % of GDP for EM and DM in 2010
0
Korea
Peru
-2 ChinaIndonesia
Thai
Mex ico Brazil
EM
Australia Turkey
Russia
-4
Phil Hungary
Chile Czech
Malay sia Italy
India Germany
Poland
-6 S Africa
Fiscal Balance
Portugal
Euro area
Japan
-8 DM
France
Ireland
-10 Spain
UK US
Greece
-12
-14
0 50 100 Public Debt 150 200 250
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Figure 25: Domestic consumer Macro policy and rising inflation - QR not QE in EM
discretionary relative to MSCI EM
Underweight: Brazil, China, commodities and energy
130
China and Brazil are booming. GDP in China expanded at 13.1%q/q saar in 1Q10;
120 with strong contribution from domestic private-sector demand and a significant
upturn in exports. Brazil is leading LatAm growth. J.P. Morgan has increased the
110 2010 GDP growth forecast to 7.5%; the highest growth in 25 years. Consistent with
higher growth they have brought forward the timing of higher interest rates; the Selic
100 overnight rate is forecast to touch 12.5% by end 2010. Latin America is now
expected to grow 4.9% in 2010, nearly 2% above its estimated potential growth rate.
90
Dec-08 May -09 Oct-09 Mar-10 The exit from aggressive pro-growth policies and rising headline inflation are macro
headwinds for the consensus overweight EM consumption trade. Higher inflation
Source: Datastream, 9 June 2010. Note: Chart
shows the performance of J.P. Morgan index of
slows the growth in discretionary income – this is the opposite trend to 2009.
domestic consumer discretionary relative to EM.
QR not QE in EM
Figure 26: Valuation of Domestic QR= quantitative restrictions; this is the use of administrative policies to manage the
consumer discretionary relative to allocation of capital. The asset inflation trade (a consensus position in 2009) is
MSCI EM battling policymakers who are fighting asset inflation with quantitative restrictions in
29 EM. We have been underweight simple asset inflation trades for some time e.g.
property. Capital controls/taxes could slow EM F/X appreciation. After significant
25
underperformance we would not short these stocks.
21
17
13
9
00 01 02 03 04 05 06 07 08 09
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Figure 30: J.P. Morgan REER: Deviation (%) from long term mean Figure 31: Brazil CPI (%oya) and SELIC overnight rate
since 1975
28
100
24 Selic ov ernight target rate
80 20
60
16
40 12
20
8
0 4
-20 CPI
0
-40 00 02 04 06 08 10
IDR
TWD
PHP
THB
KRW
CHF
HUF
AUD
USD
BRL
RUB
CLP
CZK
CNY
TRY
ZAR
PLN
MXN
EUR
19
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(852) 2800-8599 21 June 2010
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Figure 32: CEMBI Yield and India CEMBI surfers – OW India, Turkey, South Africa
10Y Govt Yield
CEMBI is J.P. Morgan’s emerging market corporate bond index. CEMBI yield
16 CEMBI (JCBYBLYD Index) is 6.5% (year low 6.1% end April). Since 3 May, CEMBI
Yields spreads (JCBSBLSD Index) have increased by 93bp to 367bp reflecting the current
uncertainty in global financial markets. Supply is on hold. New issues from EM
12
Indian 10 corporates slowed to USD3.3 bn in May vs. an average of 16bn per month over Jan-
Year y ields April. J.P. Morgan’s full year supply target is 127.5 bn out of which 68bn has been
8 issued YTD. This forecast is at risk as we believe EM corporates will prefer to stay
out of the market rather than pay generous concessions to get investors in from the
sidelines.
4
J.P. Morgan forecasts CEMBI spreads to range between 350 to 400bp through mid
Apr 06 Oct 07 Apr 09
year. However, we remain confident in EM growth fundamentals and believe
Source: Bloomberg, 7 June 2010. that as the market stabilizes, spreads will recover to 300 bps by year-end. This is
also a function of the treasury yield which is forecast to increase from 3.26%
currently to 4% by Dec 10.
CEMBI is particularly important to India as the Indian private sector funds the
current account deficit. India's nominal GDP growth could be 17% this year. Long
term borrowing costs are half the level of nominal GDP (Indian 10Y bonds 7.6% and
CEMBI yields 6.5%). Many Indian companies will view today's monetary conditions
as supportive of growth.
In the past ECB data has been fairly volatile and does not seem to be affected from
the change in CEMBI spreads. The exception is the blowout after Oct-08 when ECBs
fell in line with the spike in spreads. In the current CEMBI spread rise so far, there
has not been much impact on ECB approvals/ utilization of pre-approved ECBs.
There might be a larger impact in the 2H. We are monitoring our OW on India
closely. In the recent past, corporate India has been borrowing substantial amounts
overseas and the relative importance of ECBs has also been increasing. Annual net
ECB borrowing rose from USD2 bn in 2005 to 23bn in 2008. It was 8bn in 2009 and
is forecast to be 11bn in 2010. Typically the spreads and markets are concurrently
negatively correlated.
Turkey is also a beneficiary of lower borrowing costs due to its reliance on external
financing. Its current account deficit is forecast to widen from 3.4% to 4.2% of GDP
in 2010. Nominal GDP growth is forecast to be 15% in 2010 versus 10 year bond
yields of 10% and 6.5% CEMBI. Turkish corporates should benefit from the delayed
monetary stimulus.
Table 7: Yields for government and corporate bonds plus earnings yield for US & EM equity
markets
High Low Avg 05-07 Spot Diff
US EARNINGS YIELD 11.4 6.1 6.6 7.9 1.3
US High Yield 21.0 7.5 8.4 9.5 1.1
EM EARNINGS YIELD 17.3 6.8 8.7 9.6 0.9
CEMBI 14.3 5.7 6.4 6.5 0.1
EMBI 12.0 6.2 7.0 6.5 (0.4)
JULI 8.7 4.8 5.7 5.1 (0.6)
US 10 Yr 5.2 2.1 4.6 3.2 (1.3)
1 Month T-Bill 5.2 (0.1) 4.0 0.0 (4.0)
Source: Bloomberg, 11 June 2010.
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OW South Africa
Figure 33: SA Real GDP growth
The drivers of our overweight on South Africa are:
%yoy
1. Positive SA growth surprises: The South African economy is finally starting to
6 deliver positive growth surprises. Leading economic indicators are positive. SA real
5 GDP growth surprised on the upside at 4.6%q/q saar in 1Q10. This was the fastest
4 growth pace in seven quarters as low interest rates worked through to boost domestic
3 demand. The MPC adopted a decidedly more upbeat tone on growth in the June
2
MPC meeting than at the last meeting and disclosed a growth forecast of 3.6% for
2011, but kept its growth projection for 2010 broadly unchanged at 2.6%y/y. J.P.
1
Morgan’s SA economics team forecast SA real GDP growth to surprise on the upside
0
at c3% in 2010.
-1
-2 2. Countercyclical accommodative monetary policy: The SARB kept the repo rate
00 02 04 06 08 10 unchanged at 6.5% in the Monetary Policy meeting in May. J.P. Morgan economists
now expect the first hike in the second quarter of 2011, given risks to the global
Source: J.P. Morgan economics. Grey are
denotes forecasts till 2011. recovery and the likely delay in the start of the hiking cycle in many developed
markets. In the Q&A session, the Governor indicated that the outlook for rates is to
Figure 34: Record low SA policy remain steady at 6.5% as inflation is expected to be contained below 6% throughout
rates – for now the forecast period. J.P. Morgan economists agree with the SARB’s benign view on
16 inflation in 2010, but highlight that relatively high wage settlements and base effects
from low food prices pose some risks that inflation could exceed the upper end of the
14 target band in the second half of 2011.
SA
12
3. Earnings recovery off a decimated base in 2009: The fall in SA earnings growth
10
in 2009 was the biggest on record (-29% vs. an average of -9.3% during previous
8 cyclical lows). We forecast EPS growth of c30-35% in both 2010 and 2011, one of
6
the highest in EM. This relative earnings growth outperformance of SA vs EM into
EM 2011 should drive the SA catch-up trade.
4
00 02 04 06 08 10 4. Relatively attractive valuations: SA offers a combination of low relative
valuations with high earnings growth.
Source: J.P. Morgan.
5. The Rand - risk and reward: The Rand remains the wildcard, having appreciated
Figure 35: SA rates on hold vs
tightening for rest of EM 3% 2010-to-date. Our valuation tools suggest that the Rand is some 10% overvalued.
Brazil However, given the demand for carry as a function of global liquidity (J.P. Morgan
Turkey expectations of a first Fed hike in 2Q11), we expect the Rand to stay “stronger-for-
India
China longer” underpinned by an environment of high growth, strong commodity prices
Korea
Thailand and healthy risk appetite.
Taiw an
Malay sia
Philippines Our preferred domestic cyclical sectors are banks, food, retailers and General
SA
Mex ico Industrials. We are overweight banks for six reasons: (1) Sustained low SA interest
Indonesia rates through 2010 vs. tightening elsewhere in EM; (2) Recovery in loan growth; (3)
Czech
Russia Unwinding of bad debts; (4) Strongest forecast earnings growth rebound in EM in
Hungary
2010/11; (5) Attractive relative valuations; and (6) SA Banks are under-owned. Our
-100 0 100 200 top stock picks include ABSA, Standard Bank, Shoprite, ARM and AngloPlat.
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The potential negative spillovers to growth are obviously Our current projections call for EM growth to reach an
greatest in the Euro area, which is the epicenter of the above-potential pace of 6.9%oya in 2010 (Latin America
financial shock. For now, our European economists view 5.1%, CEEMEA 4.1%, Emerging Asia 8.9%) and to
the financial shock as sufficient to limit the regional moderate to 5.8% in 2011 (Latin America 3.8%,
upturn to around 2% growth in the coming quarters; J.P. CEEMEA 4.8%, Emerging Asia 7.2%). Under Scenario
Morgan pencils in full-year growth forecasts for the Euro 1, EM growth performance remains above potential, with
area at 1.3%oya in 2010 and 1.9% in 2011. Looking to no material impact on Latin America and Emerging Asia
the second half of the year, growth prospects will in particular. Under Scenario 2, the impact is material
certainly be diminished by the latest developments even and the Euro sovereign and bank crisis is no longer a
if near term cyclical forces are still positive. In judging regional issue. Incipient tightening would be reversed
the magnitude of the drag, it is important to recognize and EM currencies would need to weaken considerably.
two points about the current position of the regional EM countries would likely resort to greater fiscal
economy. First, following three quarters in which GDP stimulus to offset weakness in the private sector.
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China
Market Strategy China: Mind the gap
Issues over the last 12 months
Frank LiAC
(852) 2800-5811
China led both equity and the economic recovery in EM and the world in 2009. Late 2008’s
[email protected] aggressive monetary and fiscal stimuli brought about a strong economic recovery, which in
Recommendation turn, translated into strong stock market performance (+52%) in FY09. Entering 2010,
OW: (1) new economy stocks; (2) China’s stock market underperformed major stock markets this year because of (1) the
expressways; (3) consumer staples; expected sharp fall in China’s excess liquidity growth (M2growh minus nominal GDP
(4) menswear; (5) IPPs growth) from 21% in FY09 to 5% in FY10 due to the combined effect of the drop in M2
growth and the rise in nominal GDP growth; (2) a series of policy tightening risks as
UW: (1) property; (2) reflected in the three 50bp RRR hikes, the window guidance for banks to strictly follow the
commodities; (3) home appliances; quarterly lending quota, and the recent crackdown on the housing sector. YTD 2010, the
(4) energy MSCI China index declined -8.9%, underperforming MSCI EM by 3.5%.
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China scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2008 -10.9 18.3 14.4 2.2 3 Month 3.3 1.1 -0.8
2009E 13.6 16.1 15.0 2.4 Long Bond 3.3 -0.2 0.7
2010E 21.3 13.3 16.2 2.8 Inflation 2.7 0.3 0.9
2011E 18.3 11.2 17.1 3.3 Real 3 Month 0.6 0.8 -1.7
MSCI China Absolute and Relative (vs EMF) Index MSCI Fair value Range
0
10 30 50 70 90 110 130 150
Jan-03 Dec-03 Nov -04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May -10
8.0 130
7.5 120
J .P . M o rgan f o rec a s t:
end Jun 10: 6.65
Co nsensus
end Sep 10: 6.58 110
7.0
end Dec 10: 6.50
100
6.5
J.P . M o rgan
90
6.0
Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10
Dec 04 Jul 06 Feb 08 Sep 09 M ar 11
Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends
and expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast
table contains J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the
final column is the difference between J.P. Morgan’s forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The
vertical dotted line is the current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap
relative to history. *US Mutual fund subscriptions.
27
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Brazil
Market Strategy Brazil: Better Outlook for Domestics
Issues over the past 12 months
Emy Shayo AC Brazil, along with China, has been the worst performing EM YTD. Heightened risk
(5511) 3048-6684 aversion has delivered poor equity flows in Brazil. YTD, flows are negative –US$2.5
[email protected] billion, with only March posting positive flows. Still, the economy has been very robust,
Recommendation with data for the real economy coming out consistently strong: unemployment is at a
OW: Financials, Homebuilders record low, both industrial production and retail sales are soaring, and credit growth
continues on a brisk pace.
Key drivers
Strong portfolio and FDI inflows Outlook
Brazil is the emerging market country that will undergo the highest interest rate hiking
7%+ growth driven by domestic cycle in 2010E: we see hikes of 375bp by December, brining rates to 12.5%. Still, there is
demand now much more visibility of the monetary policy dynamics, as the cycle has already
started and authorities appear committed to curb inflation, at the same time that the
Commodity prices Treasury is vowing to control spending so as to take some heat of an already red hot
economic growth. Also, the stabilization of inflation expectations after five months of rise
Key risks greatly diminishes the risk of even higher rate hikes. Better visibility on the rate cycle
Large Petrobras Capitalization reduces uncertainty and can allow the stock market to lift off, especially domestic sectors
that have been bearing the burden of the monetary adjustment. On the exchange rate front,
China slowdown/ hard landing the base case scenario is that the BRL remains range bound: on one hand the currency is
somewhat overvalued and the current account deficit is expected to double to more than
October 2010 presidential elections 3% of GDP. On the other hand, the huge interest rate differential with DM and high
growth continue to attract flows. The main local obstacle to stock market performance
over the next couple of months should be the Petrobras capitalization (expected at around
US$40 billion), as it could lead to significant overhang on the market as a whole. It is still
Market Statistics (%) early to gauge on the political process ahead of the October presidential race, but short
MSCI Brazil Index 219577 term risks have diminished some as candidates have pledged in several occasions to
Weightings in Region (%) 15.8
BRL/US$ 1.80 embrace current economic policies. On the external front, China deceleration or hard
Avg. Daily Turnover (US$MM) 2899 landing is the greatest risk to Brazilian markets, surpassing European woes as 50% of
MSCI Total Mkt. Cap (US$B) 461 Brazil’s MSCI is made of commodity names.
Source: Datastream. Prices as of 10 June 2010.
Recommendations
Brazil is relatively inexpensive at 10.2x 12M fwd PE, the lowest in over a year. Earnings
have some room to grow as a strong local and global GDP drive results up. We are
starting to see some interesting themes in domestics as local risks dissipate. We like
BM&F Bovespa and Bradesco. Our exposure to the homebuilder sector is via Gafisa.
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Brazil scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2008 0.5 14.4 16.3 3.2 3 Month 10.4 1.2 na
2009E 6.6 13.5 16.7 3.0 Long Bond 11.5 0.7 0.0
2010E 19.9 11.2 18.0 3.4 Inflation 5.3 0.1 0.2
2011E 25.1 9.0 19.1 4.5 Real 3 Month 5.1 1.1 na
MSCI Brazil Absolute and Relative (vs EMF) Index MSCI Fair value Range
400 (195392)
BY/EY
200
BY/DY (199027) (314239)
0
0 50000 100000 150000 200000 250000 300000 350000 400000
Jan-03 Dec-03 Nov -04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May -10
2.6 J .P . M o rga n f o re c a s t :
end Jun 10: 1.70 120
2.4 end Sep 10: 1.75
end Dec 10: 1.80 110
2.2
100
2.0 Consensus
90
1.8
80
1.6 J.P. M o rgan
70
1.4
Dec 04 Jul 06 Feb 08 Sep 09 M ar 11 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10
Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends
and expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast
table contains J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the
final column is the difference between J.P. Morgan’s forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The
vertical dotted line is the current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap
relative to history. *US Mutual fund subscriptions
29
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
South Korea
Market Strategy South Korea: Buying opportunity
Issues over the last 12 months
Scott YH Seo AC
(82-2) 758 5759
Korea equity market has been trending upward since 1Q09 albeit volatility and has
[email protected]
reached above 1750, which is the highest point since the beginning of 2009, helped by
stronger than expected economic activities across the globe and rebound in KRW. It was
Recommendation largely driven by strong buying flows by foreign and domestic retail investors and
OW: Banks, Auto, Tech, economic indicators that surprised on the upside. For sector performance, as expected,
Consumers large exporters led the market rally, including IT and auto, helped by a sharp depreciation
of the Won up to the 1500 level, while financial stocks pushed the market further up in
UW: Shipbuilding, Construction 2H09. However, in recent weeks, risk appetite dropped across all risk assets on the back
of the escalating sovereign credit crisis in Europe and North Korea related geopolitical
Key Drivers risks in Korea, although the latter proved to be short lived with KRW stabilizing below
Weak KRW likely to provide good 1200 within a week.
buying opportunity for foreign
investors Outlook
In coming quarters, major drivers in Korea equity market, in our view, will be 1) eased
Key risk price control by the government after the regional election, 2) rebound in KRW and 3)
Euro risks becomes contagious slowdown in equity fund outflows. After the regional election, the government is likely to
loosen their price control and hence consumer and financial sectors’ margin would
improve. Recent KRW depreciation provides buying opportunity of Korea equities, in our
view. Money outflows from equity funds are expected to slow down due to real interest
rate close to 0% or below at least in the near-term. Despite recent sharp price rally, we
still believe that share prices of large cap exporters with well-diversified consumer base
and competitiveness are likely to remain robust for the remainder of 2010, while eased
price control by the government will boost share price of domestic stocks, However, we
Market Statistics (%)
MSCI South Korea Index 468.9
still remain cautious on industrials. In particular, construction sector recovery will take
Weightings in Region (%) 13.3 more time given that 1) the government has already rolled out possible supportive
KRW/US$ 1242 measures and further measures are not likely and 2) it normally takes more than 3 years to
Avg. Daily Turnover (US$MM) 3871 resolve unsold housing units. In our view, it will take more time for construction sector to
MSCI Total Mkt. Cap (US$B) 388
Source: Datastream. Prices as of 10 June 2010.
fully recover from the recent housing downturn with the risk of housing price drop still
remaining.
Recommendations
We remain positive on auto makers, tech companies with global competitiveness, large
cap banks and consumer stocks, while selectively prefer construction companies with
large offshore project exposure and housing material companies.
30
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
300
PBR (321) (555)
250
200 DY (233) (398)
150
BY/EY (192)
100
50 BY/DY (209) (792)
0
Jan-03 Dec-03 Nov -04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May -10 0 300 600 900 1200
Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends and
expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast table
contains J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the final
column is the difference between J.P. Morgan’s forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The vertical
dotted line is the current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap relative to
history.* US Mutual fund subscriptions
.
31
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
Taiwan
Market Strategy Taiwan: Potentially Oversold
Issues over the last 12 months
Nick LaiAC
(886-2) 27259864
In May, MSCI TW was down 9.1% but outperformed MSCI APxJ (-10%) over the same
[email protected] period (in USD terms). Transport sector (down 2.1%) was the best performer because the
Recommendations share was supported by pickup in cargo business, while the worst performing sector was
OW: Tech Plastics (down 11.7%). The declining oil price and the noise that petrochemical sector
may not be included on ECFA’s Early Harvest List caused share price correction.
UW: Financials
Outlook
Key Drivers Taiwan’s Legislative Yuen has passed the third reading of Industrial Innovation Bill in
Global capital spending which corporate tax will be cut to 17%, effective in 2011, from 20% this year and 25% in
2009 and before. With this, corporate tax in Taiwan will fall among the lowest in the
Cross-Strait developments on track region, only after Hong Kong (16.5%) and same as Singapore but lower than S. Korea
(20% for PAT above Won200mn) and Japan (22-30% depending on brackets).We believe
Corporate tax cut this is a positive driver for corporate earnings, and that non-tech collectively should
benefit more than tech as most non-tech companies pay higher tax due to lack of tax
Key risks credits.
Fade of economic recovery
Negotiation of ECFA and Early harvest List remains underway and signing of ECFA is
Policy risks expected in June/July during the 5th cross strait talk. Beijing authority will most likely use
its bargaining power to push political concession from Taiwan, whose dilemma is year-
end election where ruling party KMT worries politically it could lose majority support
despite ECFA benefiting Taiwan economically. As a result, net outcome in our view could
be smaller number of products or industries be included in the List and enjoy reduced
tariff or grant market access to China.
Recommendations
We maintain our positive view on Taiwan and are OW tech but selective in financial and
Market Statistics (%) material in our portfolio. Our Dec-10 index target remains 8,800 based on long-term
MSCI Taiwan Index 255.1 average PE of 16x and forward earnings estimates. The market is potentially oversold.
Weightings in Region (%) 10.7
TWD/US$ 32.4 Our analysis indicates that 82% of entire listed companies have fallen below their 55-day
Avg. Daily Turnover (US$MM) 1888 MAVG now, and only 18% are above. Historically, this represents an attractive buying
MSCI Total Mkt. Cap (US$B) 311 signal for 6-12 month horizon, in our view.
Source: Datastream. Prices as of 10 June 2010.
32
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
Taiwan scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2008 -69.2 33.2 5.5 4.5 3 Month 0.9 0.0 -0.3
2009E 32.8 25.0 8.0 2.9 Long Bond 1.4 0.0 0.4
2010E 88.0 13.3 14.1 3.8 Inflation 0.6 0.0 0.6
2011E 16.7 11.4 15.1 4.7 Real 3 Month 0.3 0.0 -0.9
MSCI Taiwan Absolute and Relative (vs EMF) Index MSCI Fair value Range
32 120
31
110
Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends and
expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast table contains
J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the final column is the
difference between J.P. Morgan’s forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The vertical dotted line is the
current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap relative to history. *US Mutual fund
subscriptions.
33
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
Russia
Market Strategy Russia: Strong balance sheet and earnings
Issues over the last 12 months
Alex KantarovichAC
(7-495) 967 3172
The Russian stocks have been seeing the recurring bouts of volatility; the May peak-to-
[email protected] through decline of 18% in MSCI Russia index was followed by a 14% rise. The external
pressures persisted as in May oil price dropped 21% before partially regaining grounds.
Recommendations However sellers were particularly visible in the FX sensitive segments such as Financials
• Gazprom and Consumers as in May-June the ruble plunged by 8%.
• Evraz Outlook
The EU budget problems may continue to result in the euro weakness putting pressure on
• Sberbank oil price and the ruble. In the short run, the market may stay range bound and volatile.
With the MSCI Russia Index trading on 2010 P/E of 6x, the Russian equities look very
• Comstar cheap, whether by historic or comparative measure. The implied aggregate equity risk
premium has risen to near 800 bp, in spite of Russia’s sovereign and corporate bond
Key drivers spreads rising some 150 bp and 200 bp respectively. The ERP is now more reminiscent of
Oil holding grounds the levels seen during the 2008-09 crisis. This betrays investors’ nervousness about the
global recovery reversal hurting earnings. However, confirmation that the recovery stays
Strong domestic macro on track would bring the stocks’ cheapness back into focus. We recommend building
positions in undervalued names with strong fundamentals.
End of easing cycle by the CBR
Recommendations
Key risks Not expecting the immediate recovery of the euro and oil price we underweight Russian
Recurring worries of EU debt, oils. Still, within the segment, we prefer quality upstream names such as Rosneft (OW)
Chinese tightening and Tatneft (OW) due to expected changes in taxation outlook. Gazprom should
outperform the segment on strong 1Q10 figures and as outlook improves. Within
Materials, we believe it is time to end underweighting integrated steels; the likes of Evraz
and Mechel are in a win-win situation: still riding the fading momentum in raw materials
Market Statistics (%) already pushing up steel prices. On the domestic front, the Utilities may enter a period of
MSCI Russia Index 706 underperformance due to the intensified talks about tariff cups; we remain neutral on
Weightings in Region (%) 6.5 Consumers where pricey multiples are balanced with the defensive features; start
RUB/US$ 31.7
Avg. Daily Turnover (US$MM) 1923 overweighting Financials after both Sberbank and VTB delivered stronger than expected
MSCI Total Mkt. Cap (US$B) 190 quarterly results and the CBR has finished the interest rate easing cycle; Sberbank offering
Source: Datastream. Prices as of 10 June 2010. attractive long term fundamentals may close the recent performance gap with VTB. In
telecoms the positive newsflow of Svyazinvest restructuring may continue to support
Comstar.
34
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
Russia scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2008 -24.2 6.5 16.6 0.9 3 Month 4.7 -0.3 na
2009E -21.3 8.2 12.5 0.9 Long Bond 4.7 -0.3 na
2010E 29.0 6.4 14.8 2.2 Inflation 6.0 -0.5 -0.2
2011E 25.2 5.1 16.1 2.9 Real 3 Month -1.3 0.2 na
400
PBR (594) (1326)
300
DY (513) (1920)
200
BY/EY Not meaningful
100
BY/DY Not meaningful
0
Jan-03 Dec-03 Nov -04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May -10 0 500 1000 1500 2000 2500
Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends and
expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast table contains
J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the final column is the
difference between J.P. Morgan’s forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The vertical dotted line is the
current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap relative to history. *US Mutual
fund subscriptions
35
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
36
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
India scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2008 -16.9 21.5 16.5 1.0 3 Month 5.7 0.5 -0.9
2009E 3.9 20.7 16.1 1.1 Long Bond 7.8 0.0 0.5
2010E 25.1 16.6 17.7 1.2 Inflation 14.9 0.0 1.2
2011E 25.4 13.2 18.9 1.5 Real 3 Month -9.2 0.5 -2.1
MSCI India Absolute and Relative (vs EMF) Index MSCI Fair value Range
0
150 300 450 600 750 900 1050
Jan-03 Dec-03 Nov -04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May -10
J.P . M o rgan
42 100
40
90
38
Dec 04 Jul 06 Feb 08 Sep 09 M ar 11 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10
Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends and
expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast table contains
J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the final column is the
difference between J.P. Morgan’s forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The vertical dotted line is the
current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap relative to history. *US Mutual
fund subscriptions.
37
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
South Africa
Market Strategy South Africa: A low beta equity market
Issues over the last 12 months
Deanne GordonAC
(27-21)712-0875
SA real GDP growth surprised on the upside at 4.6%q/q saar in 1Q10. This was the
[email protected] fastest growth pace in seven quarters as low interest rates worked through to boost
domestic demand. The SARB kept the repo rate unchanged at 6.5% in the Monetary
Policy meeting in May. J.P. Morgan economists now expect the first hike in the second
Recommendations
quarter of 2011, given risks to the global recovery and the likely delay in the start of the
OW: Global and domestic cyclicals
hiking cycle in many developed markets.
UW: Food Producers, Life
Outlook
insurance
SA has outperformed EMF (SA 0.24% vs. -3.4% for EMF) in dollars in the last one
month. Global equities are oscillating near the lows reached on 7 May, just ahead of the
introduction of a raft of policy measures by ECB/EU/IMF. While the outperformance of
Key Drivers
SA equities in Rands is largely due to its low beta characteristics, in a global risk averse
Countercyclical accommodative
environment on European woes, the Rand has also surprisingly held up relatively well ,
monetary policy
depreciating only by 1.5 % against the dollar in the last one month. We reiterate OW
domestic cyclicals in SA given (1) Upside growth surprise risk in 2010/11E; (b)
Strong earnings recovery off a weak
Countercyclical accommodative SA monetary policy, with rates on hold throughout 2010
base
with a first rate hike only in 2Q 11, versus widespread monetary tightening in the rest of
EM in 2010; (c) Strong earnings recovery off weak base; (d) Relatively attractive
Upside growth risk in 2010/11E
valuations vs. EM from P/E vs EPS growth profile perspective. Looking at factors which
have driven SA stock outperformance year-to-date, it is interesting to note that the two
Attractive valuations from a P/E vs.,
winning factors contributing to stock outperformance appear to be quality-based RoE
EPS growth profile
and a small cap bias. Interestingly, valuation metrics - P/E, P/B, have not been as helpful
as in 2H09 in stock screening with “cheap” stocks not topping the pops. Stocks that have
Key Risks
outperformed are dominated by SA Retailers (Massmart, Woolworths, Truworths, Mr
Currency vulnerability
Price and Shoprite). From here on out, however, we believe that earnings momentum
should start driving stock performance in SA in 2H10 given the sharp improvement in
macroeconomic data, which should spill over into a strong earnings rebound. We
recommend rotating into stocks where positive earnings revisions have not yet been
priced in. In particular, sector performance which is lagging positive earnings
Market Statistics (%)
momentum includes Platinum, Mining and Banks.
MSCI South Africa Index 700.3
Weightings in Region (%) 7.4 Recommendations
ZAR/US$ 7.70 We continue to recommend overweight domestic and global cyclicals in SA .We
Avg. Daily Turnover (US$MM) 1026
MSCI Total Mkt. Cap (US$B) 215 recommend a barbell equity portfolio to benefit from both the global and domestic
Source: Datastream Prices as of 10 June 2010 recovery in 2010. Favourite global cyclical sectors: Platinum, Oil & Gas and Mining
Houses; Favourite domestic cyclical sectors: Banks, Food Retailers and General
Industrials. Our top stock picks include ARM, Amplats, Standard Bank, ABSA and
Shoprite.
38
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
MSCI South Africa Absolute and Relative (vs EMF) Index MSCI Fair value Range
400 Absolute Relativ e to MSCI EMF
FWD PER (588) (819)
350
300 PER (564) (764)
250
PBR (596) (811)
200
150 DY (562) (758)
100
50 BY/EY (557) (1215)
0
BY/DY (561) (1193)
-50
Jan-03 Dec-03 Nov -04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May -10 300 600 900 1200 1500 1800
8.0 95
7.0
J.P . M organ 85
6.0
75
5.0
Dec 04 Jul 06 Feb 08 Sep 09 M ar 11 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10
Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends and
expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast table contains
J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the final column is the
difference between J.P. Morgan’s forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The vertical dotted line is the
current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap relative to history. *US Mutual
fund subscriptions
39
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
Mexico
Market Strategy Mexico: Cyclical Macro Momentum
Issues over the last 12 months
Ben LaidlerAC
Mexico remains our core country OW, driven by the outlook for a sharp cyclical macro
(212) 622 5252
rebound, the undervalued FX, and the underowned market. Inflationary pressures remain low,
[email protected]
keeping the Central Bank low-for-longer, whilst growth is beginning to tentatively broaden
out from the manufacturing and exports sectors.
Recommendation
OW: Domestic Cyclicals
Outlook
We see continued upside here towards our 4.5% forecast, with additional upside risk given
UW: Fixed line Telco, Staples
the historic over 2x beta of Mexico GDP to recovering global growth. The macro recovery
continues to be manufacturing and auto led. Manufacturing PMI came in at 53.6 in May,
Key drivers
indicating a healthy pace of expansion. The consumer is still skeptical, but recovery is
US Growth Rebound to drive
broadening. Consumer confidence index rose to 84.6 in May, from 82.5 a month earlier. In
Mexico turnaround
our view, the better growth environment and the strong manufacturing rebound are supporting
consumer sentiment. Credit conditions continue to lag and are the next indicator we expect to
Undervalued Mexican Peso
turn. May's inflation reading (-0.63% m/m) reiterates our benign view on inflation as output
gap will remain wide keeping wage negotiations and medium-term inflation expectations
Underowned Mexican Market
well-anchored. As a result, we believe Banco de México will remain on hold for the
remainder of 2010 and the first half of 2011 (Consensus: +25 bps in March 2011). On the
Mexican Peso, we still see incremental short term upside here, though we would be surprised
to see the Peso trade sustainably through 12, on stepped up reserve accumulation and
Key risks
concerns on the export driven recovery. That said, we think the bias is to the upside given the
US and Mexican GDP growth
cyclical recovery, our continued robust oil view (WTI $90 Q410e), the Peso’s fundamental
downsides.
REER under-valuation, and under-performance coming into the year.
Small and Shrinking Equity
Recommendations
Market
We remain OW focused on domestic cyclical plays. We like Cemex, given our view of
improving US recovery momentum, high operating leverage, very depressed earnings, and
Medium Term Structural issues
under-ownership. On the domestic side, we like First Cash Financial as an underowned SMid
Market Statistics (%) cap play on consumer recovery and increasing financial intermediation. The stock is also
MSCI Mexico Index 29620 leveraged to high gold prices.
Weightings in Region (%) 4.7
MXN/US$ 12.75
Avg. Daily Turnover (US$MM) 381
MSCI Total Mkt. Cap (US$B) 138
Source: Datastream Prices as of 10 June 2010
JPM Mkt cap P/E EPS Div Yld. ROE
Price Code Rating (US$B) 10E 11E 10E 11E 10E 10E
(MXN) (x) (x) (MXN) (MXN) (%) (%)
Top picks
Cemex 10.2 CX US OW 10.7 32.9 14.8 0.3 0.7 0.0 0.7
Ternium 34.8 TX US OW 7.0 9.1 8.3 3.8 4.2 1.4 13.6
Urbi 23.9 URBI* MM OW 1.8 11.0 9.0 2.2 2.7 0.0 12.9
ICA 29.9 ICA* MM OW 1.5 27.9 20.2 1.1 1.5 0.0 3.6
First Cash 21.4 FCFS US OW 0.6 13.4 11.5 1.6 1.9 na 18.0
Stocks to Avoid
Telmex 14.4 TMX US UW 13.0 10.8 10.9 16.9 16.8 5.5 47.8
Walmex 28.7 WALMEXV MM N 40.5 23.9 20.7 1.2 1.4 1.3 17.8
Source: DataStream, J.P. Morgan estimates. Note: The share price and valuations are as of 10 June 2010.
40
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
Mexico scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2008 -27.2 18.4 8.9 2.0 3 Month 4.9 0.1 na
2009E 2.2 18.0 9.0 2.5 Long Bond 4.9 -0.2 na
2010E 24.8 14.4 18.5 2.7 Inflation 4.3 -0.7 0.3
2011E 19.3 12.1 19.7 3.4 Real 3 Month 0.6 0.8 na
15.0
J.P . M o rgan fo rec as t :
14.0 end Jun 10: 12.5 120
end Sep 10: 12.8 Consensus
13.0 end Dec 10: 13.0
110
12.0
J.P . M organ
11.0 100
10.0
90
9.0
Dec 04 Jul 06 Feb 08 Sep 09 M ar 11 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10
Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends and
expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast table contains
J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the final column is the
difference between J.P. Morgan’s forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The vertical dotted line is the
current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap relative to history. *US Mutual
fund subscriptions
41
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
Malaysia
Market Strategy Malaysia: Reform agenda keeping the buzz
Issues over the last 12 months
Chris OhAC
(60-3) 2270-4728
We are seeing incremental evidence of a government willing to tackle the difficult issues
[email protected] at hand. Consider the following news flow over the past few months:- 1) Improving
bilateral ties with Singapore; 2) Bringing to fore the deficiencies of the economy for public
discussion via the unveiling of the New Economic Model and raising the issue of subsidy
OW: Banks, GLCs and gaming
rationalization; 3) Public removal of the Sime Darby CEO for cost overruns in its energy
stocks, Construction, property and
division. On the macro front, domestic demand indicators since 2Q09 have been on a solid
oil and gas mid caps.
upward trajectory and, together with strong credit growth data, suggest that the underlying
N: Plantations
momentum remains firm. J.P. Morgan is forecasting real GDP of 7.7% for 2010. We
believe the positive macro story provides a solid backdrop for Malaysia equities in 2010
UW: Cyclical stocks that have run
from both an earnings growth perspective (CY10E earnings growth of 22% and CY11 of
ahead of valuations.
16%) as well as potential foreign capital inflows.
Key Drivers
Outlook
Strong macro economic recovery
Investors remain sidelined as they wait for PM Najib to implement previously announced
driving earnings growth
reform policy measures. Key events to look out for include:- 1) Part 2 of the New
Economic Model (NEM) document and the 10MP (which is expected to incorporate
Structural reforms, government
details of policy implementation to address structural weaknesses identified under NEM
pump-priming under 10MP
Part 1), 2) fiscal discipline, 3) greater economic corporation between Malaysia-Singapore,
and 4) more evidence of improvements in the government delivery system and the GLCs.
Pro-growth monetary policy,
Key risks include policy flip-flops, the long lead time to implement measures and the need
mergers & acquisitions
for political buy-in following the introduction of various reform initiatives. While we
believe a market re-rating is undeserved at this stage, we believe the risk is on the upside
Key Risks
should implementation happen given the low base of expectations.
Political uncertainty, policy flip
flops
Recommendation
Malaysia's market PE premium has now widened to around 20% in this market correction
External shocks which may derail
making it difficult for investors to justify on valuation grounds. However, the market
external demand momentum
remains relatively insular with domestic institutions (with consistent inflows) dominating
Market Statistics (%)
trading while foreign investors shy away due to the lack of secular growth and relatively
MSCI Malaysia Index 470.8 expensive valuations. Should external uncertainties clear (as is our base case), Malaysia's
Weightings in Region (%) 2.9 low beta status is likely to mean it lags on the rebound. That said, should reform
MYR/US$ 3.3 implementation surprise on the upside, we are of the view that the market could potentially
Avg. Daily Turnover (US$MM) 223
MSCI Total Mkt. Cap (US$B) 84 see a structural valuation re-rating. We would tactically be focused on owning companies
Source: Datastream Prices as of 10 June 2010.. that benefit from a recovering economy but have less downside risk. Key picks would be
AMMB, Public Bank, Tenaga, Genting and IJM Corp.
42
Adrian Mowat Emerging Markets Equity Research
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Malaysia scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2008 -13.0 17.0 12.6 2.9 3 Month 2.7 0.3 0.3
2009E 2.7 16.6 12.6 3.2 Long Bond 4.0 -0.1 0.5
2010E 22.6 13.5 14.8 3.6 Inflation 1.6 0.2 1.1
2011E 16.0 11.6 15.6 4.0 Real 3 Month 1.1 0.1 -0.8
-150
0 300 600 900 1200 1500 1800 2100
Jan-03 Dec-03 Nov -04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May -10
Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends
and expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast
table contains J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the
final column is the difference between J.P. Morgan’s forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The
vertical dotted line is the current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap
relative to history. *US Mutual fund subscriptions.
43
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Thailand
Market Strategy Thailand: Resilient despite turmoil
Issues over the last 12 months
Sriyan PieterszAC
(66-2) 684-2670
Despite violent protests, Thai equities are up YTD. Corporate and sovereign balance
[email protected] sheets remained healthy. GDP growth in 1Q10 was significantly stronger than
expectations; +18% q/q (cf. +15.5% q/q in 4Q09). The disruption caused by the Red
Recommendations Shirt protest in Bangkok has hit tourist related businesses. The impact on industrial
OW: Banks, Consumer activity appears limited, if any.
Recommendations
Market Statistics (%) We continue to hold our positive view on Thailand given the economic momentum and
MSCI Thailand Index 311.8 the resilience of the fundamentals so far. Our base case remains stabilization from the
Weightings in Region (%) 1.5 current political situation by mid-year. Consequently, we view any market sell-off driven
THB/US$ 32.5 by political jitters as a buying opportunity. Our top large-cap picks are KBANK and
Avg. Daily Turnover (US$MM) 420
MSCI Total Mkt. Cap (US$B) 44 KTB, which we believe will benefit from potential upside to market loan growth
Source: Datastream Prices as of 10 June 2010. estimates, although slower policy rate increases are negative for NIM expansion
expectations. Small banks also benefit from extended low rates as well as strong auto
sales: we like TCAP. We also like PTT, SCC and LH which we expect to benefit from
stronger domestic spending, a premise that is supported by recent strong consumer data.
SCC is also defensively positioned against the potential fallout from a euro crisis - a
slump in demand driving oil prices lower would be a net positive for SCC.
44
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Thailand scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2008 14.6 17.2 12.0 3.2 3 Month 1.4 0.0 0.3
2009E 33.6 12.9 15.2 3.6 Long Bond 3.3 -0.7 0.7
2010E 15.1 11.2 16.0 3.8 Inflation 2.9 -0.4 2.6
2011E 16.5 9.6 16.8 4.2 Real 3 Month -1.5 0.4 -2.2
MSCI Thailand Absolute and Relative (vs EMF) Index MSCI Fair value Range
400 Absolute Relativ e to MSCI EMF FWD PER (121) (400)
350
PER (263) (552)
300
250 PBR (232) (495)
200
DY (189) (390)
150
100 BY/EY (163) (1288)
37 120
Co nsensus
35
110
33
J .P . M o rga n f o re c a s t :
end Jun 10: 32
31 100
end Sep 10: 32
J.P . M organ
29 end Dec 10: 31
90
27
Dec 04 Jul 06 Feb 08 Sep 09 M ar 11 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10
Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends and
expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast table
contains J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the final column
is the difference between J.P. Morgan’s forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The vertical dotted
line is the current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap relative to history.
*US Mutual fund subscriptions
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Indonesia
Market Strategy Indonesia: An eye on politics
Issues over the last 12 months
Aditya S SrinathAC
(62-21) 5291-8573
A resilient economy, combined with expectations of accelerated reform propelled the
[email protected] JCI by 81% in 2009, its strongest advance since 1993. Healthy earnings, benign
inflation and consequently a stable and low interest rate regime has allowed for
Recommendation momentum to continue in 2010 after a brief pause for breath earlier in the year. An S&P
OW: Real estate, industrials. credit rating upgrade in March raised optimism on Indonesia’s potential to achieve an
consumer discretionary investment grade rating in the near future. Markets have focused on the growth
opportunity and decline in risk premiums, and as a result equity indices and the 10 year
N: Financials, Telcos Consumer Government Bond both hit record levels in late April-early May before easing just
staples slightly recently.
46
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Indonesia scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2008 4.8 18.5 27.0 2.3 3 Month 6.6 0.0 0.1
2009E 16.4 15.9 27.3 2.7 Long Bond 8.9 -0.3 -0.1
2010E 9.8 14.5 25.9 3.1 Inflation 4.2 0.7 1.6
2011E 16.1 12.5 26.0 3.6 Real 3 Month 2.4 -0.7 -1.5
MSCI Indonesia Absolute and Relative (vs EMF) Index MSCI Fair value Range
800 Absolute Relativ e to MSCI EMF
FWD PER (1368) (3547)
700
PER (2528) (5733)
600
500 PBR (1620) (3417)
400
DY (2872) (6645)
300
200 BY/EY (3436)
100
BY/DY (1244)
0
Jan-03 Dec-03 Nov -04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May -10 0 1000 2000 3000 4000 5000 6000 7000 8000
Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends
and expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast
table contains J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the
final column is the difference between J.P. Morgan’s forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The
vertical dotted line is the current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap
relative to history. *US Mutual fund subscriptions.
47
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Turkey scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2008 1.8 11.4 18.1 3.3 3 Month 7.8 0.4 na
2009E 3.5 11.0 18.3 4.2 Long Bond 9.3 1.0 -2.3
2010E 16.1 9.5 18.4 3.1 Inflation 9.1 -0.3 -0.8
2011E 14.0 8.3 18.7 3.8 Real 3 Month -1.3 0.7 na
MSCI Turkey Absolute and Relative (vs EMF) Index MSCI Fair value Range
800 Absolute Relativ e to MSCI EMF
FWD PER (450226) (998695)
700
PER (455484) (1517444)
600
500 PBR (510011) (1460161)
400
DY (504208) (1542051)
300
200 BY/EY (482618)
Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends
and expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast
table contains J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the
final column is the difference between J.P. Morgan’s forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The
vertical dotted line is the current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap
relative to history. *US Mutual fund subscriptions.
49
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Philippines
Market Strategy Philippines: Market re-rating likely
Issues over the last 12 months
Kelly LimAC
(63-2) 878-1188
The Philippines has been relatively insulated from the global crisis compared to its
[email protected] regional peers as remittances have remained surprisingly resilient and as trade accounts
for a much smaller proportion of the economy. The economy still managed to grow by
Recommendation 0.9% Y/Y in FY09 as private consumption (3.8% Y/Y) and government spending
OW: Banks, Property, Utilities (8.5% Y/Y) kept the economy afloat. During the year, the Bangko Sentral ng Pilipinas
joined regional central banks in cutting rates aggressively (200 bps) given the
Key drivers decelerating inflation trajectory, resulting in ample domestic liquidity. As a result,
Revival in domestic demand interest rates fell to a record low. Coupled with improved risk appetite and recovering
economy, the market rallied by +63% in 2009. More recently, the 1Q10 GDP release
Government pump-priming reflected strong recovery as the economy surged 12.9%q/q, saar following a strong
7.6% gain in 4Q09. This left growth up 7.3%oya, much higher than market expectation.
Earnings momentum
Outlook
Positive political outcome from We believe the Philippine market remains attractive as the domestic growth story is
elections intact. Key drivers are a rebound in private consumption, continued fiscal stimulus and
the secular growth in remittances and BPO activity. J.P. Morgan forecasts 2010 GDP
growth at 4.5%oya and full-year inflation to remain well within historical trend at
Key risks 5.4%oya. The Philippines has taken a big step in the right direction politically, with
Global economic slowdown incoming President Aquino being given a very strong mandate. Aquino’s platform of
change and anti corruption priority offers the most potential upside to the market, and
Sharp slowdown in remittances represents the favored choice for business. The main concern is limited experience, but
will be helped by a capable, reformist cabinet, with cracking down on tax inefficiencies
Monetary tightening and leakages being prioritized. Aquino’s biggest problem would the huge fiscal deficit
brought about by a low tax take. However his platform of clean government provides a
Market Statistics (%) solid starting point. Finally, corporate fundamentals are solid. Earnings growth, we
MSCI Philippines Index 607.7 believe, remains attractive driven by improved volumes and pricing for property and
Weightings in Region (%) 0.5 banks, and acquisitions and tariff hikes for utilities.
PHP/US$ 46.7
Avg. Daily Turnover (US$MM) 38
MSCI Total Mkt. Cap (US$B) 14 Recommendations
Source: Datastream Prices as of 10 June 2010. We believe a positive political outcome and improving macro fundamentals bode well
for a market re-rating. Given a unique positive position of having a business positive
leader with a strong mandate, the market should be well underpinned despite the
external volatility. Among the sectors, we find the property and banking sectors to offer
the greatest upside potential, especially with earnings likely to show the most growth
acceleration versus 2009. We like banking, utilities, and property sectors. Top picks in
the Philippines are Metrobank, Ayala Land, and EDC
JPM Mkt cap P/E EPS Div Yld. ROE
Price Code Rating (US$B) 10E 11E 10E 11E 10E 10E
(PHP) (x) (x) (PHP) (PHP) (%) (%)
Top picks
Ayala Land Inc 13.5 ALI PM OW 3.8 36.3 32.6 0.4 0.4 0.4 8.7
Metro Bank & Trust 54.5 MBT PM OW 2.1 11.8 7.9 4.6 6.9 2.2 11.7
Energy Development Corporation 4.7 EDC PM OW 1.9 12.3 12.6 0.4 0.4 8.1 24.2
Aboitiz Power 18.3 AP PM OW 2.9 13.3 13.2 1.4 1.4 2.3 27.1
Robinsons Land 14.3 RLC PM OW 0.8 11.0 9.6 1.3 1.5 5.0 13.6
Source: Datastream, J.P. Morgan estimates. Note: The share price and valuations are as of 10 June 2010.
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Philippines scorecard
Key Financial Data Summary Local Interest Rates and Inflation Trend
EPS Growth P/E ROE Yield Spot -3M ∆ +3M ∆
2008 -13.2 22.1 12.3 3.4 3 Month 3.9 0.0 1.4
2009E 24.8 17.7 14.8 3.9 Long Bond 8.0 -0.1 0.0
2010E 14.0 15.5 16.0 4.2 Inflation 4.3 -0.1 2.1
2011E 15.6 13.4 17.3 4.1 Real 3 Month -0.4 0.1 -0.7
MSCI Philippines Absolute and Relative (vs EMF) Index MSCI Fair value Range
500 Absolute Relativ e to MSCI EMF (286) (505)
FWD PER
DY (790)
200
BY/EY (562) (1552)
100
BY/DY (925)
0
0 500 1000 1500 2000 2500 3000
Jan-03 Dec-03 Nov -04 Oct-05 Sep-06 Aug-07 Jul-08 Jun-09 May -10
Source: MSCI, Bloomberg, IBES, Datastream, CEIC, J.P. Morgan, Consensus Economics. Unless stated all forecasts are J.P. Morgan’s. The scorecards are designed to assist in tracking trends
and expectations. -3M∆ refers to the change in this factor over the past three months and +3M∆ refers to the forecast change in this factor over the next three months. The Economic Forecast
table contains J.P. Morgan’s real GDP forecasts, the change in these forecasts over the past three months, the difference between these forecasts and the average for emerging markets and the
final column is the difference between J.P. Morgan’s forecast and consensus expectations. The MSCI Fair Value chart is designed to show current valuations relative 10 year valuation history. The
vertical dotted line is the current index level. The five horizontal bars show a +/- one standard deviation range for these valuation measures. A dotted line to the left indicates a market that is cheap
relative to history. *US Mutual fund subscriptions
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Scorecard notes
Key financial data
Market forecast numbers are derived from bottom-up calculations of each MSCI
constituent where estimates are available from J.P. Morgan for covered stocks and
I/B/E/S for stocks not covered by J.P. Morgan.
Inflation
Year-over-year change in Consumer Price Index used.
Risk appetite
Countries included in the Emerging Market Bond Index (EMBI) are South Africa,
Brazil, Mexico, Russia, Malaysia, Thailand, Chile and Turkey. Data for EMBI is as
such available only for these countries. Country relative is the Country EMBI
blended yield minus the EMBI Index blended yield.
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Extended markers
Table 10: Exports
Country Index Current %oya 3M/3M % One year ago %oya Latest data for Reporting lag
Australia AUITEXP Index 14.5 3.5 (7.7) Mar 10 One month
Brazil BZTBEXPM Index 23.0 12.1 (12.3) Apr 10 One month
Chile CHTBEXPM Index 27.4 (3.1) (35.2) Apr 10 One month
China CNFREXP$ Index 30.4 (7.7) (22.6) Apr 10 One month
Hong Kong HKETEXP Index 21.5 (3.7) (17.8) Apr 10 One month
Hungary HUTREXP Index 20.5 (8.3) (31.3) Mar 10 One quarter
India INMTEXIR Index 54.5 23.5 (24.9) Mar 10 One quarter
Indonesia IDEXP Index 42.6 0.8 (22.9) Apr 10 One month
Malaysia MAETEXP Index 52.5 1.8 (26.1) Mar 10 One month
Mexico MXTBBEXP Index 43.2 11.6 (35.5) Apr 10 One month
Philippines PHEXEXP Index 43.8 5.9 (30.8) Mar 10 One month
Poland POMECBGE Index 27.0 (3.5) (30.2) Mar 10 One month
Russia RUTBEX Index 61.3 (3.1) (47.7) Mar 10 One month
Singapore SIEXP Index 40.0 5.7 (32.1) Apr 10 One month
South Africa SATBEX Index 24.7 6.9 (35.5) Apr 10 One month
South Korea KOEXTOT Index 41.9 16.4 (29.4) May 10 One month
Taiwan TWTREXP Index 47.8 0.3 (34.3) Apr 10 One month
Thailand THNFEXP Index 34.6 5.5 (25.3) Apr 10 One month
Turkey TUTBEX Index 25.1 3.5 (33.4) Apr 10 One month
Source: Bloomberg.
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Table 16: Survey of Key EM Managers Positioning Relative to Table 18: Average Asset Allocation of Global Emerging Market
MSCI EM – For major EMs Funds
Country > 2% OW < 2% UW OW-UW < 0.1% EM % Weights Performance (%)
Russia 18 (18) 9 (10) 9 (8) 3 (4) 6.3 Funds MSCI Rel Abs Rel
Brazil 10 (9) 8 (11) 2 (-2) 0 (0) 15.9 India 8.8 7.8 1 (0.2) -15.9 0.2
Mexico 7 (13) 7 (5) 0 (8) 4 (4) 4.5 Indonesia 3.1 2.1 1 (0.7) -19.3 -3.2
India 10 (9) 11 (13) -1 (-4) 1 (1) 7.8 Turkey 2.5 1.6 0.9 (1.3) -17.3 -1.2
China+HK 7 (7) 11 (12) -4 (-5) 0 (0) 17.3 Mexico 5.2 4.5 0.7 (0.7) -13.2 2.9
South Africa 5 (7) 11 (11) -6 (-4) 2 (2) 7.0 Thailand 1.9 1.4 0.5 (0.7) -7.7 8.4
Korea 9 (3) 17 (20) -8 (-17) 1 (1) 13.4 Hungary 1.0 0.6 0.4 (0.3) -29.2 -13.1
Malaysia 2 (2) 16 (16) -14 (-14) 10 (10) 2.9 Philippines 0.7 0.4 0.3 (0.2) -10.9 5.2
China 3 (3) 20 (20) -17 (-17) 0 (0) 17.3 South Africa 7.3 7.0 0.2 (-0.6) -14.6 1.5
Taiwan 1 (1) 22 (22) -21 (-21) 1 (1) 10.9 Egypt 0.7 0.6 0.2 (0.3) -21.3 -5.1
Israel 0 (0) 24 (17) -24 (-17) 15 (11) 2.7 Czech Republic 0.5 0.4 0.1 (0) -17.5 -1.4
Source: EPFR Global, MSCI, J.P. Morgan calculations Russia 6.4 6.3 0 (0.7) -22.1 -5.9
Peru 0.4 0.6 -0.2 (0) -2.5 13.6
Table 17: Survey of Key EM Managers Positioning Relative to Chile 1.2 1.4 -0.2 (-0.8) -9.0 7.1
Morocco 0.0 0.2 -0.2 (-0.2) -12.5 3.6
MSCI EM – For EMs that are less than 2% of the benchmark
Poland 0.8 1.3 -0.5 (-0.6) -22.6 -6.5
Country > 2% OW < 0.1% OW-Zero EM % Colombia 0.2 0.7 -0.5 (-0.6) -6.2 10.0
Turkey 17 (16) 3 (3) 14 (13) 1.6 Israel 1.7 2.7 -1 (-1.4) -7.0 9.1
Indonesia 11 (9) 6 (6) 5 (3) 2.1 Brazil 14.9 15.9 -1.1 (-0.3) -19.8 -3.7
Thailand 8 (9) 8 (10) 0 (-1) 1.4 Malaysia 1.8 2.9 -1.1 (-1.5) -12.5 3.7
Egypt 4 (4) 19 (20) -15 (-16) 0.6 China + HK 16.1 17.3 -1.2 (-1.1) -12.8 3.4
Hungary 3 (5) 19 (20) -16 (-15) 0.6 Korea (South) 10.8 13.4 -2.6 (-2.1) -20.4 -4.3
Peru 1 (2) 21 (23) -20 (-21) 0.6 Taiwan 8.2 10.9 -2.7 (-2.4) -13.9 2.3
Poland 1 (2) 22 (22) -21 (-20) 1.3 China 14.6 17.3 -2.7 (-3.5) -12.8 3.4
Philippines 1 (2) 22 (24) -21 (-22) 0.4 Asia 51.5 56.2 -4.8 (-5.2) -15.3 0.8
Chile 1 (1) 25 (23) -24 (-22) 1.4 Latam 21.9 23.1 -1.2 (-0.9) -17.1 -0.9
Czech Republic 2 (1) 30 (29) -28 (-28) 0.4 EMEA 21.0 20.7 0.3 (-0.2) -21.6 -5.5
Colombia 0 (0) 33 (36) -33 (-36) 0.7 Cash 1.9 0.0 1.9 (2.8)
Morocco 0 (0) 41 (42) -41 (-42) 0.2 Other GEMs 3.9 0.0 3.9 (3.6)
Other Markets Source: EPFR Global, MSCI, J.P. Morgan calculations. Note: (1) Fund weightings are as of
30 April 2010 and MSCI weightings as of 1 May 2010. (2) The survey covers 43 fund
Hong Kong 15 (16) 14 (14) 0.0
managers. Potentially China stocks have been misclassified as Hong Kong, hence the
Singapore 1 (1) 31 (32) 0.0
combined weight for Hong Kong and China. Hong Kong investment may be providing non-
Kazakhstan 1 (1) 33 (35) 0.0
China exposure Numbers in brackets are the previous month values. The performance is
Greece 1 (1) 40 (41) 0.0
from current month to date performance.
Source: EPFR Global, MSCI, J.P. Morgan calculations. Note: (1) <0.1% = zero weighting
or bearish view. (2) The fund weightings are simple average of global emerging market
funds country weights tracked by EPFR. The survey covers 43 fund managers. (3) The
calculation of OW is greater than 2% overweight versus the MSCI benchmark. UW is less
than -2% of benchmark weighting (4) Fund weightings are as of 30 April 2010 and MSCI
weightings as of 1 May 2010. Numbers in brackets are the previous month values.
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India is the most expensive market followed by Korea, Brazil, South Africa and Mexico.
On the other side, the inexpensive markets compared to its history are Australia, Thailand, Russia, Taiwan, Turkey, China,
Czech Republic, Philippines, Indonesia, Hong Kong, Singapore, Chile, Hungary, Malaysia and Poland.
The CVI assumes mean reversal. After years of structural decline in interest rates, reflation in Asia and economic stability
helped drive a structural re-rating of emerging equity markets; arguably we are in a stage of mean reversal now.
-1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8
Cheap Expensive
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US 1039
P/E 16.4 21.3 5.0 18.3 3.0 34.6 1079 11.6 784 -52% 42% (0.97) (0.60)
P/B 2.0 3.1 0.9 2.5 0.4 5.5 1446 1.4 701 -64% 38% (1.34) (1.22)
D/Y 2.1 2.2 0.7 2.2 0.4 4.0 282 1.1 1453 -47% 93% 0.16 0.25
12m Fwd PER 12.5 16.3 3.6 14.4 1.3 25.2 1367 10.2 282 -50% 23% (1.05) (1.44)
Bond/Earnings Yield Ratio 0.6 1.1 0.4 0.7 0.2 1.9 1465 0.3 854 -72% 78% (1.49) (1.25)
Bond / Dividends Yield Ratio 1.6 2.7 1.0 1.9 0.5 5.7 1465 0.8 854 -72% 107% (1.09) (0.68)
Composite Score (1.11) (1.22) -1.14
Australia 927.4
P/E 16.7 17.8 2.3 17.5 2.1 22.8 1001 11.4 268 -26% 47% (0.48) (0.38)
P/B 1.8 2.1 0.3 2.2 0.4 2.8 1361 1.4 690 -34% 34% (0.78) (0.99)
D/Y 4.3 3.9 0.8 4.4 0.6 6.5 690 2.8 624 -34% 51% (0.41) 0.16
12m Fwd PER 11.8 14.3 2.5 13.8 1.7 20.7 624 8.0 307 -43% 47% (1.03) (1.16)
Bond/Earnings Yield Ratio 0.9 1.2 0.3 1.0 0.2 1.9 357 0.6 728 -53% 51% (1.14) (0.39)
Bond / Dividends Yield Ratio 1.3 1.8 0.5 1.3 0.2 2.9 433 0.7 728 -56% 94% (1.14) (0.12)
Composite Score (0.83) (0.48) -0.83
Singapore 330.0
P/E 14.7 18.7 4.9 14.0 2.1 37.7 212 8.0 193 -61% 85% (0.81) 0.37
P/B 1.7 1.8 0.4 1.7 0.3 2.7 322 0.9 130 -37% 79% (0.31) (0.19)
D/Y 3.5 2.7 1.2 4.0 0.7 6.0 193 1.2 365 -42% 189% (0.66) 0.69
12m Fwd PER 13.2 15.9 2.9 14.0 1.9 24.0 210 8.2 215 -45% 61% (0.94) (0.45)
Bond/Earnings Yield Ratio 0.4 0.7 0.3 0.4 0.1 1.7 212 0.2 193 -76% 150% (0.92) 0.08
Bond / Dividends Yield Ratio 0.8 1.6 0.8 0.7 0.1 3.3 327 0.3 193 -76% 134% (0.93) 0.39
Composite Score (0.44) 0.15 -0.44
Korea 477.1
P/E 11.3 15.5 5.5 12.2 2.4 45.5 121 7.7 256 -75% 47% (0.76) (0.38)
P/B 1.56 1.3 0.3 1.6 0.2 2.1 558 0.5 63 -25% 232% 0.83 0.01
D/Y 1.1 1.8 0.5 1.7 0.5 2.9 87 1.0 481 -63% 9% 1.52 1.20
12m Fwd PER 8.8 11.9 4.1 10.0 1.6 25.5 121 5.5 126 -66% 61% (0.75) (0.75)
Bond/Earnings Yield Ratio 0.6 1.3 0.9 0.6 0.2 5.2 121 0.3 256 -89% 87% (0.85) (0.48)
Bond / Dividends Yield Ratio 4.5 5.0 2.3 3.3 1.1 11.7 115 1.4 256 -62% 224% (0.25) 1.09
Composite Score 0.83 0.11 0.39
Taiwan 259.5
P/E 16.8 24.9 9.2 17.4 4.6 68.9 477 11.7 245 -76% 44% (0.88) (0.13)
P/B 1.8 2.4 0.7 1.9 0.2 4.4 232 1.2 160 -58% 47% (0.83) (0.46)
D/Y 3.3 2.0 1.3 3.9 1.1 7.6 160 0.6 477 -56% 500% (0.96) 0.49
12m Fwd PER 11.9 18.7 6.6 14.3 4.5 61.6 199 9.5 244 -81% 25% (1.02) (0.52)
Bond/Earnings Yield Ratio 0.2 1.3 1.0 0.3 0.1 3.8 208 0.2 260 -94% 0% (1.05) (1.59)
Bond / Dividends Yield Ratio 0.4 3.9 3.3 0.6 0.2 13.4 288 0.2 173 -97% 124% (1.05) (0.74)
Composite Score (0.96) (0.63) -0.63
China 59.1
P/E 14.0 15.5 4.2 15.9 3.8 31.2 26 7.2 20 -55% 94% (0.37) (0.51)
P/B 2.2 1.8 0.7 2.4 0.6 4.8 103 0.5 20 -55% 376% 0.46 (0.41)
D/Y 2.7 2.6 0.7 2.6 0.5 5.7 20 1.2 26 -53% 126% (0.07) (0.21)
12m Fwd PER 11.8 13.1 4.5 13.0 3.1 35.0 33 6.0 20 -66% 98% (0.29) (0.39)
Bond/Earnings Yield Ratio 0.5 0.9 0.4 0.6 0.2 1.9 26 0.3 35 -76% 36% (1.04) (0.67)
Bond / Dividends Yield Ratio 1.2 2.3 1.1 1.5 0.5 5.8 97 0.8 35 -79% 46% (0.96) (0.59)
Composite Score (0.60) (0.46) -0.53
Source: Datastream, MSCI, J.P. Morgan calculations. Note: #SD refers to the number of standard deviations from the long-term (LT) and short-term (ST) means.
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(852) 2800-8599 21 June 2010
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India 691.7
P/E 19.1 16.4 4.4 17.1 2.8 33.7 169 10.4 102 -43% 83% 0.59 0.70
P/B 3.0 2.9 0.7 3.4 0.7 4.6 148 1.7 340 -35% 71% 0.10 (0.57)
D/Y 1.2 1.6 0.3 1.5 0.3 2.5 126 0.9 169 -54% 29% 1.23 0.91
12m Fwd PER 15.7 13.7 3.4 15.6 3.0 23.6 163 8.2 383 -33% 91% 0.59 0.03
Bond/Earnings Yield Ratio 1.5 1.6 0.7 1.3 0.3 3.8 169 0.6 126 -61% 135% (0.14) 0.73
Bond / Dividends Yield Ratio 6.6 6.3 2.3 5.4 1.3 12.5 169 2.3 126 -47% 185% 0.14 0.91
Composite Score 0.53 0.91 0.69
Malaysia 471.5
P/E 16.3 20.1 5.0 16.3 2.2 45.5 257 11.8 317 -64% 38% (0.75) 0.01
P/B 1.9 2.1 0.7 2.0 0.3 4.9 455 0.6 101 -61% 198% (0.28) (0.08)
D/Y 3.1 2.6 0.8 3.3 0.4 5.1 101 1.1 455 -40% 182% (0.58) 0.43
12m Fwd PER 13.9 16.0 3.8 13.9 1.4 27.2 455 7.8 101 -49% 77% (0.56) (0.04)
Bond/Earnings Yield Ratio 0.7 1.2 0.7 0.7 0.1 3.5 257 0.4 327 -81% 71% (0.80) (0.16)
Bond / Dividends Yield Ratio 1.3 2.7 1.6 1.3 0.2 8.4 455 0.8 327 -85% 70% (0.85) 0.14
Composite Score (0.45) (0.16) -0.16
Thailand 313.5
P/E 11.9 15.4 5.5 12.3 3.9 43.2 114 8.2 267 -72% 45% (0.64) (0.09)
P/B 1.8 2.0 0.7 1.9 0.3 5.1 639 0.6 74 -65% 187% (0.30) (0.40)
D/Y 3.7 3.2 1.0 4.0 0.7 6.2 166 0.9 217 -40% 302% (0.52) 0.47
12m Fwd PER 10.5 14.3 7.7 10.0 1.2 44.9 156 5.4 345 -77% 94% (0.50) 0.41
Bond/Earnings Yield Ratio 0.39 1.0 0.7 0.6 0.2 2.6 521 0.3 185 -85% 48% (0.97) (0.79)
Bond / Dividends Yield Ratio 0.9 2.7 1.7 1.2 0.3 8.5 217 0.5 185 -90% 84% (1.01) (1.00)
Composite Score (0.78) (0.79) -0.78
Indonesia 3769.3
P/E 15.0 16.6 6.4 15.2 3.7 49.0 829 5.3 451 -69% 181% (0.26) (0.05)
P/B 3.6 2.5 0.9 3.3 0.9 5.5 3960 0.9 316 -34% 314% 1.20 0.33
D/Y 2.7 2.7 1.0 3.1 0.5 5.9 475 0.8 961 -55% 230% 0.04 0.95
12m Fwd PER 13.0 12.0 5.3 11.5 2.3 35.4 860 3.7 406 -63% 253% 0.19 0.65
Bond/Earnings Yield Ratio 1.3 2.1 0.8 1.7 0.4 6.5 829 0.7 475 -80% 95% (0.93) (0.95)
Bond / Dividends Yield Ratio 3.3 6.7 5.6 3.7 0.6 31.5 576 2.1 475 -89% 61% (0.61) (0.54)
Composite Score (0.37) (0.95) -0.51
Phil 615.6
P/E 16.3 19.1 6.6 16.6 3.3 47.7 256 7.9 277 -66% 106% (0.42) (0.09)
P/B 2.5 2.2 0.9 2.2 0.4 4.7 830 0.9 210 -47% 191% 0.35 0.55
D/Y 4.0 2.0 1.2 3.5 0.8 5.1 374 0.6 884 -22% 594% (1.72) (0.63)
12m Fwd PER 14.3 13.6 3.8 13.3 1.9 21.8 777 4.0 176 -34% 262% 0.19 0.56
Bond/Earnings Yield Ratio 1.3 2.2 1.0 1.4 0.2 6.2 256 1.0 374 -79% 35% (0.90) (0.64)
Bond / Dividends Yield Ratio 2.0 8.7 5.8 2.8 1.3 29.5 884 1.5 374 -93% 37% (1.16) (0.63)
Composite Score (0.51) (0.46) -0.51
SouthAfrica 708.7
P/E 14.4 13.2 1.9 12.8 1.7 17.7 182 9.1 221 -19% 59% 0.62 0.93
P/B 2.2 2.1 0.3 2.4 0.3 2.9 248 1.4 138 -25% 59% 0.23 (0.63)
D/Y 2.8 3.2 0.5 3.2 0.4 4.7 221 2.3 248 -39% 23% 0.76 1.13
12m Fwd PER 10.9 10.8 1.8 10.6 1.3 15.5 174 6.7 545 -30% 62% 0.05 0.21
Bond/Earnings Yield Ratio 1.3 1.5 0.6 1.1 0.2 3.0 182 0.7 513 -58% 80% (0.50) 1.02
Bond / Dividends Yield Ratio 3.1 3.7 1.3 2.6 0.5 6.9 182 1.6 513 -55% 94% (0.47) 1.00
Composite Score 0.11 0.61 0.36
Brazil 219583
P/E 12.5 12.4 4.8 12.8 2.9 42.6 21547 6.5 24255 -71% 93% 0.03 (0.09)
P/B 2.1 1.4 0.8 2.3 0.4 3.2 291681 0.4 17017 -34% 446% 0.82 (0.49)
D/Y 3.2 4.0 1.2 3.4 0.8 7.6 25508 2.1 263964 -58% 52% 0.71 0.31
12m Fwd PER 11.9 8.3 2.7 9.9 2.7 15.8 291681 4.2 50366 -25% 183% 1.32 0.74
Bond/Earnings Yield Ratio 1.4 1.9 0.7 1.7 0.3 5.0 61568 1.0 161860 -71% 38% (0.75) (0.75)
Bond / Dividends Yield Ratio 3.6 4.2 0.9 4.1 0.9 7.3 37879 2.3 161860 -50% 59% (0.57) (0.52)
Composite Score 1.32 (0.56) 0.38
Source: Datastream, MSCI, J.P. Morgan calculations. Note: #SD refers to the number of standard deviations from the long-term (LT) and short-term (ST) means.
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Mexico 29117
P/E 16.1 15.1 7.5 13.9 1.8 79.1 2566 9.0 2558 -80% 79% 0.14 1.20
P/B 2.7 2.2 0.9 2.9 1.3 6.0 18728 0.7 17106 -55% 269% 0.53 (0.17)
D/Y 2.6 2.0 0.4 2.1 0.6 3.5 17106 1.0 18728 -26% 169% (1.24) (0.74)
12m Fwd PER 13.3 11.6 1.7 12.7 1.7 16.2 26503 8.0 17106 -18% 65% 0.92 0.30
Bond/Earnings Yield Ratio 0.8 2.2 2.0 1.0 0.1 13.9 2302 0.7 8648 -94% 8% (0.74) (1.85)
Bond / Dividends Yield Ratio 1.9 8.1 6.0 3.9 1.7 25.6 3098 1.8 22844 -93% 3% (1.04) (1.20)
Composite Score 0.23 0.01 0.12
Russia 716.5
P/E 7.4 11.6 7.4 9.5 2.5 54.0 83 3.6 379 -86% 106% (0.56) (0.84)
P/B 1.0 1.3 0.5 1.5 0.5 2.4 1567 0.2 38 -59% 404% (0.62) (1.06)
D/Y 1.5 1.4 0.8 1.4 0.5 3.2 265 0.1 223 -52% 1042% (0.18) (0.22)
12m Fwd PER 6.0 8.2 2.8 8.8 2.4 22.8 332 2.5 59 -74% 141% (0.76) (1.15)
Bond/Earnings Yield Ratio 0.3 2.5 5.2 0.6 0.1 43.8 83 0.3 706 -99% 5% (0.41) (2.33)
Bond / Dividends Yield Ratio 3.1 28.6 43.7 6.1 3.3 249.1 223 1.8 503 -99% 77% (0.58) (0.91)
Composite Score (0.52) (0.71) -0.71
Poland 1647.9
P/E 14.5 16.2 10.6 12.3 2.0 98.7 861 6.7 917 -85% 117% (0.16) 1.14
P/B 1.7 1.8 0.4 2.0 0.4 3.1 589 1.0 1192 -44% 77% (0.29) (0.57)
D/Y 2.4 2.4 1.3 3.7 1.2 6.3 2253 0.8 1463 -62% 186% 0.05 1.15
12m Fwd PER 12.3 12.0 3.4 12.1 2.0 25.1 1630 5.5 618 -51% 126% 0.10 0.11
Bond/Earnings Yield Ratio 0.6 1.8 1.2 0.6 0.1 6.6 861 0.3 917 -91% 100% (1.00) (0.21)
Bond / Dividends Yield Ratio 1.7 7.3 6.6 1.5 0.6 22.0 1463 0.7 2253 -92% 149% (0.84) 0.32
Composite Score 0.07 (0.21) -0.05
Turkey 802127
P/E 10.3 12.6 6.8 11.6 3.1 46.2 234490 5.1 9691 -78% 103% (0.34) (0.41)
P/B 1.8 2.1 1.0 1.6 0.3 6.7 237918 1.0 527988 -73% 89% (0.33) 0.60
D/Y 3.5 3.8 1.9 3.7 1.4 9.4 13825 1.0 237918 -63% 252% 0.16 0.13
12m Fwd PER 9.0 8.2 3.1 9.3 1.8 18.7 264873 2.7 34351 -52% 232% 0.28 (0.14)
Bond/Earnings Yield Ratio 1.0 6.1 5.5 2.0 0.8 27.7 234490 0.8 662862 -97% 27% (0.93) (1.32)
Bond / Dividends Yield Ratio 2.6 16.3 12.1 5.3 2.4 46.4 189935 1.6 553055 -94% 66% (1.12) (1.15)
Composite Score 0.07 (1.24) -0.53
Hungary 1259.2
P/E 12.2 11.9 4.4 8.5 2.7 22.1 872 3.9 559 -45% 217% 0.08 1.41
P/B 1.7 2.1 0.7 2.0 0.5 3.7 616 0.6 148 -54% 204% (0.52) (0.52)
D/Y 2.3 2.1 0.9 2.9 0.6 5.3 857 0.9 752 -57% 149% (0.21) 1.08
12m Fwd PER 9.5 10.2 2.0 9.8 1.9 17.0 872 4.3 810 -44% 123% (0.34) (0.15)
Bond/Earnings Yield Ratio 0.6 1.1 0.6 0.6 0.2 2.5 596 0.4 559 -74% 74% (0.73) 0.05
Bond / Dividends Yield Ratio 2.3 5.1 3.2 2.7 0.5 13.3 545 1.3 984 -83% 69% (0.89) (0.78)
Composite Score (0.23) 0.86 -0.23
Czech 363.1
P/E 11.9 14.8 5.1 16.1 3.9 39.6 111 7.3 76 -70% 63% (0.59) (1.09)
P/B 2.1 1.4 0.8 2.2 0.5 3.1 480 0.5 104 -32% 299% 0.93 (0.21)
D/Y 5.2 4.0 2.8 5.8 2.6 10.0 374 0.8 540 -49% 539% (0.40) 0.25
12m Fwd PER 10.6 13.4 3.7 13.6 2.9 28.7 135 6.7 318 -63% 58% (0.75) (1.04)
Bond/Earnings Yield Ratio 0.5 0.7 0.3 0.7 0.1 2.6 111 0.4 119 -82% 31% (0.62) (1.37)
Bond / Dividends Yield Ratio 0.8 1.7 1.9 1.1 1.0 8.2 110 0.3 332 -90% 136% (0.47) (0.27)
Composite Score (0.50) (0.54) -0.52
Chile 4698.4
P/E 17.3 19.9 6.0 18.1 3.2 52.4 1660 11.4 910 -67% 52% (0.44) (0.25)
P/B 1.9 1.6 0.3 1.8 0.2 2.6 1806 0.9 910 -27% 103% 0.71 0.41
D/Y 2.3 3.2 1.2 3.5 1.8 8.9 2601 1.9 2077 -74% 19% 0.75 0.68
12m Fwd PER 14.9 15.3 2.3 16.3 2.0 20.8 1806 8.2 953 -29% 80% (0.20) (0.74)
Bond/Earnings Yield Ratio 0.6 1.8 0.9 1.1 0.5 4.8 1660 -0.1 4119 -88% -608% (1.34) (0.99)
Bond / Dividends Yield Ratio 1.4 3.1 1.5 2.1 1.5 7.2 1478 -0.3 4119 -81% -634% (1.14) (0.46)
Composite Score (0.28) (0.23) -0.25
Source: Datastream, MSCI, J.P. Morgan calculations. Note: #SD refers to the number of standard deviations from the long-term (LT) and short-term (ST) means.
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[email protected]
EMBIG100
Table 22: Cheaper valuations and The equity EMBIG100 is the top 100 companies in the MSCI Emerging markets free
higher ROE than the US index sorted by MSCI free float market capitalization. We are interested in tracking
EMBIG US the major stocks in the emerging market universe as country and sector aggregates
Median Median can hide key trends. Also these names need to be attractive relative to global
2010 PE 12.4 14.6 valuations and growth in order to attract net flows in emerging markets. This table
2011 PE 10.5 12.7
2010 DY 2.8 1.3
gives a valuation summary for these stocks.
2010 ROE 18.4 14.4
Source: J.P. Morgan. Table 25: EMBig100 valuation summary (ranked by 2010 PE)
Stock Code Country Rec Price P/E P/E DY ROE
8-Jun-10 2010 2011E 2010E 2010E
Table 23: Quartile valuation ranking Mobile Tele MBT US Russia OW 18.9 3.6 3.0 10.1 NA
P/E Gazprom GSPBEX RU Russia OW 169.0 4.6 3.4 1.4 12.3
Lukoil LKOH RU Russia N 50.3 5.3 5.1 3.9 13.6
2010E 2011E
LG Display 034220 KS Korea OW 42000.0 5.5 5.8 1.7 23.8
Min 3.6 3.0 KGHM KGH PW Poland NR 90.1 5.8 5.7 9.7 26.4
Lower Quartile 9.9 8.1 LG Electronics 066570 KS Korea N 101000.0 6.1 5.6 0.8 21.1
Median 12.4 10.5 Rosneft ROSN LI Russia OW 6.7 6.3 6.9 1.6 19.4
Top Quartile 15.5 13.5 Hynix Semi 000660 KS Korea N 26450.0 6.5 9.7 0.0 33.8
Max 36 27.5 Vale Pn VALE/P US Brazil OW 21.2 6.8 6.8 2.5 23.6
Source: J.P. Morgan. Hyundai Motor 005380 KS Korea OW 139000.0 7.4 7.5 1.1 15.7
Sinopec 386 HK China OW 5.9 7.5 6.5 3.3 17.1
Garanti Bankasi GARAN TI Turkey OW 6.5 7.5 6.8 4.0 23.8
Table 24: Quartile valuation ranking OTP Bank OTP HB Hungary OW 4863.0 7.6 5.5 3.9 13.4
Div Yld ROE Sider Nacional SID US Brazil UW 13.8 7.8 5.9 11.3 43.9
2010E 2010E Banco Brasil On BBAS3 BZ Brazil N 26.6 8.0 7.5 5.0 20.2
KB Financial 105560 KS Korea OW 51400.0 8.1 6.8 1.9 11.7
Min 0.0 3.9
Posco 005490 KS Korea OW 450000.0 8.5 NA 1.4 12.8
Lower Quartile 1.3 14.7
Bank Of China 3988 HK China OW 3.8 8.8 7.0 4.8 19.6
Median 2.8 18.4
Sberbank SBER RU Russia OW 2.3 9.0 4.7 8.5 18.8
Top Quartile 4.0 24.4
Petrobras PETR4 BZ Brazil N 29.9 9.0 6.8 3.0 14.9
Max 11.3 49.9
PTT PTT TB Thailand OW 243.0 9.5 7.8 3.9 16.1
Source: J.P. Morgan. Itausa PN ITSA4 BZ Brazil NR 10.7 9.5 7.6 3.8 16.4
CEZ CEZ CP CZ NR 890.0 9.8 9.5 5.9 21.8
Figure 37: ROE vs. P/E Hyundai Mobis 012330 KS Korea OW 192500.0 9.8 8.8 0.6 19.3
Samsung Electro 005930 KS Korea N 785000.0 9.8 11.2 0.0 18.0
50 MTN Group MTN SJ SA OW 9949.0 10.0 8.1 2.2 19.5
Enersis ENERSIS CI Chile N 207.0 10.2 9.6 5.9 15.1
40 Shinhan Financial 055550 KS Korea OW 44900.0 10.3 8.7 1.6 10.0
TSMC 2330 TT Taiwan OW 58.5 10.3 10.2 5.1 27.6
30 Hon Hai Precision 2317 TT Taiwan OW 111.5 10.3 8.6 2.3 19.0
Firstrand FSR SJ SA OW 1825.0 10.6 8.1 4.2 17.1
ROE 10 E
62
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(852) 2800-8599 21 June 2010
[email protected]
63
Adrian Mowat Emerging Markets Equity Research
(852) 2800-8599 21 June 2010
[email protected]
Table 26: Quartile earning growth Table 27: EMBig100 earnings growth
ranking NAME RIC Country Reco CAGR
Earnings Growth
Earnings growth 2009 2010E 2011E 2008-11E
2010E 2011E Ping An Insurance 2318 HK China NR 1.9 2.2 2.7 306.7
Min -40.0 -12.5 Cathay Financial 2882 TT Taiwan N 404.3 79.9 46.9 137.1
Lower Quartile 12.3 9.9 Perusahaan Gas Negara PGAS IJ Indonesia UW 882.7 -7.1 9.7 115.6
Median 24.1 18.9 Walmex WALMEXV MM Mexico N 809.1 -40.0 15.8 84.9
Top Quartile 34.2 23.3 LG Electronics 066570 KS Korea N 325.2 15.8 9.5 75.3
Max 610.8 92.6 Nan Ya Plastics 1303 TT Taiwan UW 69.7 67.3 26.3 53.1
Tencent Hldg 700 HK China OW 84.8 44.8 29.2 51.2
Source: J.P. Morgan calculations.
Mediatek 2454 TT Taiwan OW 88.0 27.9 23.3 43.6
Sinopec 386 HK China OW 116.5 11.3 14.4 40.2
Sberbank of Russia SBER RU Russia OW -80.4 610.8 92.6 38.9
Fubon Financial Holdings 2881 TT Taiwan OW 70.7 29.9 19.7 38.5
Hyundai Motor 005380 KS Korea OW 104.5 25.9 -1.6 36.3
LG Display 034220 KS Korea OW 6.1 136.4 -4.8 33.6
China Overseas 688 HK China OW 47.1 29.4 21.4 32.2
Itausa PN ITSA4 BZ Brazil NR 0.9 1.1 1.4 30.9
Samsung Electronics 005930 KS Korea N 76.6 40.1 -12.5 29.4
Bmf Bovespa BVMF3 BZ Brazil OW 35.6 36.1 16.9 29.2
Bank Of China 3988 HK China OW 26.0 35.6 25.8 29.1
Garanti Bankasi GARAN TI Turkey OW 63.9 16.0 10.1 27.9
LG Chem 051910 KS Korea OW 70.5 18.9 2.2 27.5
China Life 2628 HK China NR 1.2 1.3 1.5 27.0
CIMB Group Holdings CIMB MK Malaysia N 37.5 24.1 18.9 26.6
Hon Hai Precision 2317 TT Taiwan OW 23.8 32.8 19.9 25.4
Femsa FMX US Mexico OW 12.3 53.4 13.8 25.2
Gold Fields GFI SJ SA OW -2.0 6.7 86.3 24.9
HDFC Bank HDFCB IN India OW 17.6 22.1 35.3 24.8
Larsen & Toubro LT IN India OW 30.7 13.3 23.3 22.2
ICBC 1398 HK China OW 16.1 27.8 22.2 21.9
Bank Rakyat Indonesia BBRI IJ Indonesia UW 22.6 16.1 22.6 20.4
China Const Bank 939 HK China OW 15.3 26.1 17.8 19.6
Hyundai Mobis 012330 KS Korea OW 51.0 2.0 10.9 19.5
PTT PTT TB Thailand OW 14.8 22.3 21.4 19.4
Naspers NPN SJ SA OW 5.6 22.4 30.1 18.9
Credicorp BAP US Peru OW 31.2 8.7 13.3 17.3
Bank of Comm. 3328 HK China OW 5.6 27.5 19.9 17.3
NHN 035420 KS Korea NR 9225 10711 12646 16.7
Bank Central Asia BBCA IJ Indonesia OW 17.9 8.8 22.0 16.1
Astra International ASII IJ Indonesia OW 12.0 29.8 7.5 16.0
Infosys Technologies INFO IN India OW 29.8 6.3 11.9 15.6
TSMC 2330 TT Taiwan OW -9.8 64.4 1.4 14.5
Gerdau GGBR4 BZ Brazil NR 1.5 2.0 3.0 14.2
Tata Consltncy Servcs TCS IN India OW 3.5 32.9 8.0 14.1
Banco Itau ITUB4 BZ Brazil OW -1.3 26.7 18.4 14.0
China Steel 2002 TT Taiwan OW -21.9 28.0 47.3 13.8
Ambev ABV US Brazil N 4.6 30.6 6.5 13.3
Reliance Industries RIL IN India OW -7.7 -0.6 56.5 12.8
Grupo Mexico GMEXICOB MM Mexico OW -14.3 50.0 11.1 12.6
HDFC HDFC IN India N -6.4 22.7 22.2 11.9
Source: IBES, Datastream, J.P. Morgan estimates. All estimates are for the calendar year. IBES estimates for non-rated (NR) stocks.
NM = not meaningful due to negative numbers. SA stands for South Africa. CZ stands for Czech Republic Recommendations: OW =
Overweight, N = Neutral, UW = Underweight, NR = Not rated. 8 June 2010.
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Emerging Market
Emerging Dashboards
MarketDashboards
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North America
Philippines
EMF Latin
Indonesia
EMF Asia
EMF Asia
Malaysia
Thailand
America
Europe
Taiwan
Global
Japan
EMEA
Korea
China
India
EMF
2010 Year to Date
Consumer Discretionary 2.7% 10.5% -4.7% -7.2% -0.5% 4.2% -11.5% -6.8% 4.2% 11.3% -6.8% -9.5% 12.4% 1.2% 0.0% 33.9% 16.4%
Consumer Staples -2.1% -0.3% -5.9% -0.8% 3.2% 1.2% 4.1% 0.2% 1.2% 1.2% -3.7% -2.8% 5.6% -3.5% 36.2% 15.5%
Energy -9.8% -3.7% -20.7% 4.1% -9.4% -3.9% -16.7% -9.6% -3.9% -5.1% -1.5% -4.8% -2.6% 5.1% 2.3% -9.7%
Financials -6.9% 3.7% -19.0% -4.1% -5.2% -5.9% -5.0% -7.2% -5.9% -6.2% -15.2% -9.2% 3.0% 4.6% 3.6% 15.8% 8.6%
Healthcare -7.1% -4.7% -12.1% -8.5% 4.9% 6.1% 0.0% 5.3% 6.1% 0.0% 18.9% 6.2% 0.0%
Industrials 1.4% 6.5% -4.7% 0.5% -4.7% -5.1% -1.3% -5.3% -5.1% -1.9% -2.8% -10.1% -2.6% -3.9% 20.0% 27.7%
Information Technology -2.9% -2.6% -6.9% 2.7% -7.0% -7.2% 1.8% -10.4% -7.2% 6.7% -11.7% -19.0% 4.6%
Materials -7.5% -2.8% -12.2% -5.2% -5.5% -10.4% -3.1% -0.4% -10.4% -6.2% -6.2% -20.2% -11.7% 6.4% 24.3% 8.6%
Telecoms -8.6% -4.1% -17.6% 0.5% -0.9% 2.2% 0.6% -8.9% 2.2% 4.7% 0.6% 4.9% 11.6% 8.4% 1.3% -14.5% -7.4%
Utilities -9.7% -3.5% -21.3% 3.7% -3.8% -3.5% -6.6% 2.3% -3.5% -3.5% -8.6% -4.5% -0.1% 11.4% -0.6% -6.2%
Region / Country -4.9% 0.2% -13.8% -2.5% -4.7% -4.6% -5.3% -5.7% -4.6% 1.2% -9.8% -7.6% 0.1% 1.1% 6.2% 6.9% 3.8%
Benchmark
Change vs dollar 1.8% -4.3% -0.9% 0.0% -0.1% 4.8% 2.9% 2.6% -0.1%
Czech Republic
South Africa
EMF Latin
Argentina
Colombia
Morocco
Hungary
America
Mexico
Poland
Russia
Turkey
EMEA
Egypt
Brazil
Chile
Peru
2010 Year to Date
Consumer Discretionary -11.5% -12.1% -14.0% 15.5% -6.8% -0.3% -7.9% 14.4% 0.0%
Consumer Staples 4.1% 3.8% 1.1% 27.2% -9.9% -9.2% 0.2% 19.6% -19.2% 12.9% 0.0% 0.0%
Energy -16.7% -16.0% 1.7% 10.6% -9.6% -3.5% -6.5% 7.6% 6.4% 7.1% 0.0%
Financials -5.0% -7.6% 18.3% 19.4% 6.9% 22.0% 8.2% -7.2% 4.8% -6.0% 10.1% 2.8% -6.5% -8.4% 18.4% 16.3%
Healthcare 0.0% 0.0% 5.3% 5.3% -0.7% 4.2% 0.0%
Industrials -1.3% -8.8% 6.6% 14.5% -5.3% -4.3% 3.9% 9.7% -6.4% 25.7%
Information Technology 1.8% 4.3% -10.4% -6.9%
Materials -3.1% -4.1% 2.8% 11.0% 3.3% 2.3% -0.4% 0.4% 11.7% -8.0% -11.7% 6.6% 0.0%
Telecoms 0.6% -9.4% 1.5% -1.1% 11.9% -8.9% -4.9% 2.1% -11.4% -10.2% -12.3% -5.4% -5.6% 16.5%
Utilities -6.6% -5.1% -2.8% -1.8% 2.3% 0.0% 0.0% -13.0% 6.4%
Region / Country -5.3% -7.8% 0.9% 9.6% 5.9% 8.5% 5.4% -5.7% 1.2% -2.4% 5.9% -0.3% -1.6% -0.5% 3.3% 17.8%
Benchmark
Change vs dollar -2.4% 3.9% -4.2% -3.2% 1.8% 6.9% -3.1% -3.5% -4.1% -13.7% -17.0% -11.8% -3.4% -11.9%
Source: Bloomberg, MSCI. 16 June 2010.
Notes: Regional headings first sorted by regional weights in the MSCI EMF and then country headings from left to right by relative weights within the MSCI EMF
Indices: Regions in US$ and countries in local currency. Local currency movements against the dollar: appreciation / (depreciation).
Country and sector cross sections in italic blue have outperformed their indices by more than 2%; numbers in red have underperformed their indices by more than 2%.
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UK London Stk Exchange 2,508 7.9 9.0 7.7 0.31 0.34 0.32 25 5
Japan Tokyo Stk Exchange 2,677 18 17 15 0.66 0.62 0.47 20 4
Australia ASX 1,061 4.1 5.1 3.3 0.39 0.45 0.39 15 3
HK HKSE 1,379 4.1 6.3 6.0 0.30 0.43 0.34
10 2
Singapore SSE 257 0.8 1.1 1.0 0.30 0.43 0.30
EM Asia 5 1
South Africa Johannesburg Stk Exchange 473 1.3 1.6 1.2 0.28 0.34 0.27 5.0
Turkey Istanbul Stk Exchange 80 1.1 1.7 1.2 1.40 2.12 0.75
Poland Warsaw Stk Exchange 62 0.5 0.6 0.4 0.74 0.92 0.44 2.5
Trading value calculation for Russia, Mexico and Brazil, includes value of depository receipts traded (DR) along with local stock exchange turnover.
0.2
South Africa and Australia market capitalization and trading value includes only local listed portion of dual listed stocks. Velocity Ratio = (Trading
Value / Free float market cap) * 100 0.0
Updated 16 June 2010 04 05 06 07 08 09 10
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Source: J.P. Morgan Economics, Bloomberg. Note: Current inflation data for countries which outside/above target range is highlighted.
# Countries where central banks target is not available. We have given J.P. Morgan Economic estimates.
No target is available for China, but general expectation is that the Central Bank would continue raising rates when the headline CPI rises above 3.0 % Updated as of 16 June 2010
In case of Taiwan, Estimate by DGBAS,CB targets M2 growth (2.5-6.5% for 2010)
Russia's CBR is not yet in a full-fledged inflation targeting, so they can change the target during the year.
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Outlook: Market Drivers
Global and developed market drivers
Country Positive Negative
Global Unprecedented significant policy response to the financial crisis, but markets need to see results, equity Developed economies in recession, ongoing deleveraging depressing most asset classes, no
valuations discounting a recession confidence in policy makers
US Passage of TARP Sub-prime & housing issues, slower earnings growth and inflation, confusion over implementation of
TARP
Europe Cheap valuations, weaker Euro Weakening economic growth, wage pressures, earning downgrades to come
UK Valuations cheap, currency weakness, wage growth under control, aggressive cut rates Weak consumer, falling property prices, economy in recession
Japan New credit cycle, reasonable valuations Cyclical earnings, recent weak manufacturing and yen volatility, economy in a recession
Australia Consumer tax cuts on the way, corporate pricing power, Larger than expected easing by RBA Falling property prices, bank funding costs and asset quality issues, lower commodity prices, slowdown
in economic activity
Hong Kong Fiscal stimulus, lower mortgage rates Property (which is 34% of index) unlikely to perform due to tight credit, weak capital markets, global
recession, exposure to slowing global trade and poor outlook for employment in financial services
Singapore Pro-growth fiscal policy, negative real rates and attractive valuations Weaker Singapore dollar policy, significant growth slowdown - export related and economy in a
recession
Emerging Market Drivers
Country Positive Negative
China Large fiscal stimulus. falling CPI, aggressive monetary easing policy, reform & liberalization on track, Slowing economic momentum, social stability issues, broader and deeper US/global recession, policy
lower corporates tax rates, trade weighted RMB appreciation, strong domestic demand, eased loan mis-step risks, poor sentiment in the property market, slowdown in Rmb appreciation
growth control, stamp duty tax cut and CIC investment
Brazil Cheap Valuations, Beta Play, Easing Interest Rate Cycle, Under owned Domestic Sector Redemption pressures, Commodity Driven Market, Downside risks to Earning and Growth
Korea Fiscal stimulus, tax cut (including property, income and corporate tax), falling commodities prices Weak domestic economy with deleveraging consumer, delay in deregulations dampening sentiment in
the housing market
Taiwan Fiscal stimulus, Corporate Tax cuts, realizing closer cross-straits links, investment positioning Tech is unlikely to perform with global recession, SME exposure of banks and increased political tension
(consensus UW position among FIs), compelling valuation due to the prosecution of the previous president
South Africa SA under owned by foreigners, infrastructure investment, cheap valuations, deep domestic investor base Rand exchange rate wildcard, political uncertainty, portfolio outflows by domestic fund managers on FX
relaxation, viewed as a commodity play, electricity shortage
India Aggressive monetary policy measure by RBI, fiscal stimulus and indirect tax cuts, long term economic Current account and Fiscal deficits, elections in 1H 09, slowdown impact on Indian IT
growth, attractive valuations, demographics, cash flow into insurance companies
Russia Government's pro-active response to liquidity crisis Severe liquidity deficit, Monetary tightening, heavy commodity exposure, high inflation, lack of monetary
flexibility, consensus overweight going into financial crisis
Mexico Re rating upside on Calderon reform agenda and boast to Potential GDP, Fiscal Stimulus Program and Delay in US strengthening, Mexican credit availability, Foreign owned banking system, Deteriorating
Policy Rate flexibility, Lower corporate risks, competitive FX public security situation.
Malaysia Strong domestic demand, soft commodity play, 9MP pump priming Near term political uncertainty, limited GLC reform, delays in 9 MP infrastructure projects, trading at a
premium to region
Indonesia Lower oil prices reducing pressure on subsidies, external balances remain healthy Limited policy flexibility, high inflation, increase in bond issuance to meet subsidies, currency weakness,
Bakrie brothers issue
Turkey Falling commodity prices, robust banking sector, policy rates likely to have peaked, inexpensive Lira weakness, exposure to growth slowdown in developed Europe, low earnings growth, delays in
valuations, CBRT rate cuts on growth worries securing IMF stand-by agreement, political tensions
Thailand Fiscal stimulus, aggressive monetary easing, Newly elected democratic govt should speed up fiscal Politics, uncertainty on macro economic policy
spending
Poland Domestic demand, market-friendly political setting Wage and margin pressures, loss of momentum in manufacturing, local mutual fund redemptions,
exposure to growth slowdown in developed Europe, relatively expensive compared to the region
Czech Republic Diversified growth, low interest rates, reformed banking sector High exposure to growth slowdown in developed Europe via auto manufacturing sector
Philippines Fiscal consolidation, resilient OFW remittances, BPO sector to see continued strength, investment cycle Global risks to affect risk appetite on emerging economies, low liquidity, political noise
upturn, falling food and oil prices
Hungary Continued fiscal restraint, IMF support High exposure to FX-denominated loans by households, poor growth prospects, exposure to growth
slowdown in developed Europe, tight monetary policy
Updated as of 16 June 2010.
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Profit Outlook: Earnings Forecasts Matrix for Countries and Sectors
Weight EPS Growth Weight EPS Growth Weight EPS Growth
Emerging Markets (%) JPMorgan Consensus China (%) J.P. Morgan Consensus India (%) JPMorgan Consensus
Median 2010 2011 Median 2010 2011 Median 2010 2011 Median 2010 2011 Median 2010 2011 Median 2010 2011
Total Market 100.0 - - - 19.0 27.3 17.0 Total Market 100.0 23.9 25.4 17.2 22.1 24.6 16.5 Total Market 100 21.7 25.1 26.0 19.1 22.7 18.2
Consumer Discretionary 6.3 - - - 18.4 19.3 17.0 Consumer Discretionary 4.6 23.6 25.2 14.6 21.0 22.7 17.0 Consumer Discretionary 4.8 22.6 23.7 11.7 13.4 14.7 16.2
Consumer Staples 6.7 - - - 17.6 15.9 17.5 Consumer Staples 5.7 17.2 16.7 16.1 19.8 14.5 18.0 Consumer Staples 5.6 18.4 18.2 25.6 15.4 17.8 20.5
Energy 14.4 - - - 19.5 15.2 13.5 Energy 16.9 12.8 25.9 10.4 33.8 31.0 12.8 Energy 15.6 34.8 41.8 20.6 12.3 16.8 9.8
Financials 25.1 - - - 21.0 25.6 21.8 Financials 38.1 26.8 25.3 22.2 22.0 19.8 18.9 Financials 25.2 22.3 21.5 26.7 23.7 25.1 21.3
Health Care 0.8 - - - 23.4 22.7 18.2 Health Care 0.9 24.2 17.6 30.2 22.1 17.5 31.3 Health Care 3.9 29.1 33.9 18.4 29.1 33.9 18.4
Industrials 6.7 - - - 18.6 20.8 18.1 Industrials 7.6 22.0 53.1 12.5 19.8 64.3 18.5 Industrials 10.0 31.0 28.4 66.4 40.4 33.3 38.9
Information Technology 13.4 - - - 31.9 56.1 6.7 Information Technology 6.2 54.0 132.6 34.8 40.3 94.1 40.9 Information Technology 17.0 15.5 14.7 21.4 13.1 12.2 23.4
Materials 14.5 - - - 38.5 58.4 27.4 Materials 5.4 39.5 43.1 31.3 39.0 86.3 21.1 Materials 11.1 19.3 35.5 26.5 19.3 39.5 14.4
Telecommunication Services 8.4 - - - 6.1 10.0 9.6 Telecommunication Services 12.6 4.4 1.2 5.1 4.4 1.2 5.1 Telecommunication Services 0.7 -31.2 -31.2 35.4 -1.1 -1.1 23.7
Utilities 3.7 - - - 9.0 12.3 14.4 Utilities 2.0 NM NM 20.4 NM NM 21.4 Utilities 6.1 8.3 8.6 16.4 13.3 13.9 9.3
Weight EPS Growth Weight EPS Growth Weight EPS Growth
Indonesia (%) JPMorgan Consensus Korea (%) JPMorgan Consensus Malaysia (%) JPMorgan Consensus
Median 2010 2011 Median 2010 2011 Median 2010 2011 Median 2010 2011 Median 2010 2011 Median 2010 2011
Median 2010 2011 Median 2010 2011 Median 2010 2011 Median 2010 2011 Median 2010 2011 Median 2010 2011
Total Market 100.0 15.7 17.9 16.7 17.7 20.1 18.9 Total Market 100.0 17.3 45.0 5.0 18.1 51.2 6.7 Total Market 100.0 12.6 23.1 16.8 16.0 22.3 100.0
Consumer Discretionary 13.7 29.8 29.8 7.5 21.8 21.8 13.6 Consumer Discretionary 13.7 12.2 14.6 4.5 12.0 14.9 9.9 Consumer Discretionary 11.5 3.9 -2.7 40.0 21.0 18.9 13.7
Consumer Staples 10.7 17.4 14.4 20.6 17.3 16.0 13.4 Consumer Staples 4.6 16.6 9.3 16.5 16.9 10.7 8.8 Consumer Staples 13.4 32.4 13.9 2.5 34.3 19.4 10.7
Energy 12.9 0.5 23.5 48.9 -4.6 29.1 41.8 Energy 2.2 18.5 18.6 12.4 72.5 63.1 14.1 Energy 0.8 4.9 4.9 3.2 4.9 4.9 12.9
Financials 28.0 24.5 17.8 20.4 23.2 24.9 18.3 Financials 16.5 25.8 76.8 15.8 24.9 83.8 14.4 Financials 31.1 14.3 29.0 16.1 16.4 18.1 28.0
Health Care 0.0 NA NA NA NA NA NA Health Care 0.5 25.6 20.8 25.0 25.6 20.8 25.0 Health Care 0.0 NA NA NA NA NA 0.0
Industrials 4.3 7.5 7.5 -7.0 9.7 9.7 15.4 Industrials 13.4 14.4 29.8 10.4 15.5 37.3 10.4 Industrials 18.9 33.7 44.4 28.7 30.5 40.1 4.3
Information Technology 0.0 NA NA NA NA NA NA Information Technology 30.9 66.4 80.9 -10.3 66.4 86.1 -2.7 Information Technology 0.0 NA NA NA NA NA 0.0
Materials 10.2 60.5 35.3 -3.3 53.2 30.0 15.8 Materials 13.2 11.5 19.8 9.4 11.5 20.9 4.9 Materials 0.8 -1.0 -1.0 9.8 -1.0 -1.0 10.2
Telecommunication Services 13.6 12.1 10.4 11.0 12.1 10.4 11.0 Telecommunication Services 3.1 20.0 54.4 11.9 20.0 54.4 11.9 Telecommunication Services 11.1 9.5 8.5 9.1 8.9 6.5 13.6
Utilities 6.6 -7.1 -7.1 9.7 4.6 4.6 15.8 Utilities 1.9 NM NM NM NM NM NM Utilities 12.3 9.3 36.3 8.5 9.3 36.5 6.6
Weight EPS Growth Weight EPS Growth Weight EPS Growth
Philippines (%) JPMorgan Consensus Taiwan (%) JPMorgan Consensus Thailand (%) JPMorgan Consensus
Median 2010 2011 Median 2010 2011 Median 2010 2011 Median 2010 2011 Median 2010 2011 Median 2010 2011
Total Market 100.0 13.3 12.9 14.4 15.9 23.0 12.2 Total Market 100.0 27.9 92.1 13.3 23.2 84.4 12.6 Total Market 100.0 9.5 14.2 16.3 14.4 18.8 18.7
Consumer Discretionary 3.9 16.6 16.6 12.6 16.6 16.6 12.6 Consumer Discretionary 2.6 -4.8 77.1 34.2 6.2 92.8 30.2 Consumer Discretionary 1.5 8.8 8.8 5.0 11.9 11.9 9.0
Consumer Staples 0.0 NA NA NA NA NA NA Consumer Staples 1.5 17.5 17.7 10.3 20.5 19.2 10.9 Consumer Staples 8.1 13.9 13.7 7.3 17.2 16.0 9.3
Energy 0.0 NA NA NA NA NA NA Energy 0.8 -2.6 -2.6 8.3 -3.9 -3.9 11.0 Energy 41.7 5.7 15.6 17.8 5.6 20.5 19.3
Financials 45.5 11.6 14.0 21.9 16.1 17.1 17.1 Financials 14.5 31.7 48.3 25.2 24.7 31.5 23.9 Financials 35.3 20.0 13.5 15.9 18.6 19.7 18.3
Health Care 0.0 NA NA NA NA NA NA Health Care 0.0 NA NA NA NA NA NA Health Care 0.0 NA NA NA NA NA NA
Industrials 11.2 13.6 13.6 12.1 10.7 10.7 16.5 Industrials 3.2 37.9 -368.3 36.9 24.1 1050 12.1 Industrials 0.0 NA NA NA NA NA NA
Information Technology 0.0 NA NA NA NA NA NA Information Technology 60.8 33.1 142.8 9.5 32.8 128.6 12.1 Information Technology 0.0 NA NA NA NA NA NA
Materials 0.0 NA NA NA NA NA NA Materials 12.1 28.0 18.0 21.5 35.1 31.9 7.4 Materials 7.6 29.4 16.7 29.5 32.0 17.2 36.1
Telecommunication Services 21.7 1.7 5.3 4.3 1.7 5.3 4.3 Telecommunication Services 4.4 2.8 -3.1 0.8 2.8 -3.1 0.8 Telecommunication Services 4.7 5.6 5.6 3.8 5.6 5.6 3.8
Utilities 17.7 25.8 26.8 19.4 127.2 112.6 13.2 Utilities 0.0 NA NA NA NA NA NA Utilities 1.1 10.2 10.2 -4.6 12.4 12.4 10.7
Source: I/B/E/S, MSCI, J.P. Morgan. Note: Average earnings growth calculated based on earnings aggregate of MSCI constituents. Consensus numbers are used for stocks not covered by J.P. Morgan under J.P. Morgan forecasts calculation. Median numbers are for
the year 2009. Updated as of 16 June 2010.
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Profit Outlook: Changes in 2010 and 2011 EPS Forecasts
World Emerging Markets (EM) EM Asia EM Europe
130 150 160 2011 150
2011 2011
140 150 140
120 2011
140
130 130
130
110 120 120 2010
2010 120
2010 2010 110
110 110
100
100 100
100
90 90 90
90
Feb-09 Sep-09 Apr-10 Feb-09 Sep-09 Apr-10 Feb-09 Sep-09 Apr-10
Feb-09 Sep-09 Apr-10
Source: I/B/E/S
Notes: The dashboard aims to show changes in earnings expectations. All year ends are for December. EPS figures are normalized, starting at 100 on base date Feb 2009 for ease of comparison. These numbers are directly from IBES aggregate and may differ from
those in the growth expectations pages where adjustments are made for exceptional items. Countries earnings revisions are in local currencies term whereas APxJ regions earnings revisions is in US $ term. Updated 16 June 2010.
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90
80
2010
70 90
Feb-09 Sep-09 Apr-10 Feb-09 Sep-09 Apr-10
Source:I/B/E/S Notes: The dashboard aims to show changes in earnings expectations. All year ends are for December. EPS figures are normalized, starting at 100 on base date Feb 2009 for ease of comparison. These numbers are directly from IBES aggregate and
may differ from those in the growth expectations pages where adjustments are made for exceptional items. Countries earnings revisions are in local currencies term whereas APxJ regions earnings revisions is in US $ term. Updated 16 June 2010.
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EMF LATAM
Philippines
EMF EMEA
Indonesia
Emerging
EMF Asia
Malaysia
Thailand
Markets
Taiwan
Korea
China
India
USA
12-month forward PE
Consumer Discretionary 14.3 11.7 12.3 12.2 11.0 8.0 15.8 13.9 12.5 15.2 12.5 16.1 19.5
Consumer Staples 13.2 16.9 15.0 17.2 15.4 12.8 14.8 16.9 21.0 15.3 17.0 13.4 NA
Energy 11.9 7.9 5.4 10.3 10.2 7.2 18.4 10.2 13.3 10.8 11.3 10.1 NA
Financials 11.7 11.0 9.6 10.9 11.1 8.3 12.0 10.6 17.5 12.5 12.7 10.1 17.4
Health Care 11.1 17.9 13.8 NA 19.7 14.1 NA 29.9 17.9 NA NA NA NA
Industrials 14.4 12.2 9.8 18.4 11.4 10.9 18.3 12.6 20.4 14.9 14.8 NA 13.7
Information Technology 12.9 11.2 11.8 11.8 11.1 10.5 11.5 22.9 19.4 NA NA NA NA
Materials 14.5 10.1 11.4 9.5 9.9 8.6 13.3 11.5 9.6 13.0 13.9 10.5 NA
Telecom Services 13.4 11.3 9.9 11.4 11.5 7.9 13.0 11.9 10.0 15.7 11.7 12.0 10.2
Utilities 12.3 11.6 9.8 9.6 13.0 NM NA 12.9 17.7 12.4 14.7 11.4 15.5
Market Aggregate 12.6 10.7 8.5 11.5 11.4 9.3 12.1 11.6 15.3 13.7 12.8 10.4 14.4
Sector Neutral** 12.8 10.7 9.5 11.3 11.1 8.8 13.6 12.4 14.4 12.7 12.7 11.1 12.2
South Africa
EMF LATAM
EMF EMEA
Republic
Hungary
Mexico
Poland
Russia
Turkey
Czech
Brazil
Chile
12-month forward PE
Consumer Discretionary 12.3 NA 12.0 17.4 9.7 NA -19.9 12.2 11.1 13.4 26.8
Consumer Staples 15.0 20.2 13.8 NA 18.9 NA NA 17.2 16.3 17.5 20.3
Energy 5.4 4.8 8.9 12.4 8.2 9.2 NA 10.3 10.2 NA NA
Financials 9.6 8.3 9.8 13.9 8.3 8.6 11.1 10.9 10.6 13.3 11.9
Health Care 13.8 NA 12.7 NA NA 16.0 NA NA NA NA NA
Industrials 9.8 NA 9.3 12.7 8.4 NA NA 18.4 20.0 14.0 20.0
Information Technology 11.8 NA NA 11.8 NA NA NA 11.8 11.8 NA NA
Materials 11.4 8.2 14.6 6.4 11.0 NA NA 9.5 8.1 12.9 17.4
Telecom Services 9.9 9.6 9.5 15.8 8.6 9.8 12.0 11.4 10.2 11.7 10.4
Utilities 9.8 11.3 NA 11.3 NA NA 9.8 9.6 8.5 NA 11.3
Market Aggregate 8.5 6.1 10.9 11.7 9.1 9.6 11.1 11.5 10.4 13.7 15.5
Sector Neutral** 9.5 8.6 10.7 11.7 9.6 10.2 11.8 11.3 10.7 11.8 12.4
Source: IBES, MSCI, J.P. Morgan. Note: Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates. IBES Estimates are not available for Morocco, Jordan, Peru and Colombia.
**Sector neutral PE are calculated by using sector weights of MSCI EM and sector PE of respective markets (MSCI EM sector PE used where country sector does not exist) Updated 16 June 2010.
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EM Global Price Taker Sector Absolute and relative (vs EMF) Index
450 110
400 Absolute (lhs)
350 90
300
70
250
200 Relative to EM (rhs)
50
150
100 30
50
0 10
Jan-90 Jul-92 Jan-95 Jul-97 Jan-00 Jul-02 Jan-05 Jul-07 Jan-10
Source: Datastream, MSCI. J.P. Morgan. MSCI emerging markets companies have been classified in five categories. Of the five categories, Global Consumer/Capex (Tech-Hardware) weighting equally divided between Global consumer and Global Capex. The above
table contains MSCI free float market capitalization as a percentage of MSCI emerging markets. Charts show the relative absolute and relative performance of emerging markets sectors by demand classification. Updated 16 June 2010.
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Source: Bloomberg, J.P. Morgan, DataStream, MSCI, IBES Note: GBI-EM Bond Maturity and Yield to Maturity are used for each country. Updated 16 June 2010.
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2010E GDP Growth in EM: J.P. Morgan and Consensus Forecasts Consensus Forecasts for 2010E GDP growth in EM and DM
7.6 6.5 2.6
7.0
2.4
J.P.Morgan EM growth forecast 5.9
DM consensus growth forecast (RHS) 2.2
6.4
5.3 2
5.8 1.8
4.7 1.6
5.2
4.1 1.4
4.6 Consensus EM growth forecast
EM consensus growth forecast (LHS) 1.2
4.0 3.5 1
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10
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Source: J.P. Morgan Economics, Bloomberg. Bold figures on next column indicate tightening. Updated 16 June 2010.
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Source:
Russian Rouble (RUB) South African Rand (ZAR) Mexican Peso (MXN) Indian Rupee (INR) Malaysian Ringgit (MYR) Colombian Peso (COP)
43 14.0 J.P.Morgan forecast: 15.7 J.P.Morgan forecast: J.P.Morgan forecast: 3.9 J.P.Morgan forecast:
J.P.Morgan forecast: 52.5 2,600
13.0 end Sep 10: 7.85 15.1 end Sep 10: 12.15 Consensus end Sep 10: 44.0 end Sep 10: 3.10
39 end Sep 10: 30.11 Consensus 3.7
12.0 14.5 end Dec 10: 12.25 50.5 end Dec 10: 46.5 Consensus end Dec 10: 3.02 2,400
end Dec 10: 30.28 end Dec 10: 7.90
35 11.0 13.9 48.5 end Mar 11: 2.98
end Mar 11: 30.06 end Mar 11: 7.95 end Mar 11: 12.25 end Mar 11: 43.0 3.5 J.P. Morgan 2,200 Consensus
13.3
Consensus
10.0 46.5 J.P. Morgan forecast:
31 12.7 2,000
9.0 44.5 3.3
12.1 end Sep 10: 1950
27 8.0 11.5 1,800
42.5 end Dec 10: 2000
7.0 J.P. Morgan 3.1 J.P. Morgan
J.P. Morgan
10.9 40.5 J.P. Morgan Consensus end Mar 11: 2080
23 6.0 1,600
J.P.Morgan 10.3
38.5 2.9
Dec 04 Aug 06 Mar 08 Nov 09 Jun 11 5.0 9.7 Dec 04 Aug 06 Mar 08 Nov 09 Jun 11
Dec 04 Aug 06 Mar 08 Nov 09 Jun 11 Dec 04 Aug 06 Mar 08 Nov 09 Jun 11
Dec 04 Aug 06 Mar 08 Nov 09 Jun 11 Dec 04 Aug 06 Mar 08 Nov 09 Jun 11
Polish Zloty (PLN) Chilean Peso (CLP) Turkish Lira (TRL) Thai Baht (THB) Indonesian Rupiah (IDR) Hungarian Forint (HUF)
J.P.Morgan forecast: 2.0 J.P.Morgan forecast: 44 J.P.Morgan forecast: 13,500 J.P. Morgan forecast:
3.9 Consensus 725 J.P.Morgan forecast: 270 J.P. Morgan forecast:
3.7 end Sep 10: 3.12 1.9 end Sep 10: 1.50 42 end Sep 10: 31.5 end Sep 10: 8700 257 end Sep 10: 220
end Sep 10: 520 J.P. Morgan
675 12,500 end Dec 10: 8900 244
3.5 end Dec 10: 3.21 end Dec 10: 520 1.8 end Dec 10: 1.50 40 end Dec 10: 31.0 end Dec 10: 229
3.3 Consensus 1.7 end Mar 11: 9000 231
625 end Mar 11: 505 end Mar 11: 1.49 Consensus 38 end Mar 11: 30.5 11,500 end Mar 11: 229
end Mar 11: 3.22 218
3.1 1.6 36 205
2.9 575 1.5 Consensus
34 10,500 192
2.7 1.4 32 Consensus 179
525 Consensus
2.5 1.3 J.P.Morgan 30 9,500 166
J.P. Morgan
2.3 475 1.2 153
28 J.P. Morgan 140
2.1 J.P. Morgan J.P. Morgan 1.1 8,500
425
1.9 Dec 04 Aug 06 Mar 08 Nov 09 Jun 11 Dec 04 Aug 06 Mar 08 Nov 09 Jun 11 Dec 04 Aug 06 Mar 08 Nov 09 Jun 11
Dec 04 Aug 06 Mar 08 Nov 09 Jun 11 Dec 04 Aug 06 Mar 08 Nov 09 Jun 11
Dec 04 Aug 06 Mar 08 Nov 09 Jun 11
Czech Koruna (CZK) Peruvian Nuevo Sol (PEN) Philippine Peso (PHP)
26 3.8 J.P. Morgan forecast: 60 J.P. Morgan forecast:
end Sep 10: 2.84 end Sep 10: 43.25
24 3.5 56
end Dec 10: 2.85
end Dec 10: 42.75
Consensus
22 3.3 end Mar 11: 2.85 52 Consensus
end Mar 11: 42.75
20 J.P. Morgan 48
J.P. Morgan forecast: 3.0
18 44
end Sep 10: 20.60 2.8
end Dec 10: 21.25 Consensus 40 J.P. Morgan
16
J.P. Morgan 2.5
end Mar 11: 21.36 36
14
Dec 04 Aug 06 Mar 08 Nov 09 Jun 11
Dec 04 Aug 06 Mar 08 Nov 09 Jun 11 Dec 04 Aug 06 Mar 08 Nov 09 Jun 11
Expected % Gain vs USD till December 2010 (J.P. Morgan) Expected % Loss vs USD till December 2010 (J.P. Morgan)
12 0
-2
9
-4
6
-6
3 -8
0 -10
HUF
CZK
JPY
COP
ARS
EUR
ZAR
BRL
TWD
IDR
KRW
PHP
THB
ILS
INR
CLP
CNY
RUB
TRL
MYR
MXN
PLN
Source: Datastream, J.P. Morgan estimates Source: Datastream, J.P. Morgan estimates
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Spread (L) Yield Spread (L) Yield Spread (L) Yield Spread (L) Yield
Source: Bloomberg, J.P. Morgan. Source: CEIC, JP Morgan estimates, Moody's, Standard & Poor's, Bloomberg * Data from World Economic Outlook for April 2010 for Current Account data, ** F denotes forecast Note: Forex reserves as of 30 April 2010 or latest
available data. Updated 16 June 2010.
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Perspective: Emerging Markets Balance Sheets
No. of Companies Debt/Equity Debt/Assets Debt/Market. Cap Asset Turnover Current Ratio Interest Coverage Altman Z Score
China 105 0.56 0.26 0.66 0.77 1.03 7.8 4.9
Brazil 67 0.59 0.27 0.49 0.56 1.58 7.4 3.3
Korea 78 0.39 0.20 0.21 0.94 1.13 7.3 3.4
Taiwan 99 0.32 0.19 0.15 1.04 1.36 7.7 3.9
South Africa 34 0.46 0.22 0.17 0.87 1.31 5.2 4.3
India 52 0.80 0.33 0.23 0.73 1.42 5.9 4.1
Russia 25 0.60 0.32 0.66 0.53 1.28 9.8 3.7
Mexico 21 0.56 0.26 0.32 0.66 1.25 6.4 4.1
Malaysia 33 0.75 0.34 0.38 0.47 1.68 4.5 4.2
Chile 14 0.66 0.31 0.16 0.61 1.10 5.8 3.0
Indonesia 17 0.61 0.28 0.11 0.84 1.21 11.2 7.7
Turkey 12 0.67 0.27 0.37 1.14 1.17 6.1 3.3
Thailand 15 0.70 0.34 0.34 1.45 1.44 6.8 4.6
Poland 11 0.43 0.23 0.38 1.03 1.03 5.5 3.6
Czech Republic 2 0.40 0.19 0.17 0.43 0.85 22.6 3.1
Peru 2 0.38 0.22 0.05 0.65 2.11 22.2 9.7
Egypt 9 0.65 0.27 0.22 0.56 1.22 5.9 2.2
Colombia 5 0.35 0.23 0.17 0.44 1.30 1.1 5.5
Philippines 8 0.62 0.27 0.20 0.62 1.12 7.2 2.8
Hungary 3 0.56 0.28 0.35 1.00 1.35 4.6 5.1
Morocco 3 0.79 0.29 0.21 0.59 1.17 14.2 3.5
Debt to Equity Ratios Quartile Distribution Chart (x)
8
0
South Africa
India
Indonesia
Israel
Korea
China
Russia
Thailand
Chile
Poland
Peru
Morocco
Colombia
Brazil
Hungary
Czech Republic
Philippines
Egypt
Taiwan
Mexico
Malaysia
Turkey
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China 1354 0.6 0.3 0.1 73 6044 4465 17.6 16.8 9.9 9.3
Brazil# 194 1.2 0.4 0.1 102 2089 10793 12.5 11.1 3.1 1.7
Russia# 141 -0.1 0.2 0.2 93 1710 12109 20.7 21.2 5.9 6.4
India 1184 1.3 0.5 0.1 54 1675 1415 13.8 12.1 9.5 8.3
Mexico 111 1.0 0.5 0.1 80 1048 9462 6.1 4.8 1.5 0.4
Korea 48 0.1 0.3 0.1 91 1045 21673 7.0 6.6 6.3 5.6
Turkey 76 1.2 0.4 0.1 79 733 9686 14.0 12.5 3.2 1.9
Indonesia 233 1.2 0.4 0.1 64 727 3121 16.0 14.5 5.1 3.8
Poland 38 -0.1 0.2 0.2 97 510 13413 11.5 11.7 3.6 3.8
Taiwan 23 0.3 0.3 0.1 na 445 19222 3.1 2.8 3.0 2.7
Argentina 41 1.0 0.4 0.2 86 368 9071 2.6 1.6 3.2 2.2
South Africa 49 0.7 0.5 0.1 90 354 7229 10.3 9.2 3.2 2.2
Thailand 68 0.7 0.3 0.1 77 321 4703 10.2 9.2 4.0 3.3
Colombia 46 1.5 0.5 0.1 75 281 6066 12.9 11.8 3.9 2.2
Malaysia 28 2.0 0.5 0.1 76 238 8463 10.2 8.1 10.4 8.1
Egypt 78 2.0 0.5 0.1 87 236 3018 9.1 6.9 4.9 2.8
Czech Rep. 10 0.2 0.2 0.2 96 203 19530 13.6 13.4 3.1 3.0
Chile 17 1.0 0.4 0.1 89 194 11306 9.9 8.6 3.6 2.3
Philippines 94 1.8 0.6 0.1 86 192 2054 9.8 7.7 4.5 2.5
Peru 30 1.2 0.5 0.1 92 149 5044 10.8 9.1 5.4 3.8
Hungary 10 -0.1 0.2 0.2 97 137 13713 11.1 11.3 1.9 2.1
MSCI EM 3,918 1.0 19,038 4,859 13.8 13.3
Source: CEIC, Datastream, Bloomberg, US Consensus Bureau, World Bank, UNESCO, J.P. Morgan estimates
* Age dependency ratio defined as dependents to working-age population.
** Gross Enrollment Ratio is defined as pupils enrolled in a secondary level, regardless of age expressed as a percentage of the population in the relevant official age group
*** 10-year CAGR for period 2000-2010, in local currency. # CAGR for period 2000-2010 ## Population data based on IMF estimate as on October 2009.
Data for Gross enrollment data for 2004 except for Malaysia, Brazil and Argentina which is for 2003. Updated 16 June 2010.
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Consumer Staples
Telecom Services
Discretionary
Technology
Information
Health care
Industrials
Consumer
Financials
Materials
Utilities
Energy
MSCI Emerging
Total
Markets Free Index
China 0.9 1.1 3.2 7.1 0.2 1.4 1.0 1.0 2.4 0.4 18.5
Korea 1.8 0.6 0.3 2.2 0.1 1.9 4.2 1.8 0.4 0.3 13.5
Taiwan 0.3 0.2 0.1 1.6 0.4 6.5 1.3 0.5 10.8
India 0.4 0.5 1.2 2.0 0.3 0.8 1.4 0.9 0.1 0.5 8.0
Malaysia 0.3 0.4 0.0 0.9 0.5 0.0 0.3 0.3 2.8
Indonesia 0.3 0.2 0.3 0.7 0.1 0.2 0.3 0.2 2.3
Thailand 0.0 0.1 0.6 0.5 0.1 0.1 0.0 1.5
Philippines 0.0 0.2 0.1 0.1 0.1 0.5
Asia 4.1 3.1 5.7 15.2 0.6 5.1 13.0 5.3 4.2 1.7 57.9
South Africa 0.9 0.4 0.7 1.9 0.2 0.3 2.1 0.9 7.4
Russia 0.2 3.7 0.9 0.9 0.4 0.4 6.5
Poland 0.0 0.0 0.2 0.8 0.0 0.0 0.1 0.1 0.1 1.4
Turkey 0.0 0.2 0.1 1.0 0.2 0.0 0.2 1.7
Hungary 0.1 0.2 0.1 0.0 0.4
Egypt 0.2 0.1 0.0 0.1 0.5
Czech Republic 0.0 0.1 0.1 0.2 0.4
Morocco 0.1 0.1 0.2
EMEA 0.9 0.8 4.8 5.1 0.2 0.6 0.0 3.1 2.0 0.7 18.4
Brazil 0.8 1.4 3.7 3.9 0.5 0.4 4.3 0.5 0.8 16.1
Mexico 0.5 1.1 0.3 0.2 0.8 1.7 4.6
Chile 0.1 0.2 0.1 0.3 0.3 0.0 0.4 1.6
Peru 0.2 0.5 0.7
Colombia 0.0 0.2 0.3 0.2 0.1 0.8
LatAm 1.3 2.8 3.8 4.8 1.0 0.4 6.0 2.2 1.4 23.7
Total 6.3 6.7 14.4 25.1 0.8 6.7 13.4 14.5 8.4 3.7 100.0
Source: MSCI, J.P. Morgan. Updated 16 June 2010.
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Companies Recommended in This Report (all prices in this report as of market close on 18 June 2010)
Bank Rakyat Indonesia (BBRI.JK/Rp9,100/Underweight), Bharat Heavy Electricals (BHEL)
(BHEL.BO/Rs2,417.15/Overweight), Foschini (FOSJ.J/6,730c/Overweight), Hite Brewery
(103150.KS/W149,000/Underweight), Hynix Semiconductor (000660.KS/W28,150/Neutral), Hyundai Department Stores
(069960.KS/W113,500/Overweight), Hyundai Mobis (012330.KS/W207,500/Overweight), Hyundai Motor Company
(005380.KS/W144,500/Overweight), Indocement (INTP.JK/Rp16,050/Overweight), JD Group
(JDGJ.J/4,449c/Overweight), KB Financial Group (105560.KS/W49,700/Overweight), KEPCO
(015760.KS/W32,800/Overweight), Kia Motors (000270.KS/W31,900/Overweight), Korean Air
(003490.KS/W79,400/Neutral), LG Chem Ltd (051910.KS/W306,500/Overweight), LG Display
(034220.KS/W42,600/Overweight), LG Electronics (066570.KS/W97,300/Neutral), LG Innotek
(011070.KS/W166,000/Overweight), Lotte Shopping Co (023530.KS/W347,000/Overweight), Mechel
(MTL/$21.07/Overweight), POSCO (005490.KS/W465,000/Overweight), Samsung Electro-Mechanics
(009150.KS/W152,000/Overweight), Samsung Electronics (005930.KS/W822,000/Neutral), Semen Gresik (Persero) Tbk
(SMGR.JK/Rp9,000/Overweight), Shinhan Financial Group (055550.KS/W46,000/Overweight), Shinsegae
(004170.KS/W518,000/Overweight), S-Oil Corp (010950.KS/W52,300/Neutral), Tatneft (TATN.RTS/$4.60/Overweight),
Thanachart Capital (TCAP.BK/Bt26.00/Overweight), Unilever Indonesia Tbk (UNVR.JK/Rp16,800/Neutral), VTB
(VTBRq.L/$5.02/Overweight), Woori Financial Group (053000.KS/W16,050/Overweight)
Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
Important Disclosures
• Market Maker/ Liquidity Provider: JPMSL and/or an affiliate is a market maker and/or liquidity provider in Mechel, Tatneft,
VTB.
• Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for
Hyundai Motor Company, Kia Motors, Lotte Shopping Co, POSCO, Semen Gresik (Persero) Tbk, Unilever Indonesia Tbk, VTB,
Woori Financial Group within the past 12 months.
• Beneficial Ownership (1% or more): JPMSI or its affiliates beneficially own 1% or more of a class of common equity securities of
Hyundai Department Stores, Hyundai Motor Company, Unilever Indonesia Tbk.
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• Client of the Firm: Bank Rakyat Indonesia is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI
provided to the company non-investment banking securities-related services and non-securities-related services. Bharat Heavy
Electricals (BHEL) is or was in the past 12 months a client of JPMSI. Hynix Semiconductor is or was in the past 12 months a client
of JPMSI. Hyundai Mobis is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the
company non-investment banking securities-related services. Hyundai Motor Company is or was in the past 12 months a client of
JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-
related services and non-securities-related services. Indocement is or was in the past 12 months a client of JPMSI; during the past 12
months, JPMSI provided to the company non-investment banking securities-related services. KB Financial Group is or was in the
past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-
related services and non-securities-related services. KEPCO is or was in the past 12 months a client of JPMSI; during the past 12
months, JPMSI provided to the company non-investment banking securities-related services. Kia Motors is or was in the past 12
months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment
banking securities-related services and non-securities-related services. Korean Air is or was in the past 12 months a client of JPMSI;
during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. LG Chem Ltd is or
was in the past 12 months a client of JPMSI. LG Display is or was in the past 12 months a client of JPMSI; during the past 12
months, JPMSI provided to the company investment banking services and non-investment banking securities-related services. LG
Electronics is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment
banking services, non-investment banking securities-related services and non-securities-related services. Lotte Shopping Co is or was
in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services.
POSCO is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment
banking services and non-investment banking securities-related services. Samsung Electro-Mechanics is or was in the past 12
months a client of JPMSI. Samsung Electronics is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI
provided to the company investment banking services, non-investment banking securities-related services and non-securities-related
services. Semen Gresik (Persero) Tbk is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided
to the company investment banking services. Shinhan Financial Group is or was in the past 12 months a client of JPMSI; during the
past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services
and non-securities-related services. Tatneft is or was in the past 12 months a client of JPMSI. Thanachart Capital is or was in the past
12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related
services and non-securities-related services. Unilever Indonesia Tbk is or was in the past 12 months a client of JPMSI; during the
past 12 months, JPMSI provided to the company investment banking services. VTB is or was in the past 12 months a client of
JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-
related services and non-securities-related services. Woori Financial Group is or was in the past 12 months a client of JPMSI; during
the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services
and non-securities-related services.
• Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking
services from Hyundai Motor Company, Kia Motors, LG Display, LG Electronics, Lotte Shopping Co, POSCO, Samsung
Electronics, Semen Gresik (Persero) Tbk, Shinhan Financial Group, Unilever Indonesia Tbk, VTB, Woori Financial Group.
• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment
banking services in the next three months from Hyundai Motor Company, KB Financial Group, Kia Motors, LG Chem Ltd, LG
Display, LG Electronics, Lotte Shopping Co, POSCO, Samsung Electronics, Semen Gresik (Persero) Tbk, Shinhan Financial Group,
Unilever Indonesia Tbk, VTB, Woori Financial Group.
• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other
than investment banking from Bank Rakyat Indonesia, Hyundai Mobis, Hyundai Motor Company, Indocement, KB Financial Group,
KEPCO, Kia Motors, Korean Air, LG Display, LG Electronics, POSCO, Samsung Electronics, Shinhan Financial Group, Thanachart
Capital, VTB, Woori Financial Group. An affiliate of JPMSI has received compensation in the past 12 months for products or
services other than investment banking from Bank Rakyat Indonesia, Hyundai Motor Company, KB Financial Group, KEPCO, Kia
Motors, Korean Air, LG Chem Ltd, LG Display, LG Electronics, Samsung Electronics, Shinhan Financial Group, Thanachart
Capital, Unilever Indonesia Tbk, VTB, Woori Financial Group.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of Hynix Semiconductor and owns 3,497,790 as of 21-Jun-10.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of Hyundai Mobis and owns 3,264,900 as of 21-Jun-10.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of Hyundai Motor Company and owns 7,048,910 as of 21-Jun-10.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of KB Financial Group and owns 3,497,810 as of 21-Jun-10.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of Korea Electric Power Corporation and owns 3,445,000 as of 21-Jun-10.
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• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of Kia Motors and owns 3,500,000 as of 21-Jun-10.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of LG Chem Ltd and owns 7,099,890 as of 21-Jun-10.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of LG Display and owns 3,490,000 as of 21-Jun-10.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of LG Electronics and owns 2,514,600 as of 21-Jun-10.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of POSCO and owns 7,023,030 as of 21-Jun-10.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of Samsung Electro-Mechanics Co. Ltd. and owns 6,961,470 as of 21-Jun-10.
• J.P. Morgan Securities (Far East) Ltd, Seoul branch is acting as a Market Maker (Liquidity Provider) for the Equity Linked Warrants
of Samsung Electronics and owns 3,500,000 as of 21-Jun-10.
• MSCI: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior
written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or
used to create any financial products, including any indices. This information is provided on an 'as is' basis. The user assumes the
entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or
compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness
for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of
its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages
of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates.
Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies
under coverage for at least one year, are available through the search function on J.P. Morgan’s website
https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406)
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Figure 38: History of corrections in MSCI Emerging Markets: 20% corrections common in a bull market
16 Feb 94, 563 10 Jul 97, 571 10 Feb 00, 531.0 10 May 06, 879
24 Aug 94, 454 5 Oct 98, 241 3 Oct 01, 247 13 Jun 06, 665
Decline 19% Decline 58% Decline 54% 12-April-04, 497 Decline 24%
Duration 59 day s Duration 323 day s Duration 430 day s 17-May -04, 396 Duration 25 day s
Fed tightening Asian Crisis 2000 Global Correction Decline 20% Fear of Fed ov ertightening
1 Aug 90, 257
Duration 26 day s
16 Jan 91, 175
Start of Fed tightening
Decline 32%
Duration 121 day s 26 Feb 07, 940
Iraq inv ades Kuw ait 5 Mar 07, 844
Decline 10%
Duration 8 day s
22 Sep 94, 586 A-shares fall, US profit
9 Mar 95, 396 f
Decline 33%
22 Apr 92, 353 Duration 121days 23 July 07, 1163
24 Aug 92, 286 Mexican Tequila Crisis 31 October 2007, 1338
19 Feb 90, 239 25%rally 16 August 07, 957
Decline 19% 27 October 2008, 454
9 Apr 90, 198 Decline 18%
Duration 89 day s Decline 66%
Decline 17% Duration 19 day s
Brazilian Fall 18-Apr-02, 364 Duration 268 day s
Duration 36 day s 10-Oct-02, 254 US sub-prime and
Credit Crisis and EM
Decline 30% global credit market
Inflation
concerns
4.4
Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
95