As of December 31, Guide to the Markets

Transcription

1 1Q 2013 As of December 31, 2012 Guide to the Markets

2 Table of Contents EQUITIES ECONOMY FIXED INCOME INTERNATIONAL ASSET CLASS U.S. Market Strategy Team Dr. David P. Kelly, CFA david.p.kelly@jpmorgan.com Joseph S. Tanious, CFA joseph.s.tanious@jpmorgan.com Andrés D. Garcia-Amaya andres.d.garcia@jpmorgan.comd com Brandon D. Odenath brandon.d.odenath@jpmorgan.com David M. Lebovitz david.m.lebovitz@jpmorgan.com Gabriela D. Santos gabriela.d.santos@jpmorgan.com Anthony M. Wile anthony.m.wile@jpmorgan.com 2 Past performance is no guarantee of comparable future results.

3 Page Reference 3 Equities 4. Returns by Style 5. Returns by Sector 6. S&P 500 Index at Inflection Points 7. Stock Valuation Measures: S&P 500 Index 8. Earnings Estimates and Valuations by Style 9. Corporate Profits 10. Sources of Earnings per Share Growth 11. Confidence and the Capital Markets 12. Deploying Corporate Cash 13. Broad Market Lagged Price to Earnings Ratio 14. P/E Ratios and Equity Returns 15. Equity Correlations and Volatility Economy 16. Economic Growth and the Composition of GDP 17. Cyclical Sectors 18. Consumer Finances 19. Corporate Finances 20. Federal Finances: Outlays and Revenues 21. Federal Finances: Deficits and Debt 22. Tax Rates and the Distribution of Income & Taxes 23. Current Account Deficit and U.S. Dollar 24. The Aftermath of the Housing Bubble 25. Employment 26. Job Growth, Productivity and Labor Force 27. Employment and Income by Educational Attainment 28. Consumer Price Index 29. Returns in Different Inflation Environments 40 years 30. Oil and the Economy 31. Global Oil Supply 32. Domestic Natural Gas 33. Consumer Confidence and the Stock Market Fixed Income 34. Fixed Income Sector Returns 35. Interest Rates and Market Performance 36. Fixed Income Yields and Returns 37. The Fed and the Money Supply 38. Credit Conditions 39. High Yield Bonds 40. Municipal Finance 41. Emerging Market Debt International 42. Global Equity Markets: Returns and Composition 43. Global Economic Growth 44. Global Monetary Policy 45. The Importance of Exports 46. Global Manufacturing Wages 47. The Impact of Global Consumers 48. European Crisis: Fiscal Challenges 49. European Crisis: Sovereign Bond Yields 50. Chinese Growth and Economic Policy 51. Global Equity Valuations Developed Markets 52. Global Equity Valuations Emerging Markets 53. Emerging Market Equity Composition 54. International Economic and Demographic Data Asset Class 55. Asset Class Returns 56. Correlations: 10-Years 57. Mutual Fund Flows 58. Dividend Income: Domestic and Global 59. Global Commodities 60. Gold 61. Historical Returns by Holding Period 62. Diversification and the Average Investor 63. Annual Returns and Intra-year Declines 64. Cash Accounts 65. Corporate DB Plans and Endowments 66. The Dow Jones Industrial Average Since 1900

4 Returns by Style Charts reflect index levels (price change only). All returns and annotations reflect total return, including dividends. Equities S&P 500 Index 1,500 1,450 1,400 1, ,300 4Q12: -0.4% 2012: Q Value Blend Growth Value Blend Growth Mid Large 1.5% -0.4% -1.3% 3.9% 2.9% 1.7% Mid Large 17.5% % 18.5% 17.3% 15.8% 1,250 Dec-11 Mar-12 May-12 Aug-12 Oct-12 Dec-12 Small 3.2% 1.9% 0.4% Small 18.1% 16.3% 14.6% S&P 500 Index ,600 1,400 Since 10/9/07 Peak: +2.3% Since Market Peak (October 2007) Since Market Low (March 2009) Value Blend Growth Value Blend Growth Large -5.5% 2.3% 12.7% Large 135.7% 128.7% 129.9% 4 1,200 1, Since 3/9/09 Low: % 600 Dec-06 Mar-08 May-09 Aug-10 Oct-11 Dec-12 Mid % 11.6% Source: Russell Investment Group, Standard & Poor s, FactSet, J.P. Morgan Asset Management. Small 5.6% 8.2% 10.1% All calculations are cumulative total return, including dividends reinvested for the stated period. Since Market Peak represents period 10/9/07 12/31/12, illustrating market returns since the most recent S&P 500 Index high on 10/9/07. Since Market Low represents period 3/9/09 12/31/12, illustrating market returns since the S&P 500 Index low on 3/9/09. Returns are cumulative returns, not annualized. For all time periods, total return is based on Russell-style indexes with the exception of the large blend category, which is reflected by the S&P 500 Index. Past performance is not indicative of future returns. Mid Small 180.9% 168.9% 158.1% 161.2% 160.9% 159.9%

5 Returns by Sector Equities Financials Technology Health Care Industrials Energy Cons. Discr. Cons. Staples Telecom Utilities Materials S&P 500 Index S&P Weight 15.6% % % 10.6% 3.1% 3.4% 3.6% 100. Russell Growth Weight 4.6% 30.9% % % 12.5% 2.3% 0.2% Russell Value Weight 27.5% 6.4% 11.5% 9.2% 16.1% 8.3% 7.2% 3.4% 6.5% 3.9% 100. Since Market Peak (October 2007) Since Market Low (March 2009) 4Q Beta to S&P Forward P/E Ratio 10.9x 12.2x2x 12.6x 13.0x 11.0x 14.9x 15.1x1x 16.2x 14.3x 13.2x 12.5x 15-yr avg. 12.8x 23.8x 18.4x 16.9x 14.7x 18.7x 18.1x 17.5x 13.6x 16.2x 16.7x Trailing P/E Ratio 12.8x 14.6x 17.7x 14.6x 11.2x 15.4x 17.6x 40.9x 16.6x 18.5x 14.9x 20-yr avg. 15.8x 26.7x 24.1x 20.3x 18.1x 19.4x 21.1x 19.7x 14.4x 19.5x 19.5x Dividend Yield % 2.2% 2.5% 2.3% 1.6% 2.9% 4.7% 4.4% 2.8% 2.2% 20-yr avg. 2.1% 0.6% 1.5% 1.8% 1.8% % 3.8% 4.4% 2.1% 1.7% Source: Standard d & Poor s, Russell Investment t Group, FactSet, t J.P. Morgan Asset Management. All calculations are cumulative total return, not annualized, including dividends for the stated period. Since Market Peak represents period 10/9/07 12/31/12. Since Market Low represents period 3/9/09 12/31/12. Forward P/E Ratio is a bottom-up calculation based on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates. Trailing P/E ratios are bottom-up values defined as month-end price divided by the last 12 months of available reported earnings. Historical data can change as new information becomes available. Note that P/E ratios for the S&P 500 may differ from estimates elsewhere in this book due to the use of a bottom-up calculation of constituent earnings (as described) rather than a top-down calculation. This methodology is used to allow proper comparison of sector level data to broad index level data. Dividend yields are bottom-up values defined as the annualized value of the most recent cash dividend as a percent of month-end price. Beta calculations are based on 10 years of monthly price returns for the S&P 500 and its sub-indices. Past performance is not indicative of future returns. Weight rn Retur β P/E Div 5

6 S&P 500 Index at Inflection Points Equities S&P 500 Index 1,600 1,400 Mar. 24, 2000 P/E (fwd.) = 25.6x 1,527 Characteristic Mar-2000 Oct-2007 Dec-2012 Index level 1,527 1,565 1,426 P/E ratio (fwd.) 25.6x 15.2x 12.5x Dividend yield 1.1% 1% 1.8% 2.2% 2% 10-yr. Treasury 6.2% 4.7% 1.8% Oct. 9, 2007 P/E (fwd.) = 15.2x 1,565 Dec. 31, 2012 P/E (fwd.) = 12.5x 1,426 1, % +101% ,000-49% -57% +111% 800 Dec. 31, 1996 Oct. 9, 2002 P/E (fwd.) = 16.0x Mar. 9, 2009 P/E (fwd.) = 14.1x P/E (fwd.) = 10.3x '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Source: Standard & Poor s, First Call, Compustat, FactSet, J.P. Morgan Asset Management. Dividend yield is calculated as the annualized dividend rate divided by price, as provided by Compustat. Forward Price to Earnings Ratio is a bottom-up calculation based on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates. Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future results. 6

7 Stock Valuation Measures: S&P 500 Index Equities S&P 500 Index: Valuation Measures Historical Averages Valuation 1-year 3-year 5-year 10-year 15-year Latest* Measure Description ago avg. avg. avg. avg. P/E Price to Earnings 12.5x 11.8x 12.6x 12.8x 14.2x 16.7x P/B Price to Book P/CF Price to Cash Flow P/S Price to Sales PEG Price/Earnings to Growth Div. Yield Dividend Yield 2.4% 2.3% 2.2% 2.3% 2.1% 1.9% S&P 500 Shiller Cyclically Adjusted P/E Adjusted using trailing 10-yr. avg. inflation adjusted earnings 50x 40x S&P 500 Earnings Yield vs. Baa Bond Yield 1 S&P 500 Earnings Yield: 9% (Inverse of fwd. P/E) 8. 8% 30x 20x Average: 19.0x 4Q12: 21.1x 7% 6% 5% 10x 4% Moody s Baa Yield: 4.6% 7 0x '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 3% '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Source: (Top) Standard & Poor s, FactSet, Robert Shiller Data, J.P. Morgan Asset Management. Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months. Price to Book is price divided by book value per share. Data post-1992 include intangibles and are provided by Standard & Poor s s. Price to Cash Flow is price divided by consensus analyst estimates of cash flow per share for the next 12 months. Price to Sales is calculated as price divided by consensus analyst estimates of sales per share for the next 12 months. PEG Ratio is calculated as NTM P/E divided by NTM earnings growth. Dividend Yield is calculated as consensus analyst estimates of dividends for the next 12 months divided by price. All consensus analyst estimates are provided by FactSet. (Bottom left) Cyclically adjusted P/E uses as reported earnings throughout. *Latest reflects data as of 12/31/2012. (Bottom right) Standard & Poor s, Moody s, FactSet, J.P. Morgan Asset Management.

8 Earnings Estimates and Valuations by Style Equities S&P 500 Index: Forward P/E Ratio 28x 24x 20x Average: 16.1x 16x 12x Dec. 2012: 12.5x 8x '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 S&P 500 Operating Earnings Estimates Consensus estimates of the next twelve months rolling earnings $120 4Q12: $ Current P/E vs. 20-year avg. P/E Small Mid Lar rge Value Blend Growth Current P/E as % of 20-year avg. P/E E.g.: Large Cap Blend stocks are 23.1% cheaper than their historical average. Value Blend Growth $100 $80 $60 $40 Large Mid 84.8% 76.9% 72.7% % 76.6% 8 $20 $0 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Small 92.9% 85.7% 76.6% Source: (Top and bottom left) Standard & Poor s, FactSet, J.P. Morgan Asset Management. (Right) Russell Investment Group, IBES, FactSet. Earnings estimates are for calendar years and taken at quarter end dates throughout the year. Forward Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months. P/E ratios are calculated and provided by Russell based on IBES consensus estimates of earnings over the next 12 months except for large blend, which is the S&P 500.

9 Corporate Profits Equities S&P 500 Earnings Per Share Operating basis, quarterly $26 $23 $20 2Q07: $ Q12: $24.36 Adjusted After-Tax Corporate Profits (% of GDP) Includes inventory and capital consumption adjustments 11% 3Q12: 96% 9.6% 1 9% $17 8% $14 $11 $8 7% 6% 50-yr. avg.: 6.2% $5 5% $2 4% -$1 3% '02 '04 '06 '08 '10 '12 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 Source: Standard & Poor s, Compustat, BEA, J.P. Morgan Asset Management. EPS levels are based on operating earnings per share. Most recently available data is 3Q12. Past performance is not indicative of future returns. 9

10 Sources of Earnings per Share Growth Equities S&P 500 Year-Over-Year EPS Growth Growth broken into revenue growth and margin expansion, quarterly Margin Share of EPS Growth Revenue Share of EPS Growth Q94 3Q96 3Q98 3Q00 3Q02 3Q04 3Q06 3Q08 3Q10 3Q12 Source: Standard & Poor s, Compustat, J.P. Morgan Asset Management. EPS levels are based on operating earnings per share. Most recently available data is 2Q12. *3Q12 data are Standard & Poor s estimates. Past performance is not indicative of future returns. 4Q2008, 1Q2010 and 2Q2010 reflect -101%, 92% and 51% growth in operating earnings, and are adjusted on the chart. 10

11 Confidence and the Capital Markets Equities 11 Multiple Expansion and Contraction S&P 500 forward P/E based on consensus EPS estimates 26x Forward P/E 24x 22x 20x 18x 16x 14x 12x 10x Correlation Coefficient: 0.75 Est. impact of a 10pt. rise in sentiment: +2.0 multiple points* Consumer Sentiment '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Sentiment & Real Yields Real yield based on nominal 10-yr. yield minus year-over-year core CPI 6% 5% 4% 3% 2% 1% -1% Real 10-year Yield Correlation Coefficient: 0.68 Est. impact of a 10pt. rise in sentiment: +54 basis points* Consumer Sentiment '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Source: (Top) Standard & Poor s, FactSet, J.P. Morgan Asset Management. (Bottom) U.S. Treasury, BLS, University of Michigan, J.P. Morgan Asset Management. Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next twelve months. Real 10- year Treasury yields are calculated as the daily Treasury yield less year-over-year core inflation for that month. *Estimated impact based on coefficients from regression analysis

12 Deploying Corporate Cash Equities Corporate Cash as a % of Current Assets S&P 500 companies cash and cash equivalents, quarterly 3 28% 26% 24% 22% 2 18% 16% Corporate Growth $bn, nonfarm nonfinancial capex, quarterly value of deals completed $1,300 Capital Expenditures M&A Activity $1,600 $1,200 $1,400 $1,100 $1,200 $1,000 $1,000 $800 $900 $600 $800 $400 $700 $200 14% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Dividend Payout Ratio S&P 500 companies, LTM $600 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Cash Returned to Shareholders S&P 500 companies, rolling 4-quarter averages, billions USD $33 Dividends per Share $30 $27 $24 $21 $18 Share Buybacks $0 $160 $140 $120 $100 $80 $60 $ '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Source: Standard & Poor s, FRB, Bloomberg, FactSet, J.P. Morgan Securities, J.P. Morgan Asset Management. $15 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 (Top left) Standard & Poor s, FactSet, J.P. Morgan Asset Management. (Top right) M&A activity is the quarterly value of deals completed and capital expenditures are for nonfarm nonfinancial corporate business. (Bottom left) Standard & Poor s, FactSet, J.P. Morgan Asset Management. (Bottom right) Standard & Poor s, Compustat, FactSet, J.P. Morgan Asset Management. $20

13 Broad Market Lagged Price to Earnings Ratio Lagged P/E Ratio All U.S. Corporations Ratio of market value of all U.S. corporations to adjusted after-tax corporate profits for prior four quarters 35x Equities 30x 25x P/E Ratios Avg. During Recessions 12.6x Avg. During Expansions 13.9x December 31, x 20x 15x Average: 13.7x 10x Dec. 31, 2012*: 13.1x 5x 13 0x '52 '55 '58 '61 '64 '67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 '12 Source: BEA, Federal Reserve Board, Wilshire Associates, J.P. Morgan Asset Management. *The December 31, 2012 price is a J.P. Morgan Asset Management estimated based on the daily value of the Wilshire 5000 Total Market Index.

14 P/E Ratios and Equity Returns P/E and Total Return Over 1-yr. Periods Quarterly, 1Q 1952 to 3Q Current P/E: 13.1 P/E and Total Return Over 5-yr. Annualized Periods Quarterly, 1Q 1952 to 3Q Current P/E: 13.1 Equities 4 12/31/12 Implied Annual Return 15.1% Standard Error 17.2% 4 12/31/12 Implied Annual Return 13.2% Standard Error 5.7% 2 2 5x 10x 15x 20x 25x 30x 5x 10x 15x 20x 25x 30x Source: BEA, FRB, J.P. Morgan Asset Management. Prices are based on the market value of all U.S. corporations and include quarterly dividends. Valuation based on long-term PE ratio. Note: Orange line denote results of linear regression with R-squared of 0.15 for 1-yr. returns (left) and 0.35 for 5-yr. returns (right).

15 Equity Correlations and Volatility Equities Large Cap Stocks Correlations Among Stocks 7 Great Depression / 6 World War II Cuban Missile Crisis OPEC Oil Crisis 1987 Crash Tech Bust & 9/11 Lehman Bankruptcy Sovereign Debt Crisis 2 1 Average: 26.7% Dec. 2012: 34.4% '26 '32 '38 '44 '50 '56 '62 '68 '74 '80 '86 '92 '98 '04 '10 Daily Volatility of DJIA 3.5% % % % DJIA vol. shown in 3-month moving average Volatility Measure 08 Peak Average Latest DJIA (Left) % 0.53% VIX (Right) '30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 ' Source: (Top) Empirical Research Partners LLC, Standard & Poor s, J.P. Morgan Asset Management. Capitalization weighted correlation of top 750 stocks by market capitalization, daily returns, 1926 Dec. 31, (Bottom) CBOE, Dow Jones, J.P. Morgan Asset Management. DJIA volatility are represented as three-month moving averages of the daily absolute percentage change in the Dow Jones Industrial Average. Charts shown for illustrative purposes only.

16 Economic Growth and the Composition of GDP Econom my Real GDP % chg at annual rate 1 8% 6% 4% 2% -2% -4% -6% -8% yr avg. 3Q12 Real GDP: 2.5% 3.1% $625 bn of output lost $951 bn of output recovered '04 '06 '08 '10 '12 Components of GDP 3Q12 nominal GDP, billions USD $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 -$2, % Housing 10.7% Investment ex-housing 19.6% Gov t Spending 71. Consumption - 3.3% Net Exports Source: BEA, FactSet, J.P. Morgan Asset Management. GDP values shown in legend are % change vs. prior quarter annualized and reflect 3Q12 GDP. 16

17 Cyclical Sectors Econom my Light Vehicle Sales Millions, seasonally adjusted annual rate Average: 15.1 Nov. 2012: 15.5 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Housing Starts Thousands, seasonally adjusted d annual rate 2,400 Change in Private Inventories Billions of 2005 dollars, seasonally adjusted annual rate $150 $100 $50 $0 $-50 3Q12: 61.3 Average: 28.8 $100 $-100 $-150 $-200 '95 '00 '05 '10 Real Capital Goods Orders Non-defense capital goods orders ex. aircraft, $ bn, seasonally adjusted $ ,000 1, ,200 Average: 1,384 Nov. 2012: '95 '00 '05 '10 $70 $65 $60 $55 $50 $45 Average: 57.3 Nov. 2012: 55.8 $40 '98 '00 '02 '04 '06 '08 '10 '12 Source: (Top left) BEA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, FactSet, J.P. Morgan Asset Management. (Bottom left) Census Bureau, FactSet, J.P. Morgan Asset Management. (Bottom right) Census Bureau, FactSet, J.P. Morgan Asset Management. Capital goods orders deflated using the producer price index for capital goods.

18 Consumer Finances Consumer Balance Sheet Trillions of dollars outstanding, not seasonally adjusted $80 $70 Total Assets: $78.2tn Homes: 25% 2Q- 07 Peak: $81.5tn 1Q- 09 Low: $65.2tn Household Debt Service Ratio Debt payments as % of disposable personal income, seasonally adjusted 15% 14% 3Q07: 14.1% Econom my $60 $50 Other Tangible: 7% Deposits: 1 13% $40 Pension Funds: 18% 12% $30 $20 Other Financial Assets: 41% Revolving (e.g.: credit cards): 6% Non-revolving: 14% Other Liabilities: 8% Total Liabilities: $13.4tn 11% 1Q80: 11.1% $10 4Q12*: Mortgages: 72% 10.4% 1 $0 '80 '85 '90 '95 '00 '05 '10 Source: (Left) FRB, J.P. Morgan Asset Management. Data includes households and nonprofit organizations. (Right) BEA, FRB, J.P. Morgan Asset Management. *4Q12 Household Debt Service Ratio is a J.P. Morgan Asset Management estimate. 18

19 Corporate Finances Corporate Financing Gap Nonfarm nonfinancial corporate business, billions USD $1,600 $1,400 Total Internal Funds Total Capital Expenditures Total Leverage S&P 500, ratio of total debt to total equity, quarterly 24 Econom my 19 $1,200 $1,000 $800 $600 $400 Companies must borrow Companies can fund internally '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Interest Coverage Ratio (EBIT / Net Interest) S&P 500, quarterly 9x 8x 7x 6x 5x 4x 3x 2x 1x 0x 2Q12: 6.8x '94 '96 '98 '00 '02 '04 '06 '08 '10 ' Average: 173% 4Q12 : 107% '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Source: Federal Reserve, Compustat, Standard & Poor s, FactSet, J.P. Morgan Asset Management. (Top Left): All data is from the Fed s Flow of Funds tables report Z.1, F.102 lines 9 and 11. Total internal funds equals retained earnings plus depreciation.

20 Federal Finances: Outlays and Revenues The 2012 Federal Budget CBO Baseline forecast, trillions USD $4.0 26% Federal Outlays and Receipts , % of GDP Total Spending: $3.6tn Econom my $3.5 $3.0 $2.5 $2.0 Other $482bn (14%) Net Int.: $220bn (6%) Non-defense Discretionary: $620bn (17%) Defense: $669bn (19%) Borrowing: $1,158bn (32%) Other: $226bn (6%) Social Insurance: $841bn (23%) 24% 22% 2 Average: 20.5% 2012: 22.8% $1.5 $1.0 $0.5 18% Social Security: Corp.: $237bn (7%) $768bn (22%) Average: 17.9% Medicare & Medicaid: $804bn (23%) Income: $1,165bn (32%) 16% Revenues Outlays 2012: 15.8% 20 $0.0 14% Total Government Spending Sources of Financing Source: U.S. Treasury, BEA, OMB, CBO, J.P. Morgan Asset Management Federal Budget is based on the CBO s August 2012 Baseline Scenario. Note: Years shown are fiscal years (Oct. 1 through Sep. 30). Revenue breakout is based on 2012 tax revenue estimates from the Office of Management and Budget.

21 Federal Finances: Deficits and Debt Econom my Federal Budget Surplus/Deficit Federal Net Debt (Accumulated Deficits) % of GDP, % of GDP, % -1-8% -6% -4% Adjusted CBO Baseline Scenario New Year s Compromise Scenario Forecast Adjusted CBO Baseline Scenario New Year s Compromise Scenario 2012 actual: 72.5% Forecast 2022: 72.8% 2022: 58.3% -2% 4 2 2% 4% Source: U.S. Treasury, BEA, CBO, J.P. Morgan Asset Management numbers are actuals. Note: Years shown are fiscal years (Oct. 1 through Sep. 30). Chart on the left displays federal surplus/deficit (revenues outlays). Federal net debt comprises all financial liabilities of the Federal government (gross debt) minus all intra-government holdings as assets. Deficit and debt scenarios are based on CBO budget forecasts from August 2012 and the CBO cost estimate for the American Taxpayer Relief Act, as passed by the Senate on January 1,

22 Tax Rates and the Distribution of Income & Taxes Historical Average Maximum Tax Rates by Decade 10 8 Dividendsid d Share of Income and Taxes by Income Level Based on adjusted gross income and federal taxes, 2009 Income Econom my Capital Gains Wage Income 1930's 1940's 1950's 1960's 1970's 1980's 1990's 2000's Current Top 5% 31.7% Potential Tax Rate Changes 2012 and 2013 maximum federal tax rates under current law Taxes % 37.9% % 23.8% % 12.4% Top 5% 58.7% 5% to 25% 34.1% Bottom 75% 34.2% 5% to 25% 28.6% Bottom 75% 12.7% Wage Income Capital Gains* Dividends* Payroll Tax** Estate Tax*** Source: (Top left) IRS, J.P. Morgan Asset Management. Wage income tax rates include employer and employee contributions to the Medicare tax. (Bottom left) IRS, The Tax Foundation, J.P. Morgan Asset Management. Tax rates based on maximum U.S. individual income tax. Wage income tax rates include employer and employee contributions to the Medicare tax. *Includes recently enacted healthcare tax of 3.8%. **In 2011 and 2012, the payroll tax cut reduced the employee s share of Social Security taxes by 2% and was allowed to expire for Rates shown include both employer and employee contributions to the payroll tax. ***For 2013, the estate tax exemption amount remained at $5.12 million. (Right) IRS, J.P. Morgan Asset Management. Taxes paid are based on federal individual income taxes, which are responsible for about 25% of the nation's taxes paid.

23 Current Account Deficit and U.S. Dollar Current Account Balance, % of GDP -8% 4Q05: -6.5% U.S. Dollar Index Nominal trade-weighted exchange index: major currencies Econom my -6% -4% % 3Q12: -2.7% Mar. 2009: Mar. 2008: 70.3 Dec. 2012: '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Source: BEA, FactSet, J.P. Morgan Asset Management. Source: Federal Reserve, FactSet, J.P. Morgan Asset Management. Data are as of 12/31/12 and are reported quarterly. 23

24 The Aftermath of the Housing Bubble Home Prices Indexed to 100, seasonally adjusted Case Shiller 20-city FHFA Purchase Only Average Existing Home Monthly Rent vs. Monthly Mortgage Payment Vacant properties $1,100 $950 $800 Monthly Mortgage Payment 4Q12*: $718 $650 Econom my $500 $350 Monthly Rent 4Q12*: $481 $200 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Home Inventories 120 Millions, annual rate, seasonally adjusted d '03 '04 '05 '06 '07 '08 '09 '10 '11 ' Nov. 2012: 2.2 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Sources: (Left) National Association of Realtors, Standard & Poor s, FHFA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, J.P. Morgan Asset Management. Monthly mortgage payment assumes a 2 down payment at prevailing 30-year fixed-rate mortgage rates; analysis based on median asking rent and median mortgage payment based on asking price. (Bottom right) Census Bureau, National Association of Realtors, J.P. Morgan Asset Management. *4Q12 rent and mortgage payment values are J.P. Morgan Asset Management estimates. 24

25 Employment Civilian Unemployment Rate Seasonally adjusted 12% Employment Total Private Payroll Total job gain/loss (thousands) % 400 Econom my 1 9% 8% 7% Nov. 2012: 7.7% mm jobs lost 5.1mm jobs gained 6% % 50-yr. avg.: 6.1% % % '70 '80 '90 '00 '10-1,000 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Source: BLS, FactSet, J.P. Morgan Asset Management. Source: BLS, FactSet, J.P. Morgan Asset Management. 25

26 Job Growth, Productivity and Labor Force 20 Years Net Job Creation Net change in millions of payroll jobs, seasonally adjusted Labor Productivity: Output per Hour Nonfarm business productivity, % change year-over-year 8% Fin. & Bus. Services 6.9 6% 40-yr. average: 1.9% Health Care 6.8 4% 2% Econom my Leisure & Hospitality Education % -4% '75 '80 '85 '90 '95 '00 '05 '10 3Q12: 1.7% Trade & Retailing 3.6 Other Services 1.1 Mining & Construction 1.1 Government 0.8 Manufacturing Source: BLS, FactSet, J.P. Morgan Asset Management. Data as of 12/31/12. Labor Force Participation Rate % of population aged 16+ working or looking for work 68% 67% 66% 65% 64% 40-yr. average: % Nov. 2012: 63.6% 62% 61% 6 59% '75 '80 '85 '90 '95 '00 '05 '10 Source: BLS, FactSet, J.P. Morgan Asset Management. 26

27 Employment and Income by Educational Attainment Unemployment Rate by Education Level 18% Average Annual Earnings by Highest Degree Earned Full-time workers aged 25 and older, 2009, USD $90,000 $87,194 16% 14% Less than High School Degree High School No College Some College College or Greater $80,000 $70, K Econom my 12% 1 Nov. 2012: 12.2% Nov. 2012: 8.1% $60,000 $50,000 $56,665 8% $40, K 6% $30,627 Nov. 2012: $30, % 4% 2% Nov. 2012: 3.8% $20,000 $10,000 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Source: BLS, FactSet, J.P. Morgan Asset Management. Unemployment rates shown are for civilians aged 25 and older. $0 High School Graduate Bachelor's Degree Advanced Degree Source: Census Bureau, J.P. Morgan Asset Management. 27

28 Consumer Price Index CPI and Core CPI % change vs. prior year, seasonally adjusted 15% 12% 50-yr. Avg. Nov Headline CPI: 4.2% 1.8% Core CPI: 4.1% 1.9% CPI Components Weight in CPI 12-month Change Food & Bev. 15.3% 1.8% Housing % Apparel 3.6% 1.8% Econom my 9% 6% Transportation 16.9% 1.6% Medical Care 7.1% 3.4% Recreation % Educ. & Comm. 6.8% 1.5% 3% Other 34% 3.4% 15% 1.5% Headline CPI % Less: Energy 9.7% 0.3% Food 13.7% 1.8% 28-3% '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 Source: BLS, FactSet, J.P. Morgan Asset Management. CPI used is CPI-U and values shown are % change vs. 1 year ago and reflect November 2012 CPI data. CPI component weights are as of December 2011 and 12-month change reflects non-seasonally adjusted data through November Core CPI is defined as CPI excluding food and energy prices. Core CPI 76.6% 1.9%

29 Returns in Different Inflation Environments 40 years Rising inflation scenarios Falling inflation scenarios Econom my 29 High and Rising Inflation High and Falling Inflation Occurred 14 times since 1972 Occurred 6 times since % 2 15% 1 5% -5% -1-15% 5% 2% Low and Rising Inflation Occurred 7 times since % 2 15% 1 5% -5% -1-15% 7% 13% Bonds Equities Cash Commodities 6% 2 3% 17% Bonds Equities Cash Commodities 25% 2 15% 1 5% -5% -1-15% 18% 23% Low and Falling Inflation Occurred 13 times since % 2 15% 1 5% 8% -15% Bonds Equities Cash Commodities Source: BLS, Barclays Capital, Robert Shiller, Federal Reserve, Strategas/Ibbotson, Standard & Poor s, FactSet, J.P. Morgan Asset Management. High or low inflation distinction is relative to median CPI-U inflation for the period 1971 to Rising or falling inflation distinction is relative to previous year CPI-U inflation rate. Bond returns are based on the Barclays U.S. Aggregate index since its inception in 1976 and a composite bond index prior to that. Equity returns based on S&P 500 price return and annual dividend yield (total return). Cash returns are based on the Barclays 1-3 Month T-Bill index since its inception in 1992 and 3-month T-Bill rates prior to that. Commodities returns based on S&P GSCI. For illustrative purposes only. Past performance is not indicative of comparable future returns. -5% -1-15% 8% 12% 4% 6% Bonds Equities Cash Commodities Above median Median Inflation: 3.3% Below medi an

30 Oil and the Economy WTI Crude Oil & Retail Gasoline Prices $160 $4.50 Oil 12/31/00 12/31/12 Gas Oil $26.72 $91.82 Gas $1.41 $3.26 $140 $4.00 Economic Drag From Oil Prices U.S. petroleum imports as a % of GDP 4% 3% 3Q08: 3.8% $120 $3.50 2% Econom my $100 $80 $60 $40 $3.00 $2.50 $2.00 $1.50 1% 4Q12*: 2.7% '70 '75 '80 '85 '90 '95 '00 '05 '10 Oil Prices and Consumption per Country Gasoline price per gallon, USD, annual barrels of oil consumed per capita Energy $12 Spending by Income Level Annual Barrels of Oil Consumed per Capita (Right) % of after-tax income $10 $8 Gasoline Price per Gallon (Left) $8.18 $8.18 $ bbls 25bbls 20bbls $6 $5.45 $ bbls $20 $1.00 $4 $ bbls $2 5bbls 30 $0 $0.50 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Source: U.S. Department of Energy, FactSet, J.P. Morgan Asset Management. Price of gas based on U.S. retail national average of all formulations and WTI for crude. $0 U.S. U.K. France Germany China India Source: (Top) BEA, FactSet, J.P. Morgan Asset Management. (Bottom) EIA, J.P. Morgan Asset Management. *4Q12 drag on growth is a J.P. Morgan Asset Management estimate. 0bbls

31 Global Oil Supply Econom my Middle East Energy Production & Chokepoints Percent of global liquid fuel production, 2011 Suez Canal 2.2% Libya 0.6% Syria 0.5% Iraq 3. Egypt 0.8% Saudi Arabia 12.8% Sudan 0.5% Kuwait 3.1% Iran 4.9% Strait of Hormuz 17. UAE 3.6% U.S. Commercial & Strategic Oil Stocks Days of net imports Mar. 2004: 128 days U.S. Commercial Oil Stocks U.S. Strategic Petroleum Reserve Nov. 2012: 260 days 0 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Total U.S. Energy Net Imports % of total energy consumption 35% 3 EIA forecast 31 Bab el-mandeb 3.4% Major Producers Major Consumers Percent of global total, 2011 Percent of global total, 2011 Saudi Arabia 13% China 5% United States 22% India 4% Russia 12% Iran 5% China 1 Saudi Arabia 3% United States 12% Canada 4% Japan 5% Brazil 3% 25% 2 15% 1 5% '90 '95 '00 '05 '10 '15 '20 Source: EIA, J.P. Morgan Asset Management. Forecasts are from the EIA Annual Energy Outlook Imports are mostly crude oil, petroleum and natural gas while consumption includes oil, gas, coal, nuclear, hydropower and bio-fuels.

32 Domestic Natural Gas Econom my 32 U.S. Natural Gas Production Trillions of cubic feet per year Other EIA forecast Shale Gas Source: EIA, BP, Federal Energy Regulatory Commission, J.P. Morgan Asset Management. *mmbtu represents 10,000 million British thermal units. U.S. Natural Gas Reserves and Prices Trillions of cubic meters, USD Reserves Natural Gas Price '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 Natural Gas Prices by Country USD per mmbtu* $16 $14 $12 $10 $8 $6 $4 $2 $0 $4.03 $10.11 $13.70 $14.10 United States United Kingdom China Japan $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0

33 Consumer Confidence and the Stock Market Consumer Sentiment Index University of Michigan 130 Average 12-month S&P 500 index return Econom my After a peak: +1.1% 1% After a trough: +22.2% 2% Total period: +6.6% 6% Aug % May % Mar % Jan Jan % Jan % Average: 85.3 Mar % Oct % Feb % May % Oct % Nov % Aug % '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Source: University of Michigan, FactSet, J.P. Morgan Asset Management. Peak is defined as the highest index value before a series of lower lows, while a trough is defined as the lowest index value before a series of higher highs. Subsequent 12-month S&P 500 returns are price returns only, which excludes dividends.

34 Fixed Income Sector Returns 10-yrs '03 - ' Q12 Cum. Ann. High Yield EMD EMD High Yield TIPS Treas. High Yield High Yield TIPS EMD EMD EMD EMD Fixed In ncome % 12.3% 11.8% 11.6% 13.7% 58.2% 15.1% 13.6% 17.9% 3.3% 200.3% 11.6% EMD High Yield Asset Alloc. EMD Treas. MBS EMD EMD Muni High Yield High Yield High Yield High Yield 26.9% 11.1% 3.6% % 34.2% 12.8% 10.7% 15.8% 3.3% 174.3% 10.6% Asset Barclays Barclays Asset Asset TIPS Muni MBS Corp. Corp. Treas. Corp. Corp. Alloc. Agg Agg Alloc. Alloc. 9.7% 8.5% 3.5% 5.2% % 18.7% % 9.8% 1.1% 94.3% 6.9% Asset Asset Asset Asset Asset Asset Asset Asset TIPS TIPS MBS TIPS TIPS Alloc. Alloc. Alloc. Alloc. Alloc. Alloc. Alloc. Alloc. 8.4% 6.3% 2.8% 5.1% 6.9% -1.4% 15.8% 7.6% 8.9% 7.8% % 6.7% Asset Barclays Corp. Corp. Treas. Muni TIPS Muni Corp. TIPS TIPS Corp. Corp. Alloc. Agg 8.2% 5.4% 2.8% 4.8% 6.2% -2.4% 12.9% 6.5% 8.1% % 84.7% 6.3% Muni MBS High Yield Barclays Barclays Barclays Barclays EMD Muni TIPS TIPS Muni Muni Agg Agg Agg Agg 5.3% 4.7% 2.7% 4.3% 5.2% -2.5% 11.4% 6.3% 7.8% 6.8% 0.7% 65.8% 5.2% Barclays Barclays Barclays Barclays Muni MBS Corp. Corp. Corp. Treas. EMD Muni Muni Agg Agg Agg Agg 4.1% 4.5% 2.6% 4.3% 4.6% -4.9% 5.9% 5.9% % 0.2% 64.5% 5.1% Barclays Barclays MBS Treas. Muni EMD MBS MBS MBS MBS Treas. MBS MBS Agg Agg 3.1% 4.3% 2.4% 3.1% 3.4% -14.7% 5.9% 5.4% 6.2% 2.6% -0.1% 64.1% 5.1% Treas. Treas. Corp. TIPS High Yield High Yield Treas. Muni High Yield Treas. MBS Treas. Treas % 3.5% 1.7% 0.4% 1.9% -26.2% -3.6% 2.4% % % Source: Barclays Capital, FactSet, J.P. Morgan Asset Management. Past performance is not indicative of future returns. Fixed income sectors shown above are provided by Barclays Capital and are represented by: Barclays Capital U.S. Aggregate Index; MBS: Fixed Rate MBS Index; Corporate: U.S. Corporates; Municipals: Muni Bond Index; Emerging Debt: Emerging Markets Index; High Yield: Corporate High Yield Index; Treasuries: Barclays Capital U.S. Treasury; TIPS: Barclays Capital TIPS. The Asset Allocation portfolio assumes the following weights: 1 in MBS, 2 in Corporate, 15% in Municipals, 1 in Emerging Debt, 1 in High Yield, 25% in Treasuries, 1 in TIPS. Asset allocation portfolio assumes annual rebalancing.

35 Interest Rates and Market Performance 10-Year Treasury Yields and Real Capital Market Returns 18% 16% Sep. 30, 1981: 15.84% 14% 12% Fixed In ncome 1 8% 6% Dec. 31, 2012: 1.76% 4% 35 2% Rising Rate Corp. Bonds S&P % Ann. Inflation Ann. Real Return % Falling Rate Corp. Bonds S&P % 11. Ann. Inflation 3.1% 3.1% Ann. Real Return 6.8% 7.7% '58 '60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Source: Federal Reserve, Standard & Poor s, BLS, Strategas, J.P. Morgan Asset Management. All returns above reflect annualized total returns, which include reinvestment of dividends. Corporate bond returns are based on a composite index of investment grade bond performance.

36 Fixed Income Yields and Returns Fixed In ncome 36 U.S. Treasuries # of issues Mkt. Value Avg. Maturity 12/31/ /31/ Q12 Yield Return 2-Year 2 years 0.25% 0.25% 0.31% 0.05% 5-Year # of issues: Year Total value: $5.209 tn Year Sector Broad Market 8,109 $16,973 bn 7.0 years 1.74% 2.24% 4.22% 0.22% MBS 805 5, Corporates 4,435 3, Municipals 46,472 1, Emerging Debt High Yield 2,013 1, TIPS Price Impact of a 1% Rise/Fall in Interest Rates +1% 25% % 2 15% 1 5% -5% -1-15% -2-25% % -4.9% 3.5% % Year 5-Year 10-Year 30-Year MBS High Yield Broad Mkt. 3.2% 4.1% 5.1% 5.6% 6.7% 6.8% 7.2% -3.2% -4.1% -5.1% -5.6% -6.7% -6.8% -7.2% TIPS Munis EMD Corps. Source: U.S. Treasury, Barclays Capital, FactSet, J.P. Morgan Asset Management. Fixed income sectors shown above are provided by Barclays Capital and are represented by Broad Market: US U.S. Barclays Capital Index; MBS: Fixed Rate MBS Index; Corporate: U.S. Corporates; Municipals: Muni Bond Index; Emerging Debt: Emerging Markets Index; High Yield: Corporate High Yield Index. TIPS: Treasury Inflation Protection Securities (TIPS). Treasury securities data for # of issues and market value based on U.S. Treasury benchmarks from Barclays Capital. Yield and return information based on Bellwethers for Treasury securities. Change in bond price is calculated using both duration and convexity according to the following formula: New Price = (Price + (Price * -Duration * Change in Interest Rates))+(0.5 * Price * Convexity * (Change in Interest Rates)^2) *Calculation assumes 2-year Treasury interest t rate falls 0.25% to and the 5-year Treasury falls 0.72% to 0.0, as interest rates can only fall to 0.0. Chart is for illustrative purposes only. Past performance is not indicative of comparable future results.

37 The Fed and the Money Supply Fixed In ncome Fed s Balance Sheet: Assets $ trillions $3.5tn $3.0tn Other $2.5tn U.S. Treasuries $2.0tn Agency MBS $1.5tn $1.0tn $0.5tn $0.0tn '03 '04 '05 '07 '08 '09 '10 '12 Fed s Balance Sheet: Liabilities $ trillions $3.0tn $2.5tn $2.0tn $1.5tn $1.0tn $0.5tn Monetary Base Excess Reserves Money Multiplier M2 / Monetary Base 10x 9x 8x 7x 6x 5x 4x 3x 2x Dec. 2012: 3.9x '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Federal Funds Rate & FOMC Interest Rate Projections 12% 1 8% 6% 4% 2% Long-term Fed projection Dec. 31, 2012: % 37 $0.0tn '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '84 '88 '92 '96 '00 '04 '09 '12 '14 Source: Federal Reserve, FactSet, J.P. Morgan Asset Management. Monetary base is defined as the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. Money multiplier defined as M2 divided by the monetary base. Long-term Fed projection is based on average expectations of FOMC members.

38 Credit Conditions Lending Standards for Approved Mortgage Loans Average FICO score based on origination date 770 Oct. 2012: Commercial & Industrial Loan Demand Net percent of banks reporting stronger demand 4 5% % Fixed In ncome '00 '02 '04 '06 '08 '10 '12 Delinquency Rates All banks, seasonally adjusted d 12% 1 8% Residential Mortgages Consumer Loans Commercial and Industrial Loans 10.8% Small Firms Large & Medium Firms '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Common Equity as a % of Total Assets All FDIC insured institutions, % 12% : 11.1% 6% 8% Average: 7.6% 38 4% 2.8% 2% 1.2% 4% '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '34 '41 '48 '55 '62 '69 '76 '83 '90 '97 '04 '11 Source: (Top left) McDash, J.P. Morgan Securitized Product Research, J.P. Morgan Asset Management. (Top right) Federal Reserve, FactSet, J.P. Morgan Asset Management. (Bottom left): Federal Reserve, FactSet, J.P. Morgan Asset Management. (Bottom right) FDIC, J.P. Morgan Asset Management. All data reflect most recently available releases. 6%

39 High Yield Bonds High Yield Spreads and Defaults 2 15% Spreads Default Rates 1 Average Latest HY Spreads 5.9% 5.5% HY Defaults 4.2% 1.1% 5% Fixed In ncome 39 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Historical High Yield Recovery Rates High yield bonds, cents on the dollar Average: 40.3 Annual Flows into High Yield Mutual Funds & ETFs Billions osusd YTD 2012: $ $20bn '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Source (Top chart): U.S. Treasury, J.P. Morgan, J.P. Morgan Asset Management. Default rates are defined as the par value percentage of the total market trading at or below 5 of par value and include any Chapter 11 filing, prepackaged filing or missed interest payments. (Bottom left): J.P Morgan, Fitch, J.P. Morgan Asset Management. (Bottom right): Strategic Insight, J.P. Morgan Asset Management. Yield to worst is defined as the lowest potential yield that can be received on a bond without the issuer actually defaulting and reflects the possibility of the bond being called at an unfavorable time for the holder. Spreads indicated are benchmark yield to worst less comparable maturity Treasury yields recovery rate is a year to date number as of November 30, Flows include ETFs and are as of November 30, Past performance is not indicative of comparable future results. $40bn $30bn $20bn $10bn $0bn -$10bn

40 Municipal Finance Muni/Treasury Ratio Ratio of Barclays 10-year Municipal Bond yield to 10-year Treasury 24 State & Local Government Debt Service Percent of current expenditures 8% 22 7% 20 6% 3Q12: 5.1% 18 5% Fixed In ncome % '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Municipal Bond Issuance* Billions osus USD, revenue e ueand dgo issues $500bn $400bn $300bn 8 Dec. 31, 2012: 113% $200bn $100bn 40 6 '98 '00 '02 '04 '06 '08 '10 '12 $0bn '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Source (Left chart): Barclays Capital, U.S. Treasury, FactSet, J.P. Morgan Asset Management. (Top right) BEA, J.P. Morgan Asset Management. (Bottom right) SIFMA, J.P. Morgan Asset Management. *Excludes maturities of 13 months or less and private placements issuance data is as of November 2012.

41 Emerging Market Debt Fixed In ncome 41 Index Breakdown USD Denominated EMD Middle East & Africa 7% Latin America 43% Europe 32% Asia 18% EMBIG Emerging Market Debt Credit Rating EMBIG average monthly credit rating, inverse scale Middle East & Africa 8% Latin America 39% Europe 19% Asia 35% CEMBI Emerging Markets Debt Spreads Spread to Treasuries of USD-denominated debt, percent 12% 1 Index 8% 6% 4% 2% Average Spread Spread (12/31/12) EMBIG 3.9% 2.7% CEMBI 3.3% 3.2% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Annual Flows into EMD Mutual Funds & ETFs Dec. 2012: BBB- Billions USD YTD 2012: $24.9 $30bn BBB- $25bn BB+ $20bn BB $15bn BB- $ $10bn B+ $5bn B $0bn B- -$5bn '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Source: J.P. Morgan, MorganMarkets, FactSet, Strategic Insight, J.P. Morgan Asset Management. Spreads measure the credit risk premium over comparable maturity U.S. Treasury bonds. The J.P. Morgan EMBI Global (EMBIG) Index is a USDdenominated external debt index tracking bonds issued by sovereigns and quasi-sovereigns in developing nations. The J.P. Morgan Corporate Emerging Bond Index (CEMBI) is a USD-denominated external debt index tracking bonds issued by corporations in developing nations. Flow data is as of November Past performance is not indicative of comparable future results.

42 Global Equity Markets: Returns and Composition 4Q Weights in MSCI All Country World Index % global market capitalization Country / Region Local USD Local USD Regions / Broad Indexes USA (S&P 500) EAFE Europe ex-u.k Pacific ex-japan Emerging Markets United States 46% Europe ex- U.K. 16% U.K. 8% Emerging Markets 13% Japan 8% MSCI: Selected Countries United Kingdom Share of Global GDP Based on purchasing power parity onal Internati France Germany Japan China India Brazil Emerging Markets 5 Europe ex- U.K. 17% United States 19% Japan 5% U.K. 3% Other Developed 4% Canada 2% Russia Source: Standard & Poor s, MSCI, IMF, FactSet, J.P. Morgan Asset Management. All return values are MSCI Gross Index (official) data. Share of global GDP based on purchasing power parity (PPP) as calculated by the IMF for Definition of emerging markets is based on MSCI and IMF data sources, respectively. Percentages may not sum to 10 due to rounding. Data as of 12/31/12.

43 Global Economic Growth Emerging Market Country Real GDP Growth Year-over-year % chg. forecasts from JPMSI 1 8% 6% 4% 2% -2% Historical JPMSI Forecast 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13-4% Emerging Markets China India Mexico Russia South Africa Korea Brazil onal Internati Developed Market Country Real GDP Growth Year-over-year % chg. forecasts from JPMSI 1 8% 6% 4% 2% -2% -4% Developed Countries Historical JPMSI Forecast 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 U.S. Canada Germany Japan U.K. France Italy Source: J.P. Morgan Global Economic Research, J.P. Morgan Asset Management. Forecast and aggregate data come from J.P. Morgan Global Economic Research. 3Q13 43

44 Global Monetary Policy Central Bank Assets Percent of Nominal GDP 35% 3 Real Policy Rates Monthly 4% 3% 25% 2 15% Bank of Japan European Central Bank 2% 1% onal Internati % U.S. Federal Reserve '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Country Level Monetary Policy and Inflation % % % -5. Hong Kong U.K. Euro area U.S. Canada Developed Markets Japan Australia Turkey -1% Emerging Markets -2% Developed Markets -3% '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Target Policy Rate India Taiwan Russia Thailand South Africa Inflation Rate Mexico Poland Emerging Markets Source: J.P. Morgan Global Economics Research, J.P. Morgan Asset Management. (Top charts) Emerging and Developed Economy GDP growth and real policy rates represent GDP weighted aggregates estimated by J.P. Morgan Global Economics Research. (Bottom chart) Target policy rates are the short-term target interest rates set by central banks. Inflation rates shown represent year-over-year quarterly rates for 3Q12. Real policy rates are short-term target interest rates set by central banks minus year-over-year inflation. Korea Real Policy Rate Colombia Indonesia Brazil China

45 The Importance of Exports Exports as a % of GDP 2011 Goods exports only Brazil % 2.2% 4.9% 10.3% US U.S. Eurozone BRIC Other India % 2.3% 10.2% 17.6% China 4.5% 4.4% 1.7% 15.5% 26.1% Russia 08% 0.8% 95% 9.5% 21% 2.1% 14.4% 4% 26.8% U.S. 1.5% 1.4% 6.9% 9.8% Japan 2.2% 1.7% % 14. U.K. 1.9% % 4.8% 18. France 1.1% 12.7% 1.5% 5.8% 21.1% onal Italy 1.4% 12.4% % 23.4% Internati Canada Germany 19.2% 2.5% 1.6% 2.8% % 21.8% 4.2% 10.7% 38.9% 5% 1 15% 2 25% 3 35% 4 Source: IMF, J.P. Morgan Asset Management. Numbers represent exports of goods only and would be higher if services were included. 45

46 Global Manufacturing Wages Manufacturing Wages Nominal, average USD per month $4,000 Developed Countries Emerging Countries $2,000 $3,500 $3,885 $3, * Latest $1,750 $3,000 $2,942 $2,958 $1,500 $2,500 $1,250 $2,000 $2,089 $2,077 $1,000 $1,500 $866 $750 onal Internati $1,000 $500 $0 U.S. Germany Japan $455 $352 $348 $309 $323 $74 $193 $139 $112 $52 $148 Brazil Mexico China Thailand Vietnam Indonesia $500 $250 $0 Source: ILO (International Labor Organization), U.S. Bureau of Labor Statistics, Ministry of Labor-Mexico, EM Advisors Group, Thailand National Statistical Office, General Statistics Office of Vietnam, Statistics Indonesia, IMF, FactSet, JP J.P. Morgan Asset Management. Chinese wages are those of rural migrant workers as a proxy. *Data begins in 2005 for Vietnam due to availability of data. Data is from 2012 for Mexico, China, and Thailand; 2011 for United States, Vietnam (preliminary), and Indonesia (preliminary); and 2010 for Brazil, Germany, and Japan. 46 Data as of 12/31/12.

47 The Impact of Global Consumers Share of Global Nominal Consumption Foreign Sales, % of Total Sales % 35% 3 Mega Cap (Russell Top 200) 3 25% 25% 2 Large Cap (Russell 1000) onal Internati 2 U.S. Consumption % of Global 15% EM Consumption % of Global Small Cap (Russell 2000) 15% '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 Source: FactSet, Compustat, Russell, J.P. Morgan Global Economics Research, J.P. Morgan Asset Management. Foreign sales as a percentage of total sales is calculated as an unweighted average of individual index constituent companies reported sales figures and does not capture all index members due to differences in reporting practices. 47