Emerging Markets Outlook and Strategy

Emerging Markets Research

Emerging Markets Strategy

J.P. Morgan Securities LLCOctober 4, 2011

www.morganmarkets.comThe certifying analyst(s) is indicated by the notation “AC.” See last page for analyst certification

and important legal and regulatory disclosures.

Emerging Markets Outlook and Strategy

Joyce ChangAC

(1-212) 834-4203

[email protected]

J.P. Morgan Securities LLC

EMBI Global, GBI-EM, JPMHY, S&P 500Return index, September 30, 2010 = 100

90

95

100

105

110

115

120

Sep-10 Dec-10 Mar-11 Jun-11 Sep-11

EMBIG

S&P 500

US HY

GBI-EM Global Div. (USD unhedged)

Source: J.P. Morgan

Spreads and yields—actual and forecastYear Forecast

Current ago End-Dec 11

EMBIG 490 305 425GBI-EM Global Div 6.73 6.27 6.70CEMBI Broad 532 332 525Fed funds 0.125 0.125 0.12510-year bond 1.78 2.48 2.25Source: J.P. Morgan

EM sell-off likely has further to run…

Emerging markets debt came under severe stress across all asset classes in the

third week of September, with EMBIG and CEMBI spreads widening by 94bp

and 108bp since then. Spot EM FX for the countries in the GBI-EM suffered the

sharpest correction and are now down 9.1% year-to-date, leaving the GBI-EM down

by 4.2%. The EM sell-off was the most pronounced in absolute and in relative terms

since the Lehman Brothers bankruptcy, followed by the largest weekly outflow on

record from EM debt dedicated funds at US$3.4 billion last week. It is hard not to

draw the comparisons to Lehman episode given both the indiscriminate nature and

rapid pace of the sell-off, alongside the growing fears that the DM economies are

sliding into a simultaneous recession. With the exception of the EMBIG, all EM fixed

income asset classes are now posting negative returns year-to-date.

…Driven by near-term risk of greater outflows by foreigners

With no safe havens left as a flight to quality and flight to liquidity take hold,

EM remains susceptible to further outflows—particularly for those countries

with high levels of foreign-holdership. Until mid-September, our client surveys and

inflow data reflected net additions of positions and net inflows up. As of mid-

September, the highest levels of foreign participation in local government bond

markets were: Hungary (37%), Indonesia (33%), South Africa (30%), Poland (30%),

Malaysia (27%), Peru (49%) and Mexico (26%). Given the poor liquidity in many

markets, investors may have little choice but to reduce liquid carry trades. Higher

bank capital requirements implemented since the 2008 crisis have contributed to

reduced secondary market liquidity for EM sovereign and corporate bonds, which

has increased market volatility. There is asymmetry in the size of the investor

positions given the US$170 billion of inflows into EM debt since early 2009 versus

current market conditions. We raise our year-end EMBIG and CEMBI targets to

425bp and 525bp, respectively, and stay underweight CEMBI versus EMBIG.

But we maintain our conviction on the longer-term positiveprospects for the asset class

The current sell-off is testing the sponsorship of EM debt as an asset class,

but it is not related to EM fundamentals or EM funding needs. The extent to

which the inflow story reverses is the key pressure point for EM debt across all

assets. We have revised EM growth down to 5.6% this year and 5.0% next year;

risks of a hard landing remain low. The growth differential to DM countries

continues to widen with GDP growth for developed economies forecast at only

1.3% this year and 0.8% next year. Total estimated EM sovereign and corporate

issuance needs are net negative given the US$39.1 billion of cash flows from

sovereign and corporate bonds for the remainder of the year. With EM FX

reserves now US$2.2 trillion higher than October 2008 levels, totaling over

US$8.1 trillion, EM central banks have scope to intervene in the event of extreme

volatility and we expect a domestic backstop bid to materialize at higher local

yield levels. We reduce directional risk in Asia including our long held overweight

SGD trade, but hold short USD/CNY and short TWD/THB. In EMEA EM, South

Africa and Hungary have the greatest potential for deeper outflows and more

volatility: keep short exposure in HUF and short Hungary 5-year bonds. BRL and

MXN were the worst performing currencies in Latin America due to hefty

positioning by international investors, but the region likely offers the best

opportunities to add duration in the coming weeks: receive 2-year (Jan ’14s) in

Brazil and 5-year TIIE in Mexico. ARS to adjust given the level of depreciation

by trading partners: sell Dec 14 versus buy Mar 14 USD/ARS.

This is an abbreviated versionof EMOS. The next full editionwhich will include individual

country sections will bepublished in Novemeber.


Joyce ChangAC (1-212) 834-4203

[email protected]

2



October 4, 2011

EM debt now feeling the pain

Emerging markets debt came under severe stress across

all asset classes in the third week of September, with

EMBIG and CEMBI spreads widening by 94bp and

108bp since then, while EM FX fell by 9.1% YTD,

leaving the GBI-EM down by 4.2% YTD. The EM sell-

off was the most pronounced in absolute and in relative

terms since the Lehman Brothers bankruptcy, followed by

the largest weekly outflow on record from dedicated EM

debt funds at US$3.4 billion last week. It is hard not to

draw the comparisons to the Lehman episode given both the

indiscriminate nature and rapid pace of the sell-off, as well

as the growing fears that the developed economies are

sliding into simultaneous recession. With the exception of

the EMBIG, all EM fixed income asset classes are now

posting negative returns year-to-date. In turn, EM equities

fell by double digits (14.8%) in September (chart 1).

Indiscriminate sell-off feels like 2008 all over again…

Although we had positioned into this sell-off

underweight EM corporates and short EM FX, we were

not nearly underweight enough. In particular, the outsized

EM FX move in September will make it harder for

(unhedged) EM investors to stay in the long duration trade.

Spot EM FX for the countries in the GBI-EM is now down

4.2% YTD. With no safe havens left as a flight-to-quality

and flight-to-liquidity takes hold, EM remains susceptible to

Contagion hits EM: Brace for furtherfallout as market technicals and liquiditywill drive performance near term

• The current sell-off represents a stress test of the

sponsorship of the EM debt asset class, not a deterioration

of EM fundamentals or concerns over funding needs

• Potential for inflow reversal remains the key pressure point

for EM debt across all assets

• EM growth revised down to 5.6% this year and 5.0% next

year (from 6.1% and 6.0%, respectively, back in June)

• A total of seven EM central banks now expected to ease

policy rates by year-end

• We raise our year-end EMBIG and CEMBI targets to

425bp and 525bp, respectively; stay underweight CEMBI

versus EMBIG

• EM FX remains the most liquid adjustment valve to hedge

bond positions, but central bank intervention is an offset:

Korea, Brazil, Turkey, Russia, Poland and Peru among other

countries have already intervened to curb extreme volatility

• Greater risk seen for local market bond positions, especially

those with high levels of foreign participation

• Total estimated EM sovereign and corporate issuance needs

of US$35.5 billion for the remainder of the year are net

negative compared to US$39.1 billion of cash flows from

sovereign and corporate bonds

• Stay cautious on duration positions in EM Asia as the

domestic backstop bid will materialize only at higher local

yield levels

• Reduce directional FX risk in EM Asia, including long-held

overweight SGD trade, but hold short USD/CNY and short

TWD/THB

• South Africa and Hungary are most vulnerable in the

EMEA EM region: keep outright short trades in South

Africa 10-year bonds and Hungary 5-year bonds and

underweight HUF and ZAR

• BRL and MXN have been the worst performing currencies

in Latin America due to hefty positioning by foreigners, but

the region likely offers the best opportunities to add

duration in coming weeks; receive 2-year (Jan ’14s) in

Brazil and 5-year TIIE in Mexico; in Argentina, sell Dec 14

versus buy Mar 14 USD/ARS


Joyce ChangAC (1-212) 834-4203

[email protected]

Market Overview

5.5

6.8

9.7

16.7

-26.0

-12.6

-8.9

-5.1

-3.5

-2.3

-0.3

3.1

-9.3

-5.6

-7.2

-1.7

-3.0

-3.1

-1.0

-2.8

-0.7

-0.1

0.8

-6.9

-30 -20 -10 0 10 20

EM equities

S&P 500

Commodities

ELMI+

GBI-EM Global div

CEMBI Broad

US High Yield

EMBIG

Global Agg

US High Grade

UST

Gold

Third week September*2011 YTD

* September 19 to September 23.Source: J.P.Morgan

Chart 1: EM has declined along with other asset classes% returns

3



October 4, 2011

J.P. Morgan Securities LLC J.P. Morgan Securities LLC

Joyce ChangAC (1-212) 834-4203 Trang NguyenAC (1-212) 834-2475

[email protected] [email protected]

further outflows, particularly for those countries with high

levels of foreign holdership. The previous record for

weekly redemptions from US and European mutual

funds/ETFs occurred in October 2008 with US$1.97 billion

of outflows.

…Driven by near-term risk of greater outflows by foreigners

Foreign bond holdings also remain high in more liquid

EM countries. Until mid-September, our client surveys

and inflow data reflected net additions of positions and net

inflows up. As of mid-September, the highest levels of

foreign participation in local government bond markets—

ones which currently are vulnerable—were in: Hungary

(37%), Indonesia (33%), South Africa (30%), Poland

(30%), Malaysia (27%), Peru (49%) and Mexico (26%).

Table 1 shows that foreign bond holdings increased in

every major local currency market this year compared to

end-2010, with the exception of Brazil.

While positions have recently been reduced somewhat

in the most crowded trades—South Africa, Mexico and

Brazil local currency—these positions remain exposed if

investors are under pressure to continue de-risking.

Given the poor liquidity in many markets, investors may

have little choice but to reduce liquid carry trades further.

Periods of poor price action are typically followed by

slower flow momentum and outflows. Charts 3 and 4

show that market performance and flows have tended to

move together, with flows lagging performance. Table 1: Foreign bonds holdings as a percentage of localgovernment bonds outstanding% (end of period)

2007 2008 2009 2010 Most recentTurkey 13% 10% 9% 13% 17%South Africa 13% 16% 15% 23% 27%Poland 20% 14% 18% 26% 30%Hungary 30% 22% 20% 23% 37%Brazil n/a n/a 8% 12% 12%Mexico 11% 12% 12% 19% 26%Peru 30% 30% 21% 46% 49%Indonesia 16% 17% 19% 31% 33%Malaysia 15% 14% 17% 22% 27%Thailand 0.2% 2% 2% 6% 8%Korea 12% 8% 10% 15% 18%Source: J.P. Morgan

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

BRL MXN ZAR COP IDR CLP PEN MYR KRW PLN RUB TRY-14%

-7%

0%

7%

14%

21%

28%Mid-Sep Rates PositionMid-Sep FX Position1-month FX move versus USD (rhs)

Source: J.P. Morgan

Chart 2: Crowded trades vulnerable to further reductionsPositioning based on the J.P.Morgan EM Client Survey from a scale of -10 (mostunderweight) to +10 (most overweight)

7090

110130150170190210230250270

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11-50510152025303540

GBI-EM GD Return

Local Flows ($bn, rhs)

Source: EPFR Global and J.P. Morgan

Chart 3: Local currency flows and GBI-EM Global Diversifiedperformance often move together

70

80

90

100

110

120

130

140

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11-20246810121416EMBIG Credit Return (ex-UST)

Hard Flows ($bn, rhs)


Chart 4: Hard currency fund flows and EMBIG ex-UST performance

4



October 4, 2011

cash flows of US$31 billion. The EM corporate high yield

default rate is currently running at only 0.3% and will

likely end the year below our forecast of 0.6%, compared

to the peak default rate of 10.7% reached in 2009 (table 2).

EM FX, rates and credit positions are now held by a

more diversified group of global and local investors

today than in 2008. The fourth key difference is that three

years ago leveraged investors, such as banks and hedge

funds represented nearly 50% of the market, held larger

positions and employed more leverage than they do today.

We believe that hedge funds have fallen to 20-25% of the

market share. The ownership of EM assets now is in the

hands of fund managers who remain vulnerable to

outflows, but are unlikely to be indiscriminate forced

sellers as the banks and hedge funds were three years ago

when the funding of their leverage disappeared. The current

EM debt universe is also much larger than in 2008 and

domestic investors are an increasingly important share of

the market. Domestic pension fund assets, which are

largely invested in EM local bond markets, have increased

assets under management from US$1.4 trillion in 2007 to

US$1.9 trillion at present. Finally, a fifth key difference is

that in October 2008 EM valuations looked rich compared

to global credit. Now, the September 2011 sell-off puts the

yields for the GBI-EM Global Diversified (6.73%) and

EMBIG (6.53%) well above J.P. Morgan’s JULI investment

grade index (4.37%) and comparable to yields for

peripheral Europe, excluding Greece (5.83%). US High

Yield debt remains cheap, boasting a 9.49% yield, and we

favor US High Yield over EM corporates. In 2008, cheap

valuations and strong government support for segments of

the US investment grade market crowded out crossover

interest and inflows into EM debt. Based on our client

survey taken at the IMF/World Bank annual meetings, the

key concern from investors about the outlook for emerging

markets centered on valuations.

But 2011 cannot be compared to 2008 with respectto EM fundamental and default risks….

In 2008, the global financial system was at a far more

dangerous point and EM fundamentals and financing

needs were much more vulnerable. Lehman actually

defaulted and the global financial system was on the verge

of fully freezing up. The rapid deterioration of the EM bank

and corporate market, as well as hedge fund deleveraging,

drove the dynamics in EM debt markets at that time. While

politics in the developed economies are clearly lagging the

economic realities, we expect that European authorities will

step in and employ their resources to address their debt

issues before reaching this point, partly because they have

the benefit of hindsight from the Lehman default as to what

might happen if they do not. Capital injections that would

ease the markets’ concerns about European banks are also

manageable compared to the US financial crisis in 2008—in

the range of EUR150-300 billion, according to both IMF

and J.P. Morgan estimates. This compares to fears that total

losses in the US banking system in 2008 had the potential

to approach US$1 trillion. It may take more stress in

markets before these capital injections occur, however.

We note five key differences between 2008 and today,

which make us comfortable that the extremes that

spreads reached then will not occur in the current crisis.

First, investors now understand that EM economies and EM

financial assets do not automatically follow and

underperform developed market trends. Before 2008, this

had been the pattern of prior crises, and part of the sell-off

then reflected the expectation by some that EM would once

again act as a higher-beta asset class to developed market

assets on the downside. Second, the gap between EM and

DM sovereign metrics has widened since 2008 and credit

ratings have converged. Over the past four years, the debt

and fiscal burdens of advanced economies increased by

30.8%-pts and 5.5%-pts, respectively. The average debt

ratio has soared to 93.5% of GDP for DM economies, while

their average fiscal deficit has risen to 7.5% of GDP. EM

debt ratios are well under half the level of developed

countries: average debt to GDP for EM economies stands at

only 34.9%, while the average fiscal deficit is 2.0% of GDP.

Third, EM corporate refinancing risks and default risks

were much greater in 2008. In the run up to 2008, EM

banks and corporates had issued a record US$464 billion in

syndicated loans, US$150 billion of Eurobonds and US$210

billion of equity. Over the past two years, EM corporates

have raised US$350 billion international capital markets,

much of which has been used towards refinancing debt. We

estimate corporate Eurobond rollover needs for the

remainder of the year at US$17.6 compared to estimated


Joyce ChangAC (1-212) 834-4203 Eric BeinsteinAC (1-212) 834-4211


J.P. Morgan Securities Ltd.

Luis OganesAC (1-212) 834-4326

[email protected]

Table 2: EM default rates declining since 2009US EM

2000 5.0% 1.0%2001 9.1% 7.3%2002 8.0% 15.4%2003 3.3% 6.3%2004 1.1% 0.1%2005 2.8% 0.0%2006 0.9% 0.2%2007 0.4% 0.0%2008 2.3% 1.9%2009 10.3% 10.7%2010 0.8% 1.5%2011 1.2% 0.3%

Source: J.P. Morgan

5



October 4, 2011

….While there is much less policy flexibility in DMversus EM economies in 2011 relative to 2008

Although current market conditions provide little

comfort, the better fundamentals and low financing

needs give EM countries more policy flexibility than DM

countries this time around. In 2008, a key question was

whether politicians—then mostly in the US—had the

willingness to respond to the crisis, while there was little

doubt then about their ability. Today we worry about the

ability to make decisions in Europe and the ability of both

the US and Europe to respond, given that monetary options

are mostly exhausted and fiscal policy is actually tightening

rather than being loosened. In contrast, EM policymakers

do have scope to ease policy rates since average EM

inflation now is lower than in 2008 (6.4%oya now versus

7.8% when Lehman collapsed), although it exceeds targets

in many cases. Moreover, EM FX reserves are now US$2.2

trillion higher than 2008 levels, providing EM countries

room to maneuver and manage outsized volatility.

Table 3 shows that since 2008 FX reserves have increased

the most in EM Asia (+US$1.79 trillion), followed Latin

America (+US$217 billion) and EMEA EM (+US$214

billion). The table also shows that current account deficits

have only widened significantly in a few countries (Brazil,

Turkey and India).

Beware the asymmetry in investor positionsversus market liquidity

Higher bank capital requirements implemented since

the 2008 crisis have contributed to reduced secondary

market liquidity for EM sovereign and corporate bonds,

which has increased market volatility and likely

increased the spread impact of the selling. There is

asymmetry in the size of the investor positions, given the

US$170 billion of inflows into EM debt since early 2009

versus liquidity in the current market conditions. We expect

both US and European banks to continue reducing balance

sheet into year-end. Chart 5 shows that inflows into EM

debt have steadily increased since the asset class suffered

US$3.2 billion of outflows for the full year in 2008, or

US$23.6 billion from the peak just before the Lehman crisis.

Yet it is important to note that this past week’s reading of

outflows is less alarmist than the headlines given the size

of the asset class now versus 2008. Last week’s outflows

represent only 2.3% of the EM debt assets under management

(AUM). By comparison, the US$1.97 billion weekly outflow

at the end of October 2008 represented 4.0% of the EM debt

AUM at the time (chart 6). Inflows into EM weekly debt

now stands at US$39.3 billion YTD, down from a peak of

US$42.6 billion earlier in the month. We now expect full-year

inflows into EM debt in the US$30-40 billion range versus

our previous forecast of US$40-50 billion.





Holly HuffmanAC (1-212) 834-4953

[email protected]

Table 3: Now versus then: EM macro indicatorsUS$ billion

FX reserves (eop)* Current account balance*2008 current 2008 2011F

Latin America 437 654 -15 -56Argentina 45 49 7 -2Brazil 193 344 -29 -50Chile 23 35 -3 -2Colombia 24 32 -7 -11Ecuador 4 3 1 -2Mexico 85 137 -16 -10Peru 30 45 -5 -4Venezuela 33 11 37 25

EMEA EM 715 929 -24 -18Czech Republic 36 36 -1 -8Hungary 33 50 -11 4Israel 42 73 2 4Poland 57 93 -29 -26Romania 36 47 -25 -7Russia 412 496 102 99South Africa 29 41 -20 -14Turkey 71 93 -41 -70

EM Asia 2,986 4,773 493 453China 1946 3198 405 325Korea 201 312 -6 21Indonesia 52 125 0 8India 256 319 -29 -54Malaysia 92 155 39 22Philippines 36 76 4 8Thailand 111 188 -3 13Taiwan 292 400 25 43* Aggregates for listed countries only. FX reserves for EM total US$ 8.1 trillion.Source: J.P. Morgan

39.3 42.1

-3.2

46.3

80.3

-100

102030405060708090

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

2007 20082009 20102011

Source: EPFR Global, Bloomberg and J.P. Morgan

Chart 5: EM inflows have reached nearly US$170 billion since early 2009US$ billion

6



October 4, 2011

although they have been relatively flat since April. While

Japanese EM funds saw redemptions of US$159 million

last week, EM FX overlay funds (primarily BRL) saw

larger outflows of US$508 million, although AUM declined

by US$2 billion over the week and US$8.3 billion since

end-August largely due to lower valuations. In October

2008, Japanese investment trusts had only US$22.5 billion

invested in EM bond funds, while EM FX overlay funds

did not exist. Table 5 shows that AUM in Japanese ITs

now stand at US$58.7 billion for EM bond funds and

US$42.9 billion for EM FX overlay funds.

Technicals point to more selling pressure as investors will

likely increase cash holdings given the uncertain global

environment and fears about increased redemptions

after September’s sell-off. Cash holdings as reported in

our monthly client survey (taken on September 15), which

tracked 183 responses from investors managing US$731

billion in EM debt assets, have increased at the margin this

year and are currently running at 4.1%, compared to an

average of 4.3% in the past six months and down from the

4.9% peak in March. The current cash level is slightly

higher than just before the Lehman sell-off but below the

6.7% cash holdings that investors held in January 2009

during the peak of the crisis (chart 7).

Total assets benchmarked against the external EMBIG,

local currency GBI-EM and ELMI, and the corporate

CEMBI stood at US$417 billion as of September 2011

compared to US$233 billion tracked against it as of June

2008. Assets benchmarked against the EMBIG amount to

more than 50% of the size of the outstanding EM sovereign

debt market. The GBI-EM has nearly four times the assets

under management now compared to October 2008, while

the CEMBI was only launched at the end of 2008. Last

week’s outflows for hard currency and blend funds, which

saw US$1.0 billion and US$500 million withdrawn,

respectively, represent only 0.6% of the EMBIG and

CEMBI assets under management tracked against the

J.P. Morgan family of indices.

Beyond the assets that are managed against the J.P.

Morgan family of indices, the universe of EM funds

tracked weekly by EPFR has grown three times, while

EM ETFs have grown fivefold. EM bond exchange traded

funds (ETFs) have grown from US$1.8 billion in October

2008 to US$11.3 billion at present. We estimate that US$3.2

billion of inflows went to ETFs in 2010 and US$3.1 billion

went to ETFs year-to-date. Outflows of US$4 billion from

Japanese retail investors have also attracted attention,






[email protected]

Table 4: AUM benchmarked against J.P. Morgan indices have almostdoubled since pre-LehmanUS$ millionEM Indices Jun-08 Sep-11Local Market Debt (GBI-EM) 35,865 133,328External Debt (EMBIG) 181,174 226,352Corporate External Debt (CEMBI) – 29,494Local currency money Market (ELMI+) 16,300 27,947Total AUM managed against EM indices 233,339 417,121Total EM Assets – Survey Responses (3 month) 665,760 808,186Source: J.P. Morgan

Table 5: Universe of EM funds tracked weekly by EPFR has grown three times, while EM ETFs have grown fivefold

Oct-29-08 Sep-28-11Weekly Flows (US$ billion) -2.0 -3.2Weekly Flows as a % of AUM -4.0% -2.3%AUM tracked by EPFR (US$ billion) 46.1 133.8Size of EM ETFs (US$ billion) 1.8 11.3Size of Japanese EM ITs (US$ billion) 22.5 58.7Size of Japanese EM FX Overlay Funds (US$ billion) – 42.9Source: J.P. Morgan, EPFR, Bloomberg

-2.3%

-4.0%-5%-4%-3%-2%-1%0%1%2%3%

Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11020406080100120140160Weekly Flows % AUM

EPFR fund universe (rhs, US$bn)


Chart 6: This week’s outflows were largest in magnitude, but smallerthan October 2008 in relative terms

3.9% 4.3%

3.0%3.5%4.0%4.5%5.0%5.5%6.0%6.5%7.0%

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Cash % 6-month Moving AverageOct-08 Sep-11

Source: J.P. Morgan

Chart 7: Current cash balances have declined compared to earlierthis year, but are running marginally higher than Lehman

7



October 4, 2011

Total sovereign financing requirements for the countries

in the EMBIG for the remainder of the year are net

negative and the remaining planned sovereign issuance

of US$15.5 billion is entirely discretionary. According to

our estimated issuance plans for 2011, remaining needs for

4Q11 are US$7.4 billion in Emerging Europe, US$4.5 billion

in the Middle East and Africa, US$2 billion in Latin

America and US$1.5 billion in EM Asia (see table 6 on the

following page). However, we characterize these entire

amounts as discretionary as sovereigns could easily rely on

savings or alternative domestic funding sources if external

capital markets remain closed for the rest of the year.

The EMBIG has become more correlated to the moves

in commodity prices since January, while the

correlation of the EMBIG to US equities has begun to

decline (chart 9). Commodities declined across the board in

September due to increasing concerns about slowing global

growth. The S&P GSCI Industrial Metals index was the

worst performer in September (-20%), implying increasing

concerns of a slowdown in Chinese demand. In turn, the

GSCI Agriculture declined 20%, followed by gold (-11%)

and Brent (-11%), bringing the latter to its lowest level

since February 2011. We believe that fears of a hard

landing in China are exaggerated. China’s services PMI

posted a solid gain in September, rising 1.6 points to 51.9.

The activity index rose even more strongly to 53.0,

consistent with official data pointing to moderate growth in

the economy. We believe that demand from Asia coupled

with ongoing supply issues in the North Sea and OPEC

production cuts will support global oil prices, but risk are

now biased to the downside.

A review of the recent fund flow trends in the US High

Yield bond market is helpful for context of the large

outflow experienced in EM fixed income last week,

given the increased importance of crossover flows into

EM debt over the past few years. Twice this summer,

during the months of June and August, US HY funds had a

week or two of sharp outflows, but these were not

sustained and were partly reversed in subsequent weeks.

From mid-May to end-August, yields widened from 6.73%

to 8.6% for US High Yield making the market more

attractive, and in September there were inflows each week

despite a negative market environment. In both the June

and August episodes, there was one large weekly outflow

over US$3 billion and then much smaller outflows

afterwards. The US HY pattern suggests there is a group of

investors with little appetite for negative volatility who sell

quickly, but then the wider spreads help slow and then

reverse the outflow trend.

EM sovereign and corporate credit unlikely tofollow 2008 extreme moves

EMBIG spreads have widened and positions reduced,

but not enough yet to warrant an outright overweight

while the global backdrop still remains uncertain. This

past month’s moves remain modest compared to 2008 when

EMBIG spreads widened by 567bp during the Lehman

episode. Contrary to the local market index, spread

compression in the EMBIG took time to reach pre-crisis

levels—almost a year and a half. For much of the past year,

it has been difficult for EM sovereign investors to add risk

into a market where spread widening had clearly lagged

other markets. With EMBIG spreads now at 480bp, they

have widened 53% since mid-May compared with 55% now

for US High Yield and 68% for US High Grade, so EMBIG

spreads are no longer a large outlier in terms of movement.


Holly HuffmanAC (1-212) 834-4953 Warren MarAC (1-212) 834-4274



Jonny GouldenAC (44-20) 7325-9582

[email protected]

200300400500600700800900

1000

Jan-08 Jan-09 Jan-10 Jan-11

+632bp

+128bp+184bp

Source: J.P. Morgan

Chart 8: Current EMBIG sell-off is modest compared to 2008EMBIG spreads (bp)

-40%

-20%

0%

20%

40%

60%

80%

Jan-08 Jan-09 Jan-10 Jan-11

WTI S&P500 Commodities*

* J.P. Morgan Commodities Index.Source: J.P. Morgan

Chart 9: EMBIG returns have become more correlated to moves incommodity prices3-month moving correlations versus EMBIG

EM corporate spreads moved above 500bp in

September, suggesting that we have entered into a

feedback loop whereby outflows and market

performance are moving into a trading pattern that

more closely resembles 4Q08. Although we believe that

lower default expectations will prevent us from breaching

1,000bp on the CEMBI Broad, it is not inconceivable—

given constrained liquidity—that investment grade

(currently trading at 369bp) and high yield spreads

(currently trading at 917bp) retrace as much half of their

2008 highs of 798bp and 2,257bp, respectively. Based on

these assumptions, we revise our year-end spread for the

CEMBI Broad to 525bp (implying IG and HY spreads peak

around 380bp and 975bp, respectively). Corporate spreads

could initially overshoot before retracing by year-end to

our forecasted 525bp level.

EM FX weakness has been acute the third week of

September; relative to the month around the Lehman

crisis, the currency component of the GBI-EM GD

index has fallen more half as much (12% versus 20%).

There is significant variation when viewed on an individual

currency basis. Chart 11 on the following page shows the

peak-to-trough move for several EM currencies in late

2008 around the Lehman crisis versus the depreciation

from recent highs to date. Chart 12 shows that IDR and

TRY stands out as only selling off less than one-third of the

move during the Lehman episode; BRL, ZAR, and KRW

have depreciated by just under 40% relative to the Lehman

sell-off, and SGD, MYR and THB have moved nearly 80%

as much as they did in 2008 (though the moves were small

in both episodes). Relative to its long-term relationship

with the euro that we identified in September’s EMOS, EM

FX is currently 1.5 standard deviations too low, while it

reached approximately 3 standard deviations below the

level suggested by the euro in late 2008.

8



October 4, 2011


Holly HuffmanAC (1-212) 834-4953 Warren MarAC (1-212) 834-4274




[email protected]

0

500

1000

1500

2000

2500

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11

Investment Grade component

High Yield component

CEMBI-Broad

Source: J.P. Morgan

Chart 10: CEMBI sell-off may have further to go and is well below2008 volatilityCEMBI-Broad IG versus CEMBI-Broad HY (SOT avg life, bp)

Table 6: Remaining sovereign borrowing requirements are fullydiscretionary

Gross GrossIssuance Forecast Issuance YTD Remaining

Fiji 250 250 –Indonesia 4,000 2,500 1,500Malaysia 2,000 2,000 –Philippines 2,749 2,749 –Sri Lanka 1,000 1,000 –

Brazil 2,000 788 1,212Chile 1,343 1,343 –Colombia 2,000 2,000 –Dominican Republic 500 500 –El Salvador 654 654 –Jamaica 400 400 –Mexico 3,000 3,000 –Panama 500 500 - Peru 500 – 500 Trinidad and Tobago 300 – 300 Uruguay 514 514 –Venezuela 4,200 4,200 –

Belarus 800 800 –Croatia 3,000 2,587 413 Czech Republic 2,100 – 2,100 Georgia 500 500 –Hungary 5,685 5,685 –Latvia 500 500 –Lithuania 750 750 –Macedonia 500 – 500 Montenegro 256 256 –Poland 4,994 4,994 –Romania 2,900 2,177 723 Russia 3,176 3,176 –Serbia 1,000 1,000 –Turkey 4,500 3,349 1,151 Ukraine 6,000 3,440 2,560

Angola 500 – 500 Bahrain 1,000 – 1,000 Israel 1,000 – 1,000 Lebanon 2,465 2,465 –Nigeria 500 500 –Senegal 500 500 –South Africa 750 750 –Tanzania 500 – 500 United Arab Emirates 1,500 500 1,000

Zambia 500 – 500 Asia 9,999 8,499 1,500 Emerging Europe 36,661 29,214 7,447 Latin America 15,911 13,899 2,012 Middle East and Africa 9,215 4,715 4,500 Total 71,786 56,327 15,459 Source: J.P. Morgan

Any decisive rally in financial markets remainsdependent on clear policy actions in Europe

Market focus will remain centered on whether

European policymakers, the EFSF and the ECB

announce clear mechanisms to support bank

recapitalization and increase the EFSF’s firepower. Euro

area sovereign risks have contaminated banks as secondary

market bond yields for both sovereigns and banks have

widened markedly (chart 13). Initially, risks focused on

Greece, then on Ireland and Portugal, and more recently on

Belgium, Spain and Italy (collectively know as the six

high-spread Euro area). The IMF estimates that nearly half

of the outstanding EUR6.5 trillion of Euro area government

debt is high-yielding1. Since European banks hold a large

amount of the high-yielding government bonds of high-

spread countries, their equity and funding markets have

been under tremendous strain, and most European banks

are unable to access unsecured term-financing.

Leverage of the enhanced EUR440 billion EFSF for

bank recapitalization as well as national directives that

banks increase their capital—either privately or via

individual country injections of capital—are necessary

to restore market confidence. The enhanced EFSF will be

able to buy sovereign Euro area bonds in the secondary

markets and make sovereign loans to fund bank

recapitalization, even in non-IMF program countries, as

well as offer precautionary credit lines. The EFSF can be

used to support banks in Greece, Ireland and Portugal in

the context of the current EU/ECB/IMF programs for those

countries. We also believe that precautionary credit lines

could be provided for Italy to help backstop any direct state

recapitalization of Italian banks, should private sources of

recapitalization prove insufficient. Alongside the use of

EFSF resources, we would expect countries firmly in the

core of the Euro area, such as Germany, France, the

Netherlands, Austria and Finland, to use national resources

to backstop their banks.

Capital injections that would ease the markets’ concerns

about European banks are manageable—in the range of

EUR150-300 billion according to most estimates,

including the IMF and J.P. Morgan (see EBA Stress TestResults Analysis: Must do much better, July 18, 2011, andEuro-TARP: up to EUR150 billion to ease the fundingcrisis, September 25, 2011). Our European bank credit and

equity analysts estimate a EUR150-170 billion capital

shortfall by applying more punitive stresses on sovereign

9



October 4, 2011

J.P. Morgan Securities LLC J.P. Morgan Securities Ltd.

Joyce ChangAC (1-212) 834-4203 Michael MarreseAC (44-20) 7777-4627


-40

-35

-30

-25

-20

-15

-10

-5

0BRL ZAR KRW TRY MXN IDR RUB INR SGD MRY THB

2008 2011

2008 moves are peak-to-trough versus USD during Aug-Dec; 2011 moves are peak-to-troughversus USD August to October 3Source: J.P.Morgan

Chart 11: EM FX depreciation versus USD around Lehman crisis and 2011(%)

00.10.20.30.40.50.60.70.80.9

IDR TRY KRW BRL ZAR MXN INR RUB SGD MYR THB

2008 moves are peak-to-trough versus USD during Aug-Dec; 2011 moves are peak-to-troughversus USD August to October 3Source: J.P.Morgan

Chart 12: EM FX depreciation as a percentage of 2008(%)

050

100150200250300350400

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11

iTraxx Europe Senior Financials

iTraxx Europe SovX Western Europe

Source: J.P.Morgan

Chart 13: European bank and sovereign spreads now trade wellbeyond 2008 levels5-year CDS spread (bp)

1. See Global Financial Stability Report: Grappling with Crisis Legacies, IMF, September 11, 2011 (Summary Version, pp. 16-28).

10



October 4, 2011

debt as well as some nominal adjustments to expected loan

losses in some jurisdictions2. The following haircuts on

government debt are utilized by our equity analysts:

Greece 60%, Portugal and Ireland 40%, and Spain and Italy

20%. Using those haircuts implies a capital shortfall among

all European banks of EUR148 billion, with the country

breakdown shown in table 7.

The IMF comes up with higher losses for the EU

banking system from sovereign credit risk exposure,

estimating cumulative spillovers of EUR300 billion. The

IMF marks-to-market the banks’ direct exposure to

government bonds from the six high-spread countries at

about EUR200 billion (note this is not a measure of stress-

tested capital needs of European banks). In addition,

interbank linkages as measured by exposures to the banks

in the high-spread Euro area constitute an additional

EUR100 billion to the banks’ direct exposure to high-yield

Euro area government bonds, implying that extra capital of

EUR300 billion would allay market concerns.

However, the lessons learned from the US TARP

highlighted that the relative success was in large part

because the available resources were far in excess of

the capital which was eventually deployed and

recapitalization was also forced on US banks. The

EUR1.259 trillion exposure of core European banks to

peripheral European geographies suggests a potential

shortfall in available resources under certain tail scenarios.

We remain skeptical that pan-European solutions for bank

recapitalization will gain momentum since banks will need

to be recapitalized on the basis of accounting standards and

stress tests, with bank backstops under national supervisory

authorities. Rather, our European credit research team

believes that there is a far higher probability of euro-TARP

emerging by stealth as a result of a single country taking the

lead and thus applying peer pressure on other member states

to follow suit3. It is possible that core countries might




follow the lead of Spain, which requires that all financial

institutions meet required 8-10% levels of core capital. This

Spanish exercise determined that 101 of 114 financial

institutions met the new minimal capital requirements as of

March 2011 and that 13 needed to raise their core capital.

For these 13 banks, 11 banks filled the capital shortfall

through injections from parent banks, M&A activity, IPO

financing and mergers and consolidation. Two small banks

are still searching for investors, while the FROB (Spain’s

capital injecting backstop) took over four banks (for a total

capital contribution of EUR7.56 billion). During Spain’s

clearly articulated strategy to improve the metrics of its

banking system, Spanish banks increased provisions by

EUR105 billion (more than 10% of GDP or the equivalent

of 50% of total core capital) and conducted 16.9% average

staff cuts plus 17.2% of branch office reductions among the

merged former cajas (savings banks).

It also remains to be seen whether proposals to leverage

the EFSF to a higher headline figure will come to

fruition given the constraints imposed under the ECB

by-laws and Maastricht treaty as well as the need to

avoid going back for additional parliamentary

approvals. Proposals under discussion reportedly include:

1) using either the ECB (or another multilateral entity) to

provide leverage to the EFSF so that the lending capacity is

increased to EUR1 trillion or higher; 2) providing

guarantees through the EFSF so that it assumes first loss in

the event of default; and, 3) potentially transforming the

EFSF into a bank with a capital injection from the ECB.

Beyond measures to leverage the EFSF, the IMF behind

the scenes may be examining ways to increase the size of

their facilities from the current level of US$400 billion

via some changes in provisioning and new bilateral

loans. The mechanism for this capital increase would be

national requests for new bilateral loans from surplus

countries (Japan, China, Saudi Arabia, Qatar) to finance

new facilities. For Spain, the debate is back on about

whether an IMF Flexible Credit Line would make sense

since Spain has stood out amongst the periphery for

implementing reforms (with the exception of labor

reforms). Official creditors assert that the new Spanish

government that will take office after the November

elections is likely to reinvigorate structural reforms and

will be fully committed to fiscal consolidation. Political

cohesion has also held in Spain relative to other countries

in the periphery. Table 8 highlights the calendar of political

events ahead in both the US and Europe.

Table 7: J.P. Morgan’s estimate of mark-to-market losses toholdings of high-spread European debt at EUR148 billionEUR14.8 billion for German listed banks; EUR13.9 billion for listed French banks; EUR7.1 billion for listed domestic UK banks; EUR2.3 billion for listed Spanish banks; EUR10.5 billion for listed Italian banks; EUR6.5 billion for listed EMEA EM banks; and EUR90 billion for smaller listed European banksSource: J.P. Morgan

2. See What Now For Tier I? European Bank Recapitalisation and Burden Sharing Outcomes, September 22, 2011.

3. See “The Preferred Route” in European Credit Outlook & Strategy, September 22, 2011

Implications for EM growth and policy actions:Mounting risk for 1H12

We now expect EM growth to moderate to 5.0%oya in

2012 from 5.6% in 2011, even after several downward

revisions across the three EM regions over the past

week. J.P. Morgan’s latest growth forecast for the Euro area

calls for a mild recession lasting from 4Q11 through 3Q12

and is conditional on the assumption that the region’s

policymakers move aggressively to support banks and

sovereigns from the fallout of a Greek debt restructuring

next year. Specifically, J.P. Morgan forecasts a contraction

in the Euro area of -0.5%oya in 2012 compared to an earlier

prediction of 0.9% growth. These revisions take J.P. Morgan’s

forecast to developed economies’ growth to only 0.8% next

year, down from 1.3% this year. Although the US forecast

still calls for growth at a 1% average over the next three

quarters, our US economists concede that there is a 50%

probability that the US also falls into recession. Taking into

account the new Euro area forecast, the growing odds of a

US recession, and ongoing market turbulence in the

quarters ahead as European troubles get sorted out, we have

lowered our GDP growth forecasts in many EM countries.

11



October 4, 2011




J.P. Morgan Securities LLC JPMorgan Chase Bank N.A., Singapore

Luis OganesAC (1-212) 834-4326 David FernandezAC (65) 6882-2461


Table 8: Headline noise to remain high: Heavy political calendar for US and Europe Month Day Date Country/region EventOctober Germany German parliament vote on 2nd Greek bailout

Greece Fifth IMF review resultsMon 3 Greece Greek exchange offer to be finalized as of this date Mon 3 Euro area Eurogroup meeting (17 finance ministers) Mon 3 Malta Possible vote on EFSF amendmentsTue 4 Euro area Ecofin meeting (27 finance ministers) Tue 4 US Congressional super committee hearing on the economic outlookThu 6 Euro area ECB rate announcement Thu 6 UK BOE rate announcement Sun 9 France Socialist Party—Presidential Primary 1Tue 11 Slovakia Scheduled to vote on EFSF, completing the voting process by the 17 European countries to ratify

the amendmentsFri 14 US Deadline for House and Senate committees to submit recommendations to the super committee

Fri-Sat 14-15 G20 G20 finance ministers meeting Mon-Tue 17-18 Euro area EU Council Meeting (EU heads of state)

Sun 23 Switzerland Federal elections

November Thu 3 Euro area ECB rate announcement Thu-Fri 3-4 G-20 G-20 Cannes Summit

Mon 7 Euro area Eurogroup meeting (17 finance ministers) Tue 8 Euro area Ecofin meeting (27 finance ministers) Thu 10 UK BOE rate announcement Mon 14 Greece Greece local elections Tue 15 Euro area Peripheral Europe flash GDP (3Q10) Nov 18 US Continuing resolution to fund the US government expiresSun 20 Spain General elections (early) Wed 23 US Deadline for the super committee to vote on a plan with the goal (not a requirement) of

US$1.5 trillion in deficit reductionTue 29 Euro area Eurogroup meeting (17 finance ministers) Wed 30 Euo area Ecofin meeting (27 finance ministers)Wed 30 Greece Sixth IMF review begins

December Germany German parliament vote on ESM ratification (tentative)Fri 2 US Super committee must submit report and legislative language to the President and Congress

Thu 8 Euro area ECB rate announcement Thu 8 UK BOE rate announcement Fri 9 Euro area EU Council Meeting (EU heads of state)

Thu 15 Greece Sixth IMF review results (expected) Fri 23 US Deadline for the House and Senate to vote on the super committee’s bill

Source: J.P. Morgan

12



October 4, 2011





Michael MarreseAC (44-20) 7777-4627

[email protected]

Table 9 shows the cumulative growth forecast revisions

made since the end of June. While the new EM growth

average of 5.0% is nearly a point below the end-June

estimate, it is still above the 2.6% registered in 2009 when

many EM countries fell into a brief recession in the

aftermath of Lehman.

Recent downward revisions to J.P. Morgan’s Euro area

growth forecasts have prompted us to cut our 2012

forecasts for the EMEA EM region further, after

lowering our 2011 and 2012 forecasts sharply in August.

In our latest round of adjustments, we reduced 2012 growth

most sharply in Hungary (-0.8%-pt) and the Czech

Republic (-0.6%-pt) due to their high trade exposure to the

Euro area, while for Hungary this also incorporates the

latest fiscal tightening measures. We have also cut growth

considerably in Russia (-0.5%-pt) as a result of the local

liquidity squeeze. Elsewhere, revisions were either modest:

Romania (-0.2%-pt), Poland (-0.3%-pt), South Africa

(-0.2%-pt), or not changed (Turkey and Israel). On a

sequential basis, we believe the slowdown in EMEA EM

will be most pronounced in 4Q11 and 1Q12.

Latin America’s GDP growth forecast was cut further to

3.2%oya in 2012, with most countries expected to

decelerate to a below-potential pace next year. The new

regional average growth forecast of 3.2%oya for 2012

resulted from a second round of downward revisions since

mid-year, and now stands well below the region’s estimated

potential growth pace of 3.7% and the IMF’s latest projection

of 4%. While the trade linkages of Latin America and

Europe are not as significant as with the US, low growth or

a recession in both will certainly hurt Latin American

exports. Moreover, with commodities representing nearly

50% of Latin American exports (and well above that level

in countries like Argentina, Brazil, Chile, Colombia, Peru

and Venezuela), the possibility of further correction in

commodity prices would unwind some of the terms-of-

trade gains that have supported consumption and

investment in the region in recent years.

EM Asia stands out in our global forecasts as still

anticipating a relatively solid growth outcome, both in

2011 and 2012. For 2011, our GDP projection of 7.1%

critically assumes that both China and India will not see

growth drop below a 7% pace through year-end. In China,

growth decelerated sharply in the first half of the year,

dropping from a lofty 12% at the end of last year, down to

7% in 2Q11. But, a broad array of activity indicators (IP,

manufacturing PMIs, retail sales, and fixed investment) are

consistent, in our view, with Chinese economic activity

stabilizing, not further deteriorating. In India, our forecast

anticipates a steady decline in growth, due to a steady diet of

12 RBI hikes, but to still be 7.1% in 4Q11. Manufacturing

PMI fell to a 2-year low in India but services growth and

agricultural growth remain robust. We retain our FY2012

growth forecasts of about 7.5%oya for now. Given that

Table 9: EM Real GDP growth revised down along with developedmarkets%oya, current forecast versus forecasts as of June 30, 2011

2011 2012Current End-June Current End-June

Developed Markets 1.3 1.9 0.8 2.7Emerging Economies 5.6 6.1 5.0 6.0

Latin America 4.1 4.6 3.2 3.9Argentina 7.5 7.0 3.0 4.8Brazil 3.3 4.0 3.4 3.8Chile 6.5 6.5 4.0 4.5Colombia 5.3 4.9 3.7 4.0Ecuador -7.8 4.5 2.7 3.5Mexico 4.0 4.5 2.5 3.8Peru 6.3 6.6 4.5 5.5Venezuela 3.5 3.5 3.0 3.0

Emerging Asia 7.1 7.5 6.7 7.6ex China / India 4.5 4.8 3.5 5.1China 8.9 9.3 8.5 9.1Hong Kong 5.2 5.2 4.0 4.6India 7.6 7.9 8.5 8.7Indonesia 6.3 6.3 5.2 6.7Korea 3.9 4.2 4.0 4.7Malaysia 4.0 4.0 1.5 4.8Philippines 4.1 4.7 4.0 5.5Singapore 4.6 4.7 1.5 5.0Taiwan 5.0 5.6 3.8 4.6Thailand 3.0 3.6 1.5 4.8

EMEA EM 4.3 4.7 3.0 4.6Bulgaria 2.8 3.5 2.4 4.0Czech Republic 2.0 3.0 1.0 3.5Egypt 1.8 2.5 3.0 3.4Hungary 1.4 2.8 0.5 2.9Israel 4.3 4.5 2.9 4.0Kazakhstan 6.5 7.0 3.5 6.5Nigeria 8.4 8.7 7.1 7.8Poland 3.8 4.2 2.7 4.0Romania 1.2 2.0 0.8 4.0Russia 3.4 4.5 3.0 5.0South Africa 3.1 3.7 2.5 3.8Turkey 6.3 5.6 2.7 4.3Ukraine 3.5 4.5 3.0 5.0GCC 5.8 5.8 3.8 5.1Source: J.P. Morgan

13



October 4, 2011

China and India together carry a nearly 70% weight in the

EM Asia aggregate, it is hard to get the regional forecast to

move dramatically unless our views on these two

heavyweights change significantly. Indeed, our forecast for

EM Asia to expand by 6.7% in 2012 again highlights their

importance. In particular, the regional forecast is pushed

higher by our expectation that Indian GDP growth will

accelerate in 2012 to 8.5% (from 7.6% in 2011), thanks to

the much-delayed arrival of the private investment cycle.

Outside of India and China, persistent weakness in US

and European growth, and the prospect of even weaker

DM growth going forward, have taken its toll on our

forecasts. For 2012, we expect GDP growth of 3.5% for

EM Asia (ex. China and India), with our forecasts for each

country below consensus expectations, some substantially

so. We anticipate the biggest growth disappointments to be

in Southeast Asia, where our forecast for Malaysia,

Thailand, and Singapore are around 3%-pts or more below

market consensus.

A look at the components of our 2012 GDP forecasts for

EM Asia sheds light on why we anticipate the region

will hold up relatively well, while also highlighting the

sources of downside risk. Since 2008, external demand

has not been a net positive for Asian GDP growth. Indeed,

in 2010 and in our 2011 projection, net external demand

contributed zero; in other words, from a GDP accounting

point of view, all of the region’s 9.2% growth in 2010 and

our expectation of 7.1% growth this year, is being

generated by domestic demand. For 2012, our 6.7%

regional growth forecast assumes a -0.3%-pt drag from net

external demand. If the European and US outlooks darken

further, this drag would get larger. Note that in 2009, net

external demand took off 1.2%-pts from EM Asia’s GDP

growth, with China seeing an exceptionally large 3.9%-pts

drag as its export growth slumped. Perhaps more

importantly, our assumption that domestic demand growth

stays resilient would also be at risk, especially for

investment (including inventories), in a deeper DM

slowdown scenario. Again using 2009 as a benchmark,

gross domestic investment contributed a sturdy 3.5%-pts to

regional GDP growth, but this was entirely due to China’s

massive fiscal and bank lending expansion. For EM Asia ex

China and India, in 2009, investment was a large drag,

taking away 3%-pts from GDP growth, while our forecast

for 2012 is that it adds 0.8%-pt, pointing to a potential

downside risk to our current 2012 forecasts.

China growth and demand for commodities to holdthis year

Our EM growth forecasts depend heavily on China’s

performance, since we estimate that approximately

36.5% of the contribution to global growth will come

from China this year. China’s share of global commodity

demand also continues to grow. Our commodities group

projects that 4Q 2011 Chinese petroleum demand will cross

10 million barrels per day for the first time ever and global

petroleum demand will cross 90 million barrels power day for

the first time ever. In 2008, a level of 86 million barrels per

day for global petroleum demand was sufficient to exhaust

the global oil productive capacity of the world at that time

and force prices to a peak of $147 per bbl in July 2008.4

Our forecast for full-year 2011 GDP growth for China

stands at 8.9%oya, while for 2012 we expect GDP

growth of 8.5%. China’s near-term growth indicators,

including IP and manufacturing PMIs, suggest that the

economy has continued to track a steady, moderate growth

trend through August and September, despite growing

uncertainty on the global economy. Our current estimates

look for China’s 3Q real GDP growth to be close to the

7.0%q/q (saar) growth rate recorded in 2Q, with our

forecast anticipating a mild upturn to 8.5% in 4Q.

Importantly, Chinese domestic demand is expected to be

supported by the government’s large affordable housing

program, as well as solid overall employment growth and

broad-based wage gains. On the policy front, our baseline

scenario remains that China’s central bank will pause from

further interest rate moves for the rest of the year, adopting

a “wait-and-see” approach for its monetary policy stance in

the very near term. Looking further ahead, if the global

economy and external demand conditions worsen notably

from here, we believe the Chinese government may

consider adopting some supportive measures, leaning first

on fiscal policy, then followed by a moderate easing on

liquidity conditions and the credit control measures, with

the pre-condition that headline CPI is seen to have clearly

peaked. Overall, the dominant concerns on DM demand

uncertainty going ahead appear to hint at some moderate

downside risks on the growth forecasts for China,

especially going into 1H12.

The real estate sector in China remains a major source

of risk, although we think the likelihood of a housing

market collapse is very small in the near term. Since last

year, the government has taken a series of measures to




J.P. Morgan Securities Ltd. JPMorgan Chase Bank N.A., HK

Michael MarreseAC (44-20) 7777-4627 Haibin ZhuAC (852) 2800-7039


4. See Commodity Markets Outlook and Strategy: how to achieve escape velocity, September 26, 2011

stabilize the housing market, and these measures seem to

come into effect. The housing market is likely at the

turning point: transaction volume has fallen in the past two

quarters and prices are now flat. Looking forward, we

expect the government to maintain current policy stance in

the real estate market to avoid another re-acceleration in

housing prices. From a domestic political perspective, top

leaders have strong incentives to gain points by achieving

the housing stabilization objectives. However, the cool-

down in the housing market and the pressure on real estate

developers are in line with the objectives of stabilization

policies, and should not be over-interpreted as an indicator

for a collapse. Demand remains strong, supported by the

urbanization process, income growth, the fact that there are

no alternative investment assets—these structural factors

remain unchanged by the stabilization policies. In addition,

politically a collapse scenario in the housing market carries

enormous risks, as promotions are still linked to growth,

and property is still a key source of local government

revenue. Importantly, policymakers have the ability to

manage the property cycle (most measures are on the

demand side and can be easily loosened in implementation,

removed, or even reversed).

Weaker FX gives EM policymakers time to cut rates

Many EM policymakers have shown willingness to

tolerate weaker currencies in response to the

deteriorating global growth environment, but the next

line of defense will likely be policy rate cuts—

particularly in Latin America and EMEA EM. While the

speed of the recent drop in EM FX caught many

policymakers by surprise, the FX intervention so far has

been relatively timid and has not prevented a number of

EM central banks from interrupting their tightening cycles

by adopting an outright neutral or easing bias. Indeed, three

EM central banks—Brazil, Israel and Turkey—surprised

markets by cutting policy rates preemptively over the past

month despite their inflation and FX dynamics, and a total

of seven EM central banks are expected to cut rates from

now to year-end. Latin American central banks, which were

the most aggressive hiking rates during the policy

normalization process that started in early 2010, are

expected to cut rates the most over the next three quarters.

Our new forecasts now call for cumulative cuts by mid-

2012 of 150bp in Brazil, 175bp in Chile, and 50bp in both

Mexico and Peru (table 10).

Ongoing FX weakness raises the bar for rate cuts in

some countries, owing to concerns about the pass-

through to inflation and continued high exposure to

foreign currency debt in CEE. This worry is most acute in

Hungary where we are pushing back our forecast for a rate

cut by a quarter to 2Q12, with risks of a further delay. In

South Africa, the deteriorating inflation profile also raises

risks of a 1-quarter delay in the rate cut to 1Q12. Near-term

rate cuts are most likely in countries where FX rates have

been either stable or appreciated. Indeed, the shekel’s rise

over the past month contributed to the BoI’s decision to

deliver an earlier than anticipated rate cut on Monday.

Although not our base case, the CNB would also likely cut

rates if the CZK were to strengthen in coming months.

14



October 4, 2011





Michael MarreseAC (44-20) 7777-4627

[email protected]

Table 10: EM central banks begin easing already this year

Current Forecastrate (%pa) next change Sep 11Dec 11Mar 12Jun 12 Sep 12Dec 12

Developed 0.80 0.63 0.62 0.62 0.62 0.62 0.63Emerging 5.93 5.93 5.80 5.72 5.73 5.75 5.90

Latin America 8.14 8.14 7.53 7.15 7.12 7.12 7.12Brazil 12.00 Oct-19-11 (-50bp)12.00 11.00 10.50 10.50 10.5010.50Chile 5.25 Nov-15-11 (-25bp) 5.25 4.75 4.00 3.50 3.50 3.50Colombia 4.50 On hold 4.50 4.50 4.50 4.50 4.50 4.50Mexico 4.50 0 Dec-2-11 (-25bp) 4.5 4.25 4.00 4.00 4.00 4.00Peru 4.25 Dec 2011 (-25bp) 4.25 4.00 3.75 3.75 3.75 3.75

EMEA EM 4.40 4.40 4.30 4.24 4.19 4.30 4.56Czech Rep 0.75 On hold 0.75 0.75 0.75 0.75 0.75 0.75Hungary 6.00 2Q 2012 (-25bp) 6.00 6.00 6.00 6.00 5.75 5.75Israel 3.00 Oct-24-11 (-25bp) 3.00 2.50 2.50 2.50 3.00 3.50Poland 4.50 1Q 12 (-25bp) 4.50 4.25 4.00 3.75 3.75 3.75Romania 6.25 1Q 12 (-25bp) 6.25 6.25 5.75 5.50 5.25 5.25Russia 3.75 3Q 12 (+25bp) 3.75 3.75 3.75 3.75 4.00 4.25South Africa 5.50 4Q 11 (-50bp) 5.50 5.00 5.00 5.00 5.00 5.00Turkey 5.75 Oct 12 (+25bp) 5.75 5.75 5.75 5.75 5.75 6.50

EM Asia 5.76 5.76 5.80 5.81 5.85 5.85 6.02China 6.56 4Q 2012 (+25bp) 6.56 6.56 6.56 6.56 6.56 6.81Korea 3.25 1Q 2012 (+25bp) 3.25 3.25 3.50 3.75 3.75 4.00Indonesia 6.75 1Q 2012 (-25bp) 6.75 6.75 6.50 6.50 6.50 6.50India 8.25 Oct-25-11 (+25bp) 8.25 8.50 8.50 8.50 8.50 8.50Malaysia 3.00 On hold 3.00 3.00 3.00 3.00 3.00 3.00Philippines 4.50 On hold 4.50 4.50 4.50 4.50 4.50 4.50Taiwan 1.8750 4Q 2012 (+12.5bp)1.875 1.875 1.875 1.875 1.875 2.00Thailand 3.50 2Q 2012 (+25bp) 3.50 3.50 3.50 3.75 3.75 3.75Source: J.P. Morgan



[email protected]

15



October 4, 2011

We recommend overweights in defensive low-beta

where value now looks outright attractive and high

spread overweights with idiosyncratic reasons to

tighten. Our EMBIG Model Portfolio recommendations are

still defensively positioned with an overweight in Latin

America versus EMEA EM, an underweight in quasi-

sovereigns, and defensive low-beta Philippines and

Colombia added last month as overweights. As spreads

approach wider levels we look at two sources of value: 1)

EMBIG bonds with yields above 15%; and, 2) previously

‘very low spread’ bonds with strong fundamentals and

technicals that have widened significantly. Table 11 shows

that only Venezuela/PDVSA and Belarus have yields above

15% in the EMBIG and we remain overweight Venezuela /

PDVSA given wide spreads that we feel do not price in the

potential for political upside in the 2012 elections. We also

highlight bonds, which markets previously considered safe

(given very low spreads) and have sold-off significantly.

Table 12 shows bonds which traded below 120bp on

August 1 (before EM spreads started widening) and where

spreads have widened over 50% since then. Not

surprisingly, the majority are in Latin America, including

Brazil, Colombia, Mexico and Panama, with the

Philippines and South Africa standing out for Asia and

EMEA EM. We remain overweight Colombia and the

Philippines from these countries.

The only central bank in EM Asia that we expect will

continue to raise policy rates in the next three months is

India, with our Bank of Korea rate hike call pushed

back into 2012. Even though the market continues to price

in rate cuts in India, the RBI is likely to stick to its script

and deliver another rate hike at the end of this month.

Indeed, if inflation and inflation expectations in India do

not show substantial moderation in the coming months, the

October rate hike may not mark the end of the cycle in

India. Elsewhere in the region, the majority of the countries

are expected to remain on hold, including China. The only

in the country in EM Asia expected to lower rates is

Indonesia, where a drop in headline inflation and a promise

to keep subsidized fuel prices unchanged even in 2012

should give BI headroom for a 25bp cut early next year.

EMBIG: Momentum points to likely widerspreads in the short-term

Given the strong cashflows and low financing needs for

EM sovereigns, we would see a large move wider on

global market risk aversion as a potential re-entry point

into EM sovereigns which we expect will be a more

resilient part of EM fixed income. Spread widening and

outflows (risk reduction) over the last few weeks have

started to lay the conditions for re-entry points to the

market that were previously lacking, but momentum

suggests it is still too early to add despite our still positive

EM growth forecast for the next year. We have revised our

EMBIG spread forecast higher by 100bp since August but

this has still not been enough to keep up with market

moves. With EMBIG spreads having widened 107bp over

the last month alone and meaningful outflows just starting

to been seen in the weekly data, we see wider spreads

possible in the short term but expect some retracement by

year-end as investors come back to buy a market where

fundamentals are still strong, supply is flat and positioning

is not stretched. EMBIG spreads peaked at 891bp in

October 2008 but we do not expect spreads to get close to

that over the next three months, given markets are much

more expectant of large sell-offs now (following the

2008/2009 experience) and technicals for EM sovereigns

are steadier with less risk in trading hands and much lower

leverage. We revise higher our year-end EMBIG spread

target to 425bp (from 375bp).

Table 11: Only Venezuela/PDVSA and Belarus have yields above15% in the EMBIGIssuer Instrument Stripped YTM Stripped SpreadPDVSA VE PDVSA 8 1/2% due 17 19.29 1,841 PDVSA VE PDVSA 12 3/4% due 22 18.96 1,753 Belarus BY Republic 8 3/4% due 15 18.40 1,781 PDVSA VE PDVSA 5 1/4% due 17 17.70 1,667 Venezuela VE Republic 12 3/4% due 22 17.03 1,553 Venezuela VE Republic 11.95% due 31 16.45 1,462 Venezuela VE Republic 9% due 23 16.02 1,431 Belarus BY Republic 8.95% due 18 15.71 1,457 Venezuela VE Republic 8 1/4% due 24 15.68 1,387 Venezuela VE Republic 9 1/4% due 28 15.63 1,375 Venezuela VE Republic 7 3/4% due 19 15.60 1,417 Venezuela VE Republic 7% due 18 15.57 1,425 Venezuela VE Republic 9 1/4% due 27 15.41 1,354 Venezuela VE Republic 9 3/8% due 34 15.16 1,321 Venezuela VE Republic 7.65% due 25 15.04 1,318 Source: J.P. Morgan

16



October 4, 2011


Warren MarAC (1-212) 834-4274

[email protected]

coming from retail and marginal crossover buyers now

seen to be retreating more aggressively back to traditional

benchmarks and EM sovereigns. While we have witnessed

a significant growth in institutionally backed CEMBI

funds in the last two years, AUM against the benchmark

currently stands at just 7.5% (or US$30 billion) of the

US$400+ billion market cap index.

We revise our year-end targets for CEMBI Broad and

corporate supply to 525bp (implying 380bp for IG and

975bp for HY) and US$175 billion, respectively. The

change in our supply forecast, which implies around

US$20 billion left to do this year, recognizes the current

challenges facing issuers and the expectation that market

access will be restricted to the better known quasi-sovereign

and investment grade names that will return to the market

as soon as conditions allow. Although the financing

constraints imposed upon corporates at this juncture is far

from ideal, EM refinancing pressures remain low with EM

corporates having front loaded much of their financing

needs into the 1H11 and built up sufficient liquidity through

operations to meet the US$17.6 billion of Eurobond

maturities (compared with coupon inflows of US$13.4 billion)

estimated for the remainder of the year (table 13).

EM corporates: The virtuous cycle of a negativefeedback loop

The extent of the reversal in the inflow story for EM

corporates and not fundamentals will determine peak

spreads for the asset class this crisis. We said as much in

the note we published on Tuesday, September 28, 2011

entitled Putting Recent Market Moves in Context. In that

report we warned that while default and refinancing risks

are much lower in EM corporates, with only US$17.6

billion of Eurobond maturities, today versus 2008. For the

remainder of the year compared to US$31 billion of cash

flows combined, challenges presented by poor liquidity and

weak sponsorship would likely continue to undermine

valuations and see spreads overshoot to the downside in the

near term. This view appears to be substantiated by the

73bp widening in CEMBI spreads in the third week of

September and the coincidental EPFR data which pointed

to acceleration in investment outflows from US and

Western European-domiciled EM mutual funds over the

same period. Retail investors may also continue to sell. On

the institutional side, we get a sense from talking to

dedicated EM money managers that they have been more

tolerant of this sell-off. However, dedicated investors have

not been large enough to counter the selling pressure

Table 13: Estimated EM corporate Eurobond cash flows forremainder 2011 and 2012 Eurobond Cash flows Remainder 2011 Forecast 2012Total cash flows 31,057 108,031Investment grade 21,320 70,293High yield 9,737 37,738of which total maturities 17,627 58,138Investment grade 13,895 40,619High yield 3,732 17,519of which total coupons 13,430 49,893Investment grade 7,425 29,674High yield 6,006 20,219

Total cash flows 31,057 108,031Asia 11,636 38,033Emerging Europe 8,429 26,411Latin America 6,217 24,072Middle East and Africa 4,775 19,515of which total maturities 17,627 58,138Asia 7,433 22,698Emerging Europe 5,098 14,881Latin America 1,757 6,505Middle East & Africa 3,338 14,054of which total coupons 13,430 49,893Asia 4,202 15,335Emerging Europe 3,332 11,530Latin America 4,460 17,567Middle East and Africa 1,437 5,461Source: J.P. Morgan and Bond Radar

Table 12: Bonds that traded below 120bp on August 1 and wherespreads have widened over 50% since then

Initial Current Bond Spread (bp) Spread (bp) % chg bp chgBR A bond 28 117 321% 89BR Republic 10 1/4% due 13 24 97 297% 72BR Republic 10 1/2% due 14 57 115 101% 58BR Republic 7 7/8% due 15 89 177 99% 88BR Republic 6% due 17 98 197 102% 99BR Republic 4 7/8% due 21 104 218 110% 114BR Republic 5 5/8% due 41 107 237 121% 130BR Republic 5 7/8% due 19 109 200 84% 91BR Republic 8 7/8% due 19 109 210 92% 101CO Republic 10 3/4% due 13 50 87 74% 37CO Republic 8 1/4% due 14 103 188 81% 84CO Republic 7 3/8% due 19 114 221 94% 107CO Republic 7 3/8% due 17 118 221 88% 104MX UMS 6 3/8% due 13 56 118 110% 62MX UMS 8% due 22 74 164 123% 90MX UMS 5 7/8% due 14 79 197 150% 118MX UMS 5 7/8% due 02/14 96 198 106% 102MX UMS 6 5/8% due 15 108 195 79% 86PA Republic 5.2% due 20 115 218 90% 103PH Republic 9% due 13 89 157 76% 68PH Republic 8 1/4% due 14 115 197 70% 81PH Republic 4% due 21 117 229 96% 113ZA Republic 6 1/2% due 14 120 183 52% 63Source: J.P. Morgan


Warren MarAC (1-212) 834-4274

[email protected]

17



October 4, 2011

Table 14a: EM corporates offering longer term valueBonds with a yield greater than 15%

Issue Country Sector Ratings Ask Price YTW SOT to worstAsiaAgile 10% due 16 China Real Estate Ba2/BB 81.50 15.34 1,435Agile 8 7/8% due 17 China Real Estate Ba2/BB 78.00 14.81 1,371Bakrie Telecom 11 1/2% due 15 Indonesia TMT NR/B 70.00 24.51 2,394BLT Finance 7 1/2% due 14 Indonesia Transport NR/CCC 43.00 47.95 4,760Country Garden 11 3/4% due 14 China Real Estate Ba3/BB- 90.00 16.15 1,575Country Garden 10 1/2% due 15 China Real Estate Ba3/BB- 85.00 15.83 1,519Country Garden 11 1/4% due 17 China Real Estate Ba3/BB- 84.00 15.67 1,456Country Garden 11 1/8% due 18 China Real Estate Ba3/BB- 84.00 15.25 1,395Evergrande 13% due 15 China Real Estate B2/BB- 74.00 24.94 2,445Hidili Industry 8 5/8% due 15 China Metals & Mining B1/BB- 70.00 19.63 1,892Kaisa Group Ltd 13 1/2% due 15 China Real Estate B2/B 71.00 26.55 2,598Lai Fung 9 1/8% due 14 China Real Estate B1/B+ 88.00 15.06 1,473Longfor 9 1/2% due 16 China Real Estate Ba3/BB 84.00 14.45 1,362Lonking 8 1/2% due 16 China Industrial Ba3/BB 81.00 14.20 1,332PT Gajah Tunggal Step-up due 14 Indonesia Industrial B3/NR 83.00 16.41 1,605Road King 7 5/8% due 14 China Infrastructure Ba3/BB- 72.00 22.33 2,198Road King 9 1/2% due 15 China Infrastructure NR/BB- 71.00 20.54 1,986West China Cement 7 1/2% due 16 China Industrial Ba3/BB- 77.00 14.92 1,414

Latin AmericaCemex 9 1/2% due 16 Mexico Industrial NA/B 76.25 16.47 1,545Cemex 9 1/4% due 20 Mexico Industrial NA/NA 69.00 16.00 1,428Cemex 9% due 18 Mexico Industrial NA/B 72.00 16.26 1,499Cemex FRN due 15 Mexico Industrial NA/B 66.50 18.18 1,749Marfrig Holding Europe 8 3/8% due 18 Brazil Consumer B1/B+ 67.00 16.84 1,550Marfrig Overseas 9 1/2% due 20 Brazil Consumer B1/B+ 68.00 16.62 1,491Maxtel 11% due 14 Mexico TMT Caa1/CCC+ 70.00 25.17 2,471Minerva Overseas 10 7/8% due 19 Brazil Consumer B2/B 81.00 14.99 1,336PDVSA 12 3/4% due 22 Venezuela Oil & Gas NA/NA 73.50 18.89 1,704PDVSA 4.9% due 14 Venezuela Oil & Gas NA/NA 69.00 18.61 1,818PDVSA 5 1/4% due 17 Venezuela Oil & Gas NA/B+ 57.50 17.59 1,649PDVSA 5 1/8% due 16 Venezuela Oil & Gas NA/NA 58.00 18.14 1,716PDVSA 5% due 15 Venezuela Oil & Gas NA/NA 61.50 19.01 1,830PDVSA 8 1/2% due 17 Venezuela Oil & Gas NA/B+ 66.50 19.18 1,819TGNOAR Step-up due 12 Argentina Utilities NA/NA 55.00 - -Trump Ocean Club 9 1/2% due 14 Panama Real Estate B3/NA 77.00 29.83 2,964

Middle East and AfricaDubai Holding Com FRN due 12 UAE Real Estate B3/NR 95.00 17.33 1,731Dubai Sukuk Centre FRN due 12 UAE Real Estate B3/B+ 90.00 17.06 1,700Source: J.P. Morgan

We do see clear value emerging in EM corporates; table

14 highlights the names that we believe already offer

longer-term value. The list is broken into two buckets, the

first including higher quality and rated names already

trading at a yield between 7-8%, and lower rated names

already trading at a yield above 15%.


Warren MarAC (1-212) 834-4274 Holly HuffmanAC (1-212) 834-4953


18



October 4, 2011

Local market bonds remain vulnerable to furtherposition reduction; stay max short EM FX

We recommend bearish positions in several local bond

markets, particularly where foreign holdings are high

relative to recent periods and where positions are long.

EMEA EM, in general, and South Africa and Hungary, in

particular, stand out as being most susceptible to outflows

(South Africa) and underperformance (Hungary); we

recommend being short 10-year bonds in the former and

5-year bonds in the latter. We are cautious on EM Asian

local bonds as well, as foreigners’ selling is likely to

remain the dominant factor in the near term. One key

differentiating factor in Asia, though, is strong domestic

support for many local markets, and we would expect this

backstop bid to materialize at higher yield levels. The best

opportunities to add duration may be in Latin America in

the coming weeks. If FX rates and general market volatility

stabilize, the slow growth and low-for-long policy of the

Table 14b: Bonds with a yield between 7-9%Issue Country Sector Ratings Ask Price YTW SOT to worstAsiaBeijing Enterprises 6 3/8% due 41 China Diversified Baa1/A- 91.72 7.04 406Cikarang 9 1/4% due 15 Indonesia Utilities Ba2/BB- 103.00 8.19 769Hutchison 6 5/8% due 15 Perp Hong Kong Diversified NR/NR 89.50 7.46 404Indosat 7 3/8% due 20 Indonesia TMT Ba1/BB 102.50 6.91 551Noble 6 3/4% due 20 Hong Kong Diversified Baa3/BBB- 91.00 8.26 660PT Adaro 7 5/8% due 19 Indonesia Metals & Mining Ba1/NR 101.00 7.42 620Emerging EuropeDev Bank of Kazakhstan 5 1/2% due 15 Kazakhstan Financial Baa3/BBB 96.00 6.60 585Lukoil 6 1/8% due 20 Russia Oil & Gas Baa2/BBB- 93.88 7.05 525VEB Finance 6.902% due 20 Russia Financial NR/BBB 100.00 6.90 516Vimpelcom 8 3/8% due 13 Russia TMT Ba3/BB 102.50 6.67 648Latin AmericaAlestra 11 3/4% due 14 Mexico TMT B1/B+ 112.00 7.03 664Auto Gil 8 1/4% due 21 Chile Consumer Ba1/NR 100.00 8.25 670Banco ABC 7 7/8% due 20 Brazil Financial Ba1/NR 93.50 8.98 728Banco Internac 8 1/2% due 70 Peru Financial Ba3/NR 101.50 8.25 654Banco Panamericano 8 1/2% due 20 Brazil Financial Ba3/NR 106.00 7.53 583Bbva Bancomer 7 1/4% due 20 Mexico Financial A3/NR 99.38 7.35 564Bbva Bancomer 6 1/2% due 21 Mexico Financial A2/NR 94.50 7.32 546BCP 6 7/8% due 26 Peru Financial Baa3/NR 98.00 7.09 488BCP Var 9 3/4% due 69 Peru Financial NR/BB+ 114.00 7.42 579Braskem 7 1/8% due 41 Brazil Industrial Baa3/BBB- 93.50 7.68 469Braskem 7 3/8% due 15 Perp Brazil Industrial Baa3/BBB- 96.50 7.73 431Commex 7% due 18 Mexico Consumer Ba3/NR 97.00 7.94 656Corp GEO 8 7/8% due 14 Mexico Real Estate Ba3/BB- 101.00 8.49 808Cosan 8 1/4% due 15 Perp Brazil Consumer Ba2 /BB 96.00 8.70 527Digicel 8 1/4% due 17 Jamaica TMT B1/NR 96.00 9.14 795Fibria Overseas 7 1/2% due 20 Brazil Pulp & Paper Ba1/BB 95.35 8.27 655Fibria Overseas 6 3/4% due 21 Brazil Pulp & Paper Ba1/BB 91.50 8.05 620Grupo Petrotemex 9 1/2% due 14 Mexico Industrial NR/BB 104.00 7.91 752Homex 7 1/2% due 15 Mexico Real Estate Ba3/BB- 99.00 7.80 711Hypermarcas 6 1/2% due 21 Brazil Consumer Ba2/BB- 93.25 7.50 562IFH Peru Ltd 8 5/8% due 19 Peru Financial Ba3/BB- 105.00 7.54 640Mabe 7 7/8% due 19 Mexico Consumer NR/BBB- 102.25 7.50 587Magnes 7 7/8% due 20 Brazil Industrial B1/BB- 99.00 8.04 634Malls Intl Fin 8 1/2% due 16 Perp Brazil Consumer NR/BB- 102.00 8.02 725MICC 8% due 17 El Salvador TMT B1/NR 100.00 8.00 703Nii Capital Corp 8 7/8% due 19 Mexico TMT B2/B+ 106.00 7.64 639Nii Capital Corp 7 5/8% due 21 Mexico TMT B2/B+ 103.00 7.10 558Odebrecht 7 1/2% due 15 Perp Brazil Diversified Baa3/BB+ 98.50 7.69 426Unibanco 8.7% due 10 Perp Brazil Financial Baa1/NR 100.10 7.14 715Urbimm 8 1/2% due 16 Mexico Real Estate Ba3/B+ 102.00 7.62 728Votorantim 7 1/4% due 41 Brazil Diversified Baa3/BBB 96.00 7.59 461YPF 10% due 28 Argentina Oil & Gas NR/NR 112.50 8.59 626Middle East and AfricaDEWAAE 7 3/8% due 20 UAE Utilities Ba2/NR 97.00 7.84 605Source: J.P. Morgan

19



October 4, 2011

Fed and other central banks should push some investors

back into the market. This is particularly the case for

Brazil, where the onset of an easing cycle and relatively

low vulnerability to foreigner selling should make the

market attractive if risk sentiment improves. In aggregate,

for real money investors, we recommend neutral duration

allocations in Asia and neutral duration allocations in Latin

America, with an emphasis on linkers. We are short

duration, meanwhile, in EMEA EM. Our top trades across

EM local markets are highlighted in the table 15. We also

update our currency and GBI-EM yield forecasts in table 16.

For similar reasons, we continue to recommend

maximum short EM FX allocations versus the GBI-EM

index (10%). The depreciation of many currencies has

been greater than declines in cyclical drivers would

suggest, notably for the MXN and some EM Asian FX.

However, currencies remain the more liquid adjustment

valve for investors to hedge bond positions which face

liquidity constraints. Further, as slower growth takes hold

heading into 2012, downward pressure on EM terms of

trade drivers, notably commodities, is likely to prevent EM

FX from rebounding meaningfully. While central banks are

well prepared with strong balance sheets to stem further FX

Table 15: Top local markets tradesTrade Entry date Latest Entry Target StopTWD/THB 2-month NDF 8-Aug-11 1.0288 1.0340 1.0065 1.0510USD/CNY 3-month NDF 12-Jul-11 6.396 6.466 6.350 6.530Long TRY/ZAR 20-Sep-11 4.35 4.29 4.50 4.20Short ZAR 10-year (R208) 13-Sep-11 8.30% 7.31% 8.40% 7.70%Short HUF 5-year (16/c) 3-Oct-11 7.41% 7.54% 8.00% 7.20%Long USD/CLP 13-Sep-11 526 475.3 550 460Long USD/COP 13-Sep-11 1961 1821 2000 1765Short CAD/MXN 27-Sep-11 14.66 13.12 12.50 15.55Long MXN/COP 27-Sep-11 140.5 141.1 155.0 130.0Long USD/ARS Sell Dec 14/Buy Mar 14 NDF 13-Sep-11 4.5085/4.6994 4.205Receive Brazil Jan ’14s 13-Sep-11 10.72% 10.94% 10.50% 11.10%Receive Chile 2-year Swap 13-Sep-11 4.62% 4.49% 3.91% 4.83%Receive Mexico 5-year TIIE swaps 13-Sep-11 5.85% 5.56% 5.15% 5.75%Receive Colombia 2-year IBR 13-Sep-11 4.90% 4.75% 4.25% 5.00%Source: J.P. Morgan

Table16: GBI-EM returns and forecasts through year-endDark bars are year-to-date returns; lighter bars are J.P. Morgan expectations from now to year-end

Yield Local Return Spot Spot ReturnCountry Forecast Return Est. 2011 YTD Current Forecast to Year-end Current Forecast to Year-endGGBI-EM Global Div 0.3% -3.5% 6.7% 6.8% 1.4% 2.3%Indonesia 11.9% 16.5% 7.3% 8.2% -4.7% 9,000 8,928 0.8%Peru 9.9% 5.2% 6.3% 6.1% 3.5% 2.78 2.75 0.9%Malaysia 7.5% -0.4% 3.6% 3.7% 0.3% 3.20 2.98 7.5%Brazil 6.7% -1.2% 10.8% 10.7% 2.9% 1.89 1.80 5.0%Colombia 5.9% -4.4% 6.7% 6.2% 3.9% 1961 1900 3.2%Thailand 4.9% -1.7% 3.8% 3.8% 0.7% 31.3 29.5 5.9%Mexico 3.4% -5.5% 6.8% 6.4% 3.8% 14.0 13.3 5.4%Philipines 2.8% -1.8% 6.3% 6.6% -0.7% 44.0 41.8 5.4%Chile 2.2% -3.9% 4.7% 4.7% 1.1% 526 500 5.2%Hungary 1.3% -1.5% 7.8% 7.8% 1.8% 223 221 1.0%Russia -2.5% -4.1% 8.2% 7.9% 2.9% 32.6 33.0 -1.2%Poland -5.8% -6.5% 5.4% 5.4% 1.4% 3.31 3.33 -0.7%Turkey -12.4% -14.4% 8.6% 8.5% 2.4% 1.88 1.88 -0.0%South Africa -16.0% -15.6% 8.2% 8.4% 1.0% 8.18 8.30 -1.4%

Source: J.P. Morgan

-20% -10% 0% 10% 20%



[email protected]

JPMorgan Chase Bank N.A., Hong Kong

Bert GochetAC (852) 2800-8325

[email protected]

20



October 4, 2011

volatility, governments broadly have shown comfort with

the directional moves in currencies. Risks are skewed to

further underperformance broadly, and we continue to

recommend a maximum short (10%) allocation versus the

GBI-EM GD index, a position which we have held since

August 9, when we increased short exposure from 5% to

10%. We also continue to recommend outright short trades

where we see the highest probability of further outflows in

local bonds, most notably in ZAR. We took profits in long

PLN/HUF and look for both to underperform versus USD.

We close our long-held overweight SGD trade, though we

continue to see upside in CNY versus USD despite recent

headwinds and increased risks from the policy side. In

Latin America, we recently took profits on long USD/BRL

but hold short exposure to the region via long USD/COP

and USD/CLP which have lagged.

EM Asia: Reduce directional risk but hold shortUSD/CNY and short TWD/THB

Asia FX has capitulated as the anchor from growth

expectations eroded away. J.P. Morgan ADXY index of

EM Asia FX, sold off violently on a position unwind as

confidence in the growth cycle turned. The September sell-

off has been the largest since early-2009, and this has

effectively taken out the year-to-date appreciation in EM

Asia. The 5% depreciation of the ADXY at the peak of the

move is almost equivalent to the full-year depreciation in

the sharp recession of 2000. Though this suggests that a

sharp economic slowdown is already priced, markets

continue to price in risk premia of a crisis or a funding

crunch on the scale of Sept-2008. So, while ADXY appears

oversold relative to a cyclical slowdown, fear of financial

system crisis (even if not our base scenario) may take the

market to deeper oversold levels (chart 14).

However, central bank intervention is now an important

offset. Central banks, having bought USD into the

USD/Asia fall, now have significant capacity to buffer

the USD/Asia rise. Indeed, central banks in many markets

are now offering USD in substantial size. Notably, recent

moves in the region have started to reflect the relative

intervention biases of Asian central banks. Currencies

where policymakers are active sellers of USD (PHP, THB,

IDR) have traded with relative resilience, while currencies

with less or no intervention have seen more violent

unwinds (SGD, INR). In the near term, we expect two-

sided volatility on USD/Asia to stay high with intervention

biases influencing relative performances within the region.

In local rates markets, trading has been mostly sideways

in recent weeks as cyclical factors (for lower yields) have

offset the impact of some outflows so far (i.e., higher

yields). But we fear that Asian government bonds will

eventually have to suffer when foreign investors reduce

their local bond holdings. Local investors would be buyers-

on-dips at current levels, but they will not underwrite the

exodus of foreign money out of their markets without

asking for concessions. As such, we believe that bond

markets such as Indonesia, Malaysia and Korea are

vulnerable to a further correction despite bond-positive

fundamentals, such as declining inflation, declining growth,

and conservative fiscal stance. We will, therefore, wait for

better levels to position in Asian bonds for the time being.

In Asia FX, we avoid over-emphasizing long-term

directional or fundamental views while financial

markets are clearly distressed, focusing instead on

defensive positions to ride out volatile times. Particularly,

we stay in defensive intra-Asia crosses for carry or for

relative intervention biases between central banks. We

minimize outright USD/Asia risks. We stay short

TWD/THB, which continues to benefit from carry and

THB stability. We continue to like short TWD funding for

carry and in view of a central bank that is expected to

remain resistant to currency appreciation. In contrast, THB

should remain resilient as it remains a laggard in EM Asia,

and the BoT has been active in capping USD/THB upside.

In this environment, we minimize outright directional risks

in USD/Asia, staying short only in markets where the

directional trend remains intact: short USD/CNY as we

continue to see records low in the daily fixings. We exit

outright short USD/SGD, and advise seeking long SGD

exposures only on a basket basis and only if the SGD

NEER trades down to the intervention level of the band

(-2% band level by our estimates).

-15.0

-10.0

-5.0

0.0

5.0

10.0

Feb-94 Feb-98 Feb-02 Feb-06 Feb-10-25%

-20%

-15%

-10%

-5%

0%

5%

10%

Asia - US growth differential

ADXY %oya

Source: J.P. Morgan

Chart 14: ADXY synchronized to growth cycle%oya both scales


Michael TrounceAC (44-20) 7777-4356

[email protected]

21



October 4, 2011

In Asian rates, we keep risk light. We exit a curve

flattener in KRW, where we were long 10-year KTB

versus paid in 2-year swaps. We also have exited a long

position in INDOGB, as the risk that Indonesian yields rise

from here remains real, despite the authorities’

interventions in both the FX and the bond market.

EMEA EM: Most vulnerable to outflows risk; stay short South Africa bonds and favor Poland versus Hungary

The ongoing downward revisions in growth forecasts

will continue to place modest further negative pressure

on EMEA EM FX, which has corrected by more than

16% since May, with much of the move taking place in

September. We continue to expect the ELMI+ subindices

for EMEA EM currencies to fall (i.e., we expect negative

total returns) and we see greater pressure on markets where

the growth outlook has been taken down further. Our latest

growth forecasts cut back most strongly the outlook for

2012 in Hungary, we keep Hungary in the bottom tier of

EMEA EM FX markets long with South Africa, where

positions are crowded.

EMEA EM central banks have to a varying extent

markedly stepped up their response to cyclically weaker

FX markets; they are focusing on containing volatility—

leaning against the wind—rather than drawing a line in

the sand. As growth and inflation forecasts were taken down

during August in response to the cyclical slowdown, interest

rate expectations fell and short rates rallied. The consequent

weakening in EMEA EM FX has been viewed differently

across EM central banks, and our trade recommendations

reflect this. In South Africa, Hungary, and Romania, the

weakening in monetary conditions is—for now—tolerable

and will act as counter-cyclical support, although the market

is right to price in rate hikes in Hungary as a response to the

weaker currency. In Russia, the RUB weakness has passed

the tipping point and intervention has returned in force; more

than US$6 billion in September. Likewise in Poland, the

NBP has for only the second time in ten years resorted to

intervention in order to dampen excess volatility. Turkey has

come the closest to drawing a line in the sand for the lira;

having effectively achieved a significant—even relative to

other EM currencies—depreciation in the November-May

period, it is now acting effectively through reserve

drawdown to halt the lira’s fall and maintain credibility over

the inflation profile.We believe that central banks will resort

to FX intervention over rate hikes, although Hungary may

be the exception.

South Africa has the greatest potential for deeper

outflows. Deteriorating growth and fiscal dynamics will

continue to weigh on South Africa assets as credit premia is

priced in. Even after the late September moves (seven

consecutive large outflow days and ZAR 15 billion of bond

outflows), we think positions are still relatively overweight.

In addition, any support from policy rate cuts is more

unlikely now given the significant depreciation of the

currency. Outflows from South Africa local bonds are also

likely to intensify as real money funds meet redemptions

by selling assets given low cash levels, potentially fueling

further rand weakness.

We are bearish on HUF FX and rates due to weak

fundamentals. The appetite of the NBH to use reserves to

defend the HUF may be limited compared with other

central banks since FX reserves may need to be used to pay

down maturing FX debts. The market is pricing in the

expectation that once again that interest rates will serve as

the main adjustment channel. Further, Hungary has adopted

a less direct approach to FX intervention, choosing to

offset any local bank demand for FX which is likely to

materialize from the new FX loan plan against their FX

reserves. These weekly EUR auctions will be conducted

between October 3, 2011 and February 29, 2012. Assuming

the NBH's scenario of a 20% participation rate, we estimate

that there could be as much as EUR3.85 billion in

additional local bank demand for FX, amounting to the

equivalent of FX intervention. However the uncertainties

surrounding this plan suggest that NBH will likely hike

rates if HUF depreciation continues at the current pace.

Poland, Turkey, Israel and Czech are the least

vulnerable markets, with lower foreign participation.

Positions are relatively light in both rates and FX markets

and central banks here have been stepping up their

intervention strategies. These markets also benefit better

fiscal positions (once parastatal debt has been taken into

account in South Africa) or better growth outlooks, or both,

but the willingness and ability of policymakers to act to

lean against the wind to smooth volatility, coupled with

smaller positions, is the key here.

Turkey stands out as having the most aggressive

intervention strategy in the region. The CBRT’s daily

USD selling auctions amounted to US$1.7 billion in

September, the largest on record. In addition, verbal

intervention has been frequent and explicit with the central

bank governor making it quite clear last week that further

TRY depreciation would be “undesirable”.

J.P. Morgan Securities Ltd. J.P. Morgan Securities LLC

Michael TrounceAC (44-20) 7777-4356 Felipe PianettiAC (1-212) 834-4043


22



October 4, 2011

The NBP has been particularly active in the FX market

in recent weeks, directly intervening to support the

currency in mid September (for the first time in 10

years) and on several occasions since then. Verbal

intervention has also been frequent from both the central

bank and the Ministry of Finance with .the goal to cap

imported price pressures as well as limit excess speculation

and currency volatility. The NBP’s strategy has proven

effective with the currency appreciating over 2% since mid-

September, prompting us to take profits on our PLN versus

HUF relative value trade. We expect the intensity of NBP

intervention to moderate while increased risks for a rate

hike in Hungary may help to strengthen HUF. That said, we

still retain a preference for PLN over in HUF in our model

portfolio given Poland’s healthy growth and fiscal outlook

and resilient flow momentum.

Latin America: Best opportunities to add duration;BRL and MXN volatility to subside, but ARS toplay catch up

The BRL and the MXN were the worst performers

among major currencies over the past month, a result of

hefty positioning by international investors. While these

currencies remain vulnerable to further correction, we see

less room for them to play the role of the higher beta in a

sell-off scenario. Central banks that have been cheering the

role of floating exchange rate regimes in providing a buffer

amid a global crisis have also become more vocal about

potential overreactions in the FX markets, which may

prompt some intervention if the overshooting persists.

ARS has lagged the sell-off as presidential elections are

approaching on October 23. While the timing is

uncertain, we believe it is inevitable that the government

will let the ARS adjust given the sharp depreciation of the

currencies of Argentina’s main trading partners (Brazil in

particular). The NDF trade tames the carry cost and should

perform well (the curve should steepen) in a scenario in

which the government tries to hold the peso steady amid

continued correction in broader EM FX.

Central Banks in Latin America have strengthened

their balance sheets since the 2008 crisis, with a

substantial increase of international reserves in the

period; Argentina was the only exception. Official

intervention in the past has been reactive to market

liquidity conditions and the pace of the depreciation (or

volatility). Some depreciation has been welcome in most of

the region, as the FX is seen as buffer in a global economic

downshift, especially for countries that not long ago were

trying to fend off appreciation pressures. Brazil has

intervened through swaps, when the USD/BRL breached

the 1.90 level, and Chilean officials recently stated that the

USD purchase operations could be terminated. Argentina

BCRA has been the most aggressive central bank in the

region as it has sold USD through spot and futures market

(US$2 billion total according to J.P. Morgan estimates) to

keep the USD/ARS 4.20 level in check.

In Latin America, the 5-year to 10-year sector of the

local bond curves in Brazil and Mexico are heavily

owned by international investors. International investors

own 40% of the stock of Mbonos outstanding and 58% of

the 5-year to 10-year bucket. Their holdings are around

US$50 billion, of which US$16 billion was built in 2011

alone. The steepening of the Mexican curve and the sound

fiscal numbers may limit the selling of Mbonos, especially

with the currency trading near 14, but forced selling (driven

by redemptions) is a risk to monitor. In Brazil, foreign

investors hold around US$125 billion in local bonds, or

12% of local debt. Positions are mostly concentrated in the

long-end (F17 and F21), where foreigners own over 40% of

the stock outstanding. A key risk to monitor is the behavior

of Japanese investors as the BRL/JPY cross trends lower.

In addition, the rapid expansion of BRL-overlay funds

since 2Q09 adds another layer of risk to the BRL (current

AUM is just below US$40 billion). A strong central bank

balance sheet and the potential unwinding of macro-

prudential measures provide a silver lining in a scenario of

global recession. The BCB holds over US$ 350 billion in

international reserves, and the government could remove

the IOF on financial transactions at will.

In Latin America, receive 2-year (Jan14s) in Brazil and

5-year TIIE in Mexico; in Argentina, sell 2-month

versus buy 6-month USD/ARS. Brazil and Mexico may

steer clear of counter-cyclical fiscal policies and instead

ease monetary conditions as the first line of defense from a

global recession. The yield curve in Brazil is relatively flat

between 2s5s, as market participants seem to believe that a

front-loaded easing cycle will need to be reversed in a

12-month horizon. In our view, the shape of the curve

gives the 2-year the most upside in a full-blown recession.

Meanwhile, the IRS curve remains steep in Mexico as

participants have not factored in the recession risks for

2012. As the scenario for low for long becomes a base

case, we see the 5-year outperforming (as it did in the US

before QE2 and from March 2011 to date).



October 4, 2011

23


Tejal Ray (1-212) 834-8580

[email protected]

Asia and Latin America Credit RatingsMoody’s S&P Fitch Recent Moody’s Action Recent S&P Action Recent Fitch Action

Rating View Rating View Rating View Action Date Action Date Action DateAsia

China Aa3 (+) AA- A+ Upgrade, O/L chngd (+) Nov-11-10 Upgrade, O/L stable Dec-16-10 Affirmed, O/L stable Aug-18-11Fiji Islands B1 (-) B NR Affirmed, O/L (-) May-12-11 Upgrade, O/L chngd to stable Aug-04-11Hong Kong Aa1 (+) AAA AA+ Affirmed, O/L (+) Sep-20-11 Affirmed, O/L stable Aug-02-11 Affirmed, O/L stable Oct-03-11India Baa3 BBB- BBB- Affirmed, O/L stable Jul-26-10 O/L chngd to stable, Affirmed Mar-18-10 Affirmed, O/L stable Jun-21-11Indonesia Ba1 BB+ (+) BB+ (+) Affirmed, O/L stable Feb-10-11 Upgrade, O/L (+) Apr-08-11 O/L chngd to (+), Affirmed Feb-24-11Korea A1 A A+ Upgrade, O/L stable Apr-14-10 Affirmed, O/L stable Jan-12-10 Affirmed, O/L stable Nov-11-10Malaysia A3 A- A- Upgrade, O/L stable Dec-16-04 Affirmed, O/L stable Jul-27-11 Affirmed, O/L stable Aug-11-11Pakistan B3 B- NR Affirmed, O/L stable Nov-16-10 Affirmed, O/L Stable Nov-15-10Philippines Ba2 BB BB+ Upgrade, O/L stable Jun-16-11 Upgrade, O/L stable Nov-12-10 Upgrade, O/L stable Jun-23-11Singapore Aaa AAA AAA Upgrade, O/L stable Jun-14-02 Affirmed, O/L stable Aug-25-11 Affirmed, O/L stable Apr-20-11Sri Lanka B1 (+) B+ (+) BB- O/L chngd to (+), Affirmed Jul-18-11 O/L chngd to (+), Affirmed Jul-19-11 Upgrade, O/L stable Jul-18-11Taiwan Aa3 AA- A+ Affirmed, O/L stable Aug-25-11 Affirmed, O/L stable Aug-02-11 Affirmed, O/L stable Nov-10-08Thailand Baa1 BBB+ BBB O/L chngd to stable, Affirmed Oct-28-10 O/L chngd to stable, Affirmed Dec-09-10 Downgrade, O/L chngd to stable Apr-16-09Turkmenistan B2 NR NR Affirmed, O/L stable Aug-13-01 Withdrawn Feb-25-05Vietnam B2 B+ B+ Affirmed, O/L stable Jan-15-09 Downgrade, O/L stable Aug-19-11 Affirmed, O/L stable Apr-11-11

Moody’s S&P Fitch Recent Moody’s Action Recent S&P Action Recent Fitch ActionRating View Rating View Rating View Action Date Action Date Action Date

Latin AmericaArgentina B3 B B O/L chngd to stable Aug-14-08 Affirmed, O/L stable Sep-12-11 Affirmed, O/L stable Jul-22-11Barbados Baa3 (-) BBB- NR O/L chngd to (-), Affirmed Jun-13-11 Affirmed, O/L stable May-03-11Belize B3 B- NR Downgrade, O/L stable Aug-04-11 CreditWatch (-) Jun-21-11Bolivia B1 (+) B+ (+) B+ Affirmed, O/L (+) Sep-08-11 O/L chngd to (+), Affirmed Aug-22-11 Upgrade, O/L stable Oct-05-10Brazil Baa2 (+) BBB- (+) BBB Upgrade, O/L (+) Jun-20-11 Affirmed, May-23-01 Upgrade, O/L stable Apr-04-11Chile Aa3 A+ (+) A+ Affirmed, O/L stable Sep-08-11 O/L chngd to (+), Affirmed Dec-16-10 Affirmed, O/L stable Sep-07-11Colombia Baa3 BBB- BBB- Upgrade, O/L stable May-31-11 Upgrade, O/L stable Mar-16-11 Upgrade, O/L stable Jun-22-11Costa Rica* Baa3 BB BB+ Affirmed, O/L stable Sep-08-11 Affirmed, O/L stable Feb-07-11 Upgrade, O/L stable Mar-04-11Cuba Caa1 NR NR Assigned Apr-05-99Dominican Republic B1 B+ B (+) Upgrade, O/L stable Apr-22-10 Upgrade, O/L stable Jun-13-11 O/L chngd to (+), Affirmed Jan-05-11Ecuador Caa2 B- (+) B- Upgrade, O/L stable Feb-01-11 O/L chngd to (+), Affirmed Aug-04-11 Upgrade, O/L stable Nov-05-10El Salvador Ba2 BB- BB Downgrade, O/L chngd to stable Mar-24-11 Downgrade, O/L stable Jan-14-11 O/L chngd to stable, Affirmed Jul-29-11Guatemala Ba1 BB (-) BB+ Upgrade, O/L stable Jun-01-10 O/L chngd to (-), Affirmed Aug-02-11 Affirmed, O/L stable Aug-04-11Honduras B2 B (+) NR Affirmed, O/L stable Sep-29-98 O/L chngd to (+), Affirmed Jun-14-11Jamaica B3 B- B- Upgrade, O/L Stable Mar-02-10 Affirmed, O/L Stable Dec-22-10 Affirmed, O/L stable Feb-08-11Mexico Baa1 BBB BBB Affirmed, O/L stable Aug-18-11 Upgrade, O/L stable Dec-17-10 Affirmed, O/L stable Jan-12-11Nicaragua B3 NR NR Upgrade, O/L stable May-26-10Panama Baa3 (+) BBB- (+) BBB O/L chngd to (+), Affirmed Aug-04-11 O/L chngd to (+), Affirmed Jul-21-11 Upgrade, O/L stable Jun-02-11Paraguay B1 BB- NR Upgrade, O/L stable Dec-02-10 Upgrade, O/L stable Aug-30-11Peru Baa3 (+) BBB BBB- (+) O/L chngd to (+), Affirmed Mar-21-11 Upgrade, O/L chngd to stable Aug-30-11 Affirmed, O/L (+) Jul-27-11Trinidad & Tobago Baa1 A NR Upgrade, O/L stable Jul-13-06 Affirmed, O/L stable Jan-14-11Uruguay* Ba1 BB+ BB+ Upgrade, O/L stable Dec-08-10 Upgrade, O/L stable Jul-25-11 Upgrade, O/L stable Jul-14-11Venezuela B2 B+ B+ Affirmed, O/L stable Jan-15-09 Downgrade, O/L stable Aug-19-11 Affirmed, O/L stable Apr-11-11

* S&P issue rating is one notch above the issuer credit ratingSee key on the following page for explanation of ratings terminology and procedures.



October 4, 2011


Tejal Ray (1-212) 834-8580

[email protected]


EMEA EMAngola Ba3 BB- BB- Upgrade, O/L stable Jun-06-11 Upgrade, O/L stable Jul-12-11 Upgrade, O/L stable May-24-11Bahrain Baa1 (-) BBB (-) BBB Affirmed, O/L (-) Sep-21-11 O/L chngd to (-), Affirmed Jul-20-11 O/L chngd to stable, Affirmed Aug-03-11Botswana A2 (-) A- NR Affirmed, O/L (-) Sep-21-11 Affirmed, O/L stable May-31-11Bulgaria Baa2 BBB BBB- (+) Upgrade, O/L stable Jul-22-11 O/L chngd to (+), Affirmed Dec-17-10 Affirmed, O/L (-) May-24-11Croatia Baa3 BBB- (-) BBB- (-) Affirmed, O/L stable Sep-14-11 Affirmed, O/L (-) Sep-15-11 Affirmed, O/L (-) Mar-08-11Czech Republic A1 AA- A+ (+) Affirmed, O/L stable Aug-04-11 Upgrade, O/L stable Aug-24-11 Affirmed, O/L chngd to (+) Jul-25-11Egypt Ba3 (-) BB (-) BB (-) Affirmed, O/L (-) Aug-30-11 Affirmed, O/L (-) Mar-10-11 O/L chngd to (-), Affirmed Jun-28-11Estonia A1 AA- A+ O/L chngd to stable, Affirmed Mar-31-10 Upgrade, O/L chngd to stable Aug-09-11 Upgrade, O/L stable Jul-05-11Gabon NR BB- BB- Affirmed, O/L stable Jun-03-11 Affirmed, O/L stable Apr-11-11Ghana NR B B+ Downgrade, O/L chngd to stable Aug-27-10 Affirmed, O/L stable Sep-23-11Hungary Baa3 (-) BBB- (-) BBB- Downgrade, O/L chngd to (-) Dec-06-10 Affirmed, O/L (-) Mar-24-11 O/L chngd to stable, Affirmed Jun-06-11Israel A1 A+ A Upgrade, O/L stable Apr-17-08 Upgrade, O/L stable Sep-09-11 Affirmed, O/L stable May-27-11Jordan Ba2 (-) BB (-) NR O/L chngd to (-), Affirmed Feb-08-11 Affirmed, O/L chngd to (-) Feb-08-11Kazakhstan Baa2 BBB BBB- (+) Affirmed, O/L stable Jan-11-11 Upgrade, O/L stable Dec-23-10 O/L chngd to (+), Affirmed Dec-20-10Kenya NR B+ B+ Upgrade, O/L stable Nov-19-10 Affirmed, O/L stable Aug-12-11Kuwait Aa2 AA AA O/L chngd to stable, Affirmed Aug-05-10 Upgrade, O/L stable Jul-20-11 Affirmed, O/L stable Jul-25-11Latvia Baa3 BB+ (+) BBB- (+) O/L chngd to stable, Affirmed Mar-31-10 O/L chngd to (+), Affirmed Mar-09-11 Upgrade, O/L chngd to (+) Mar-15-11Lebanon B1 B B Upgrade, O/L stable Apr-13-10 O/L chngd to stable, Affirmed Jan-18-11 Affirmed, O/L stable Jul-05-11Lithuania Baa1 BBB BBB (+) O/L chngd to stable, Affirmed Mar-31-10 O/L chngd to stable, Affirmed Apr-13-11 O/L chngd to (+), Affirmed May-04-11Morocco* Ba1 BBB- BBB- O/L chngd to stable Jun-18-03 Upgrade, O/L stable Mar-23-10 Affirmed, O/L stable Feb-01-11Nigeria NR B+ BB- (-) Affirmed, O/L Stable Nov-02-10 O/L chngd to (-), Affirmed Oct-22-10Oman A1 A (-) NR Upgrade, O/L stable Feb-18-10 O/L chngd to (-), Affirmed Jul-20-11Poland A2 A- A- Affirmed, O/L stable Jan-05-10 Affirmed, O/L stable Aug-03-11 Affirmed, O/L stable Mar-18-11Qatar Aa2 AA NR Upgrade, O/L stable Jul-24-07 Affirmed, O/L stable Sep-26-11Romania Baa3 BB+ BBB- Upgrade, O/L stable Oct-06-06 Affirmed, O/L stable Jun-08-11 Upgrade, O/L stable Jul-04-11Russia Baa1 BBB BBB (+) O/L chngd to stable, Affirmed Dec-12-08 Affirmed, O/L stable Aug-31-11 Affirmed, O/L (+) Sep-02-11Saudi Arabia Aa3 AA- AA- Upgrade, O/L Stable Feb-15-10 Upgrade, O/L stable Jul-16-07 Affirmed, O/L stable Apr-08-11Serbia NR BB BB- Upgrade, O/L stable Mar-16-11 Affirmed, O/L stable Sep-22-11Slovak Republic A1 A+ (+) A+ Affirmed, O/L stable May-17-11 O/L chngd to (+), Affirmed Aug-24-11 Affirmed, O/L stable Jun-06-11Slovenia Aa3 - AA (-) AA Downgrade, Review (-) Sep-23-11 O/L chngd to (-), Affirmed Dec-22-10 Affirmed, O/L stable Mar-17-11South Africa A3 BBB+ BBB+ Upgrade, O/L chngd to stable Jul-16-09 O/L chngd to stable, Affirmed Jan-25-11 O/L chngd to stable, Affirmed Jan-17-11Tunisia Baa3 (-) BBB- (-) BBB- (-) Affirmed, O/L (-) Sep-14-11 O/L chngd to (-), Affirmed Jul-28-11 Downgrade, O/L (-) Mar-02-11Turkey Ba2 (+) BB (+) BB+ (+) O/L chngd to (+), Affirmed Oct-05-10 Affirmed, O/L (+) Sep-20-11 O/L chngd to (+), Affirmed Nov-24-10Ukraine B2 B+ B (+) O/L chngd to stable, Affirmed Oct-11-10 Affirmed, O/L stable Sep-13-11 Affirmed, O/L (+) Sep-02-11UAE Aa2 NR NR Upgrade, O/L stable Jul-09-07


Developed MarketsCanada Aaa AAA AAA Affirmed, O/L stable Jun-22-11 Affirmed, O/L stable Apr-23-10 Affirmed, O/L stable Sep-06-11Germany Aaa AAA AAA Affirmed, O/L stable May-17-11 Affirmed, O/L stable May-18-11 Affirmed, O/L stable Sep-29-11France Aaa AAA AAA Affirmed, O/L stable May-03-11 Affirmed, O/L stable Feb-18-11 Affirmed, O/L stable May-31-11Austria Aaa AAA AAA Affirmed, O/L stable Aug-18-11 Affirmed, O/L stable Dec-21-10 Affirmed, O/L stable Jul-25-11Netherlands Aaa AAA AAA Affirmed, O/L stable Jul-07-11 Affirmed, O/L stable Mar-28-11 Affirmed, O/L stable Jul-26-11Sweden Aaa AAA AAA Affirmed, O/L stable Jun-16-11 Affirmed, O/L stable Dec-17-10 Affirmed, O/L stable Jul-22-11Norway Aaa AAA AAA Affirmed, O/L stable Jul-04-11 Affirmed, O/L stable Apr-15-11 Affirmed, O/L stable Jul-22-11Switzerland Aaa AAA AAA Affirmed, O/L stable Jul-04-11 Affirmed, O/L stable Feb-25-11 Affirmed, O/L stable Jul-14-11Australia Aaa AAA AA+ Affirmed, O/L stable Aug-23-11 Affirmed, O/L stable Sep-22-11 Affirmed, O/L stable Sep-14-11United Kingdom Aaa AAA AAA Affirmed, O/L stable Jun-20-11 Affirmed, O/L stable Oct-03-11 Affirmed, O/L stable Mar-14-11United States Aaa (-) AA+ (-) AAA Affirmed, O/L (-) Aug-02-11 Downgrade, O/L (-) Aug-05-11 Affirmed, O/L stable Sep-23-11New Zealand Aaa AA (-) AA Upgrade, O/L stable Aug-15-11 Downgrade, O/L stable Sep-29-11 Downgrade, O/L stable Sep-29-11Belgium Aa1 AA+ (-) AA+ (-) Affirmed, O/L stable Apr-20-11 O/L chngd to (-), Affirmed Dec-14-10 O/L chngd to (-), Affirmed May-23-11Spain Aa2 (-) AA (-) AA+ (-) Affirmed, O/L (-) Jul-29-11 Affirmed, O/L (-) Feb-01-11 O/L chngd to (-), Affirmed Mar-04-11Japan Aa3 AA- (-) AA- (-) Downgrade, O/L stable Aug-24-11 O/L chngd to (-), Affirmed Apr-26-11 O/L chngd to (-), Affirmed May-27-11Italy A2 (-) A (-) AA- Downgrade, O/L (-) Oct-4-11 Downgrade, O/L (-) Sep-19-11 Affirmed, O/L stable Sep-29-11Ireland Ba1 (-) BBB+ BBB+ (-) Downgrade, O/L negative Jul-12-11 Downgrade, O/L stable Apr-01-11 Affirmed, O/L chngd to (-) Apr-14-11Portugal Ba2 (-) BBB- (-) BBB- (-) Downgrade, O/L negative (-) Jul-05-11 Downgrade, O/L chngd to (-) Mar-29-11 Downgrade, O/L (-) Apr-01-11Iceland Baa3 (-) BBB- (-) BB+ Affirmed, O/L chngd to (-) Apr-06-10 Affirmed, O/L (-) May-17-11 O/L chngd to stable, Affirmed May-16-11Greece Ca (-) CC (-) CCC (-) Downgrade, O/L (-) Jul-25-11 Downgrade, O/L (-) Jul-27-11 Downgrade, O/L (-) Jul-13-11

EMEA EM and Developed Markets Credit Ratings

24



October 4, 2011

25

Local Currency Ratings (GBI-EM Broad Countries)Moody’s S&P Fitch Recent Moody’s Action Recent S&P Action Recent Fitch Action

Rating View Rating View Rating View Action Date Action Date Action DateBrazil Baa2 (+) BBB+ (+) BBB- (+) O/L chngd to (+), Affirmed Jun-20-11 Affirmed, O/L stable Dec-14-10 O/L chngd to (+), Affirmed Jun-28-10Chile Aa3 AA (+) AA- Upgrade, O/L chngd to stable Jun-16-10 O/L chngd to (+), Affirmed Dec-16-10 Upgrade, O/L stable Feb-01-11China Aa3 (+) A+ AA- (-) Upgrade, O/L chngd to (+) Nov-11-10 Affirmed, O/L stable Jan-12-10 Affirmed, O/L (-) Aug-18-11Colombia Baa3 BBB+ BBB Affirmed, O/L stable May-31-11 Affirmed, O/L stable Mar-16-11 Upgrade, O/L stable Jun-22-11Czech Republic A1 AA AA- (+) Affirmed, O/L stable Aug-04-11 Upgrade, O/L stable Aug-24-11 O/L chngd to (+), Affirmed Jun-04-10Hungary Baa3 (-) BBB- (-) BBB Downgrade, O/L chngd to (-) Dec-06-10 Affirmed, O/L (-) Mar-24-11 O/L chngd to stable, Affirmed Jun-06-11India Ba1 (+) BBB- BBB- Upgrade, O/L (+) Jul-26-10 Affirmed, O/L Stable Apr-06-11 O/L chngd to stable, Affirmed Jun-14-10Indonesia Ba1 BB+ (+) BB+ Affirmed, O/L stable Feb-10-11 Affirmed, O/L (+) Apr-08-11 Upgrade, O/L stable Jan-25-10Malaysia A3 A A Affirmed, O/L stable Feb-26-09 Downgrade, O/L stable Jul-27-11 Affirmed, O/L stable Aug-11-11Mexico Baa1 A- BBB+ Affirmed, O/L stable Aug-18-11 Downgrade, O/L stable Jul-28-11 Affirmed, O/L stable Jan-12-11Peru Baa3 (+) BBB+ BBB (+) O/L chngd to (+), Affirmed Mar-21-11 Affirmed, O/L stable Aug-30-11 Affirmed, O/L chngd to (+) Jul-27-11Poland A2 A A Affirmed, O/L stable Jan-05-10 Affirmed, O/L stable Aug-03-11 Affirmed, O/L stable Mar-18-11Russia Baa1 BBB+ BBB (+) O/L chngd to stable, Affirmed Dec-12-08 Affirmed, O/L stable Aug-31-11 Affirmed, O/L (+) Sep-02-11Slovakia A1 A+ A+ O/L chngd to stable, Affirmed Mar-27-09 Affirmed, O/L stable Dec-16-09 Affirmed, O/L stable May-18-10South Africa A3 A A (-) Downgrade, O/L stable Jul-16-09 Downgrade, O/L stable Jan-25-11 Affirmed, O/L (-) Jul-27-09Thailand Baa1 A- A- O/L chngd to stable, Affirmed Oct-28-10 O/L chngd to stable, Affirmed Dec-09-10 O/L chngd to stable, Affirmed May-12-11Turkey Ba2 (+) BB+ (+) BB+ (+) O/L stable chngd to (+), Affirmed Oct-05-10 Upgrade, O/L (+) Sep-20-11 O/L stable chngd to (+), Affirmed Nov-24-10


Tejal Ray (1-212) 834-8580

[email protected]

RATING SCALE STANDARD TERMINOLOGY AND PROCEDURESMOODY’s S&P Fitch MOODY’s S&P Fitch

Upper Investment Grade Aaa AAA AAAAa1 AA+ AA+ Not currently subject STABLE STABLE STABLEAa2 AA AA to changeAa3 AA- AA-A1 A+ A+A2 A A Possible long-term change OUTLOOK (+or-) OUTLOOK (+or-) OUTLOOK (+or-)A3 A- A- Likely to be put on review

Lower Investment Grade Baa1 BBB+ BBB+Baa2 BBB BBBBaa3 BBB- BBB- Likely change in short term REVIEW (+or-) CREDITWATCH (+or-) RATING WATCH (+or-)

Non-Investment Grade Ba1 BB+ BB+Ba2 BB BBBa3 BB- BB-

Lower Non-Investment Grade B1 B+ B+ UPGRADE / DOWNGRADE UPGRADE / DOWNGRADE UPGRADE / DOWNGRADEB2 B B AFFIRMED / STABLE AFFIRMED / STABLE AFFIRMED / STABLEB3 B- B-

Caa1 CCC+ CCC+Caa2 CCC CCCCaa3 CCC- CCC-

Ca CC CCC C C

Default SD RDD D

Moody’s ratings are qualified by outlooks and reviews while S&P and Fitch ratings are qualified by outlooks and watches.A review/watch is indicative of a likely short-term movement.An outlook suggests that a review/watch or a long/intermediate-term movement is likely.(+) positive outlook + positive review/watch(-) negative outlook - negative review/watchWR Rating Withdrawn

JJ..PP.. MMOORRGGAANN EEMMEERRGGIINNGG MMAARRKKEETTSS RREESSEEAARRCCHH CCOONNTTAACCTT IINNFFOORRMMAATTIIOONNJJooyyccee CChhaanngg

GGlloobbaall HHeeaadd ooff EEmmeerrggiinngg MMaarrkkeettss aanndd CCrreeddiitt RReesseeaarrcchh((11--221122)) 883344--44220033

jjooyyccee..cchhaanngg@@jjppmmoorrggaann..ccoomm

IInnddeexx aanndd QQuuaannttiittaattiivvee AAnnaallyyssiiss

EEuurrooppee,, MMiiddddllee EEaasstt aanndd AAffrriiccaa ((EEMMEEAA EEMM))

mmiicchhaaeell..mmaarrrreessee@@jjppmmoorrggaann..ccoomm MD, Strategy / Economics (EMEA EM, (44-20) 7777-4627Russia, Kazakhstan)

yyaarrkkiinn..cceebbeeccii@@jjppmmoorrggaann..ccoomm ED, Economics (Turkey, Israel, and Baltics) (90-212) 319-8599

ssoonnjjaa..cc..kkeelllleerr@@jjppmmoorrggaann..ccoomm ED, Economics (South Africa) (27-11) 507-0376

nnoorraa..sszzeennttiivvaannyyii@@jjppmmoorrggaann..ccoomm ED, Economics (Poland, Hungary (44-20) 7777-3981and Czech Republic)

nneeeennaa..xx..aallttaaff@@jjppmmoorrggaann..ccoomm VP, Strategy / Economics (Ukraine, Belarus, (44-20) 7777-4504Serbia, Croatia, Romania and Georgia)

bbrraahhiimm..xx..rraazzggaallllaahh@@jjppmmoorrggaann..ccoomm VP, Strategy / Economics (Middle East (44-20) 7777-1381and North Africa)

aannaattoolliiyy..aa..sshhaall@@jjppmmoorrggaann..ccoomm VP, Economics (Russia) (7-495) 937-7321

ggiiuulliiaa..ppeelllleeggrriinnii@@jjppmmoorrggaann..ccoomm Assoc, Strategy / Economics (27-11) 507-0777(Sub-Saharan Africa)

aanntthhoonnyy..xx..wwoonngg@@jjppmmoorrggaann..ccoomm Analyst, Economics (EMEA EM, Iceland (44-20) 7777-3750and Bulgaria)

LLaattiinn AAmmeerriiccaa

lluuiiss..ooggaanneess@@jjppmmoorrggaann..ccoomm MD, Strategy / Economics (Latin America) (1-212) 834-4326

ffaabbiioo..aakkiirraa@@jjppmmoorrggaann..ccoomm ED, Economics (Brazil) (55-11) 3048-3634

ggaabbrriieell..ccaassiillllaass@@jjppmmoorrggaann..ccoomm ED, Economics (Mexico) (52-55) 5540-9558

bbeennjjaammiinn..hh..rraammsseeyy@@jjppmmoorrggaann..ccoomm ED, Strategy (Andean Region) (1-212) 834-4308

ffrraannccoo..aa..uucccceellllii@@jjppmmoorrggaann..ccoomm ED, Strategy (Central America and Caribbean) (1-305) 579-9415

vvllaaddiimmiirr..wweerrnniinngg@@jjppmmoorrggaann..ccoomm ED, Strategy / Economics (Argentina and Chile) (1-212) 834-4144

ccaassssiiaannaa..ffeerrnnaannddeezz@@jjppmmoorrggaann..ccoomm VP, Economics (Brazil, Colombia and Peru) (55-11) 3048-3369

tteejjaall..tt..rraayy@@jjppmmoorrggaann..ccoomm Assoc, Strategy (1-212) 834-8580

ttaammaarraa..wwaajjnnbbeerrgg@@jjppmmoorrggaann..ccoomm Assoc, Economics (Brazil) (55-11) 4950-3243

iikkeerr..xx..ccaabbiieeddeess@@jjppmmoorrggaann..ccoomm Analyst, Economics (Mexico) (52-55) 5540-9339

llaauurraa..aa..kkaarrppuusskkaa@@jjppmmoorrggaann..ccoomm Analyst, Economics (Brazil, Colombia and Peru) (55-11) 3048-3322

vviiccttoorr..ddiittuurroo@@jjppmmoorrggaann..ccoomm ED, Analytics (1-212) 834-7072

gglloorriiaa..mm..kkiimm@@jjppmmoorrggaann..ccoomm ED, Index Management (1-212) 834-4153

jjaarrrraadd..kk..lliinnzziiee@@jjppmmoorrggaann..ccoomm ED, Index Management (1-212) 834-7041

aannnn..mm..ffaauussttoo@@jjppmmoorrggaann..ccoomm VP, Analytics (1-212) 834-7037

aannddrreeww..jj..sszzmmuulleewwiicczz@@jjppmmoorrggaann..ccoomm VP, Index Management (1-212) 834-4029

aannddrree..rr..hhaarrvveeyy@@jjppmmoorrggaann..ccoomm Analyst, Analytics (1-212) 834-7190

jjaarreedd..ee..hhaallppeerrnn@@jjppmmoorrggaann..ccoomm Analyst, Analytics (1-212) 834-4720

CCoorrppoorraatteess

wwaarrrreenn..jj..mmaarr@@jjppmmoorrggaann..ccoomm MD, Corporate Strategy (1-212) 834-4274

aalllliissoonn..bbeelllloowwss@@jjppmmoorrggaann..ccoomm ED, Corporate Strategy (EMEA EM) (44-20) 7777-3843

yymm..hhoonngg@@jjppmmoorrggaann..ccoomm ED, Corporate Strategy (Asia) (852) 2800-8028

ssoooo..cchh..lliimm@@jjppmmoorrggaann..ccoomm ED, Corporate Strategy (Asia) (852) 2800-7931

nnaacchhuu..nnaacchhiiaappppaann@@jjppmmoorrggaann..ccoomm ED, Corporate Strategy (EMEA EM) (44-20) 7325-6823

jjaaccoobb..aa..sstteeiinnffeelldd@@jjppmmoorrggaann..ccoomm ED, Corporate Strategy (Latin America) (1-212) 834-4066

zzaaffaarr..nnaazziimm@@jjppmmoorrggaann..ccoomm ED, Corporate Strategy (EMEA EM) (44-20) 7777-9132

iissaabbeellaa..pp..bbaacccchhii@@jjppmmoorrggaann..ccoomm VP, Corporate Strategy (Latin America) (55-11) 3048-6725

ddaanniieell..cccc..ffaann@@jjppmmoorrggaann..ccoomm VP, Corporate Strategy (Asia) (852) 2800-8080

ddaanniieell..sseennsseell@@jjppmmoorrggaann..ccoomm VP, Corporate Strategy (Latin America) (1-212) 834-7202

vvaarruunn..xx..aahhuujjaa@@jjppmmoorrggaann..ccoomm Assoc, Corporate Strategy (Asia) (852) 2800 8030

jjuulliieett..lliimm@@jjppmmoorrggaann..ccoomm Assoc, Corporate Strategy (Latin America) (1-212) 834-2516

aalleexxaannddrriiaa..rr..ccooaarrii@@jjppmmoorrggaann..ccoomm Analyst, Corporate Strategy (Latin America) (1-212) 834-5638

aannnnee--mmaarriiee..hheennddrriikkss@@jjppmmoorrggaann..ccoomm Analyst, Corporate Strategy (EMEA EM) (44-20) 7742-7432

EEMM AAssiiaa

ddaavviidd..gg..ffeerrnnaannddeezz@@jjppmmoorrggaann..ccoomm MD, Strategy / Economics (Emerging Asia) (65) 6882-2461

jjiiwwoonn..cc..lliimm@@jjppmmoorrggaann..ccoomm MD, Economics (Korea) (82-2) 758-5509

jjaahhaannggiirr..xx..aazziizz@@jjppmmoorrggaann..ccoomm ED, Economics (India) (91-22) 6157-3385

ggrraaccee..hh..nngg@@jjppmmoorrggaann..ccoomm ED, Economics (China and Taiwan) (852) 2800-7002

ssiinnbbeenngg..oonngg@@jjppmmoorrggaann..ccoomm ED, Strategy / Economics (Southeast Asia) (65) 6882-1623

ssaajjjjiidd..zz..cchhiinnooyy@@jjppmmoorrggaann..ccoomm VP, Economics (India) (91-22) 6157-3386

mmaatttt..ll..hhiillddeebbrraannddtt@@jjppmmoorrggaann..ccoomm VP, Economics (Malaysia, Singapore, (65) 6882-2253Thailand and Vietnam)

GGlloobbaall SSttrraatteeggyy

eerriicc..bbeeiinnsstteeiinn@@jjppmmoorrggaann..ccoomm MD, Strategy (1-212) 834-4211

bbeerrtt..jj..ggoocchheett@@jjppmmoorrggaann..ccoomm ED, Strategy (Asia Local Markets) (852) 2800-8325

jjoonnaatthhaann..mm..ggoouullddeenn@@jjppmmoorrggaann..ccoomm ED, EM Credit Strategy (44-20) 7325-9582

hhoollllyy..ss..hhuuffffmmaann@@jjppmmoorrggaann..ccoomm ED, Strategy (1-212) 834-4953

ffeelliippee..qq..ppiiaanneettttii@@jjppmmoorrggaann..ccoomm ED, Strategy (Latin America) (1-212) 834-4043

mmiicchhaaeell..jj..ttrroouunnccee@@jjppmmoorrggaann..ccoomm ED, Strategy (EMEA EM Local Markets) (44-20) 7777-4356

yyeennppiinngg..hhoo@@jjppmmoorrggaann..ccoomm VP, Strategy (Asia FX Markets) (65) 6882-2216

ddeennnniiss..xx..bbaaddllyyaannss@@jjppmmoorrggaann..ccoomm Assoc, Strategy (Latin America) (1-212) 834-9150

ccaarrllooss..jj..ccaarrrraannzzaa@@jjppmmoorrggaann..ccoomm Assoc, Strategy (Latin America) (54-11) 4348-3425

ggeeoorrggee..gg..cchhrriissttoouu@@jjppmmoorrggaann..ccoomm Assoc, Strategy (EMEA EM Local Markets) (44-20) 7777-9177

jjaassoonn..jj..mmoorrttiimmeerr@@jjppmmoorrggaann..ccoomm Assoc, Strategy (Asia Local Markets) (852) 2800-8329

ttrraanngg..mm..nngguuyyeenn@@jjppmmoorrggaann..ccoomm Assoc, Strategy (1-212) 834-2475

aabbhhiisshheekk..xx..ppaannddaa@@jjppmmoorrggaann..ccoomm Assoc, Strategy (India Rates Markets) (91-22) 6157-3387

llaauurraa..bbiieerreerr@@jjppmmoorrggaann..ccoomm Analyst, Strategy (EMEA EM) (44-20) 7777-9173



October 4, 2011

27

Analysts’ Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality andaccuracy of research, client feedback, competitive factors and overall firm revenues. The firm’s overall revenues include revenues from its investment banking and fixed incomebusiness units.

Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the properoption risk disclosure documents. For a copy of the Option Clearing Corporation’s Characteristics and Risks of Standardized Options, please contact your J.P. MorganRepresentative or visit the OCC’s website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf.

J.P. Morgan Credit Research Ratings Distribution, as of September 30, 2011Overweight Neutral Underweight

EMEA Credit Research Universe 28% 50% 22%IB clients* 58% 64% 49%

Represents Ratings on the most liquid bond or 5-year CDS for all companies under coverage.

* Percentage of investment banking clients in each rating category.

Ratings System: J.P. Morgan uses the following sector/issuer portfolio weightings: Overweight (over the next three months, the recommended risk position is expected tooutperform the relevant index, sector, or benchmark), Neutral (over the next three months, the recommended risk position is expected to perform in line with the relevant index,sector, or benchmark), and Underweight (over the next three months, the recommended risk position is expected to underperform the relevant index, sector, or benchmark).J.P. Morgan’s Emerging Market research uses a rating of Marketweight, which is equivalent to a Neutral rating.

Valuation and Methodology: In J.P. Morgan’s credit research, we assign a rating to each company (Overweight, Underweight or Neutral) based on our credit view of the companyand the relative value of its financial instruments, taking into account the ratings assigned to the company by credit rating agencies and the market prices for the company’ssecurities. Our credit view of a company is based upon our opinion as to whether the company will be able service its debt obligations when they become due and payable. Weassess this by analyzing, among other things, the company’s credit position using standard credit ratios such as cash flow to debt and fixed charge coverage (including andexcluding capital investment). We also analyze the company’s ability to generate cash flow by reviewing standard operational measures for comparable companies in the sector,such as revenue and earnings growth rates, margins, and the composition of the company’s balance sheet relative to the operational leverage in its business.

J.P. Morgan is the global brand name for J.P. Morgan Securities LLC (JPMS) and its non-US affiliates worldwide. J.P. Morgan Cazenove is a brand name for equity researchproduced by J.P. Morgan Securities Ltd.; J.P. Morgan Equities Limited; JPMorgan Chase Bank, N.A., Dubai Branch; and J.P. Morgan Bank International LLC.

Important Disclosures• Market Maker/ Liquidity Provider: J.P. Morgan Securities Ltd. and/or an affiliate is a market maker and/or liquidity provider in Vimpelcom Ltd., Lukoil, Dev. Bank of Kazakhstan,VEB, BBVA, Millicom, Dubai Holding Commercial Operations Group, Cemex, Dubai World.• Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Country Garden Holdings, Digicel Group Limited, HutchisonWhampoa, Beijing Enterprises Holdings Limited, Noble Group Ltd, Dev. Bank of Kazakhstan, VEB, AUTOMOTORES GILDEMEISTER, BBVA, Banco de Credito del Peru,Hypermarcas, NII Holdings, Itau Unibanco ADR, Votorantim, Hidili Industry International Development Ltd, Road King Infrastructure Ltd, Cemex, Marfrig, Dubai World, Berlian LajuTanker within the past 12 months.• Director: A senior employee, executive officer or director of JPMorgan Chase & Co. and/or J.P. Morgan is a director and/or officer of Itau Unibanco ADR.• Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of Vimpelcom Ltd., Lukoil, Dev. Bank of Kazakhstan, VEB,BBVA, Dubai Holding Commercial Operations Group, Dubai World.

Recommendation changes made by J.P. Morgan Credit Research Analysts in the subject company over the past 12 months (or, if no recommendation changes were made in thatperiod, the most recent change).

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report (or, where multiple research analysts are primarily responsiblefor this report or sections within, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each securityor 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 anyand 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 thespecific recommendations or views expressed by the research analyst(s) in this report.

Conflict of Interest: This research contains the views, opinions and recommendations of J.P. Morgan credit research analysts and research strategists. Researchanalysts and strategists routinely consult with J.P. Morgan trading desk personnel in formulating views, opinions and recommendations in preparing research.Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) and strategist(s) views and report(s). Therefore, this research maynot be independent from the proprietary interests of J.P. Morgan trading desks which may conflict with your interests. In addition, research analysts and strategistsreceive compensation based, in part, on the quality and accuracy of their analysis, client feedback, trading desk and firm revenues and competitive factors. As ageneral matter, J.P. Morgan and/or its affiliates normally make a market and trade as principal in fixed income securities discussed in research reports.

Vimpelcom Ltd. - J.P. Morgan Recommendation History

Date Rating Instrument

Nov-30-10 Overweight 8.375% ’13

Lukoil - J.P. Morgan Recommendation History


May-27-11 Underweight 6.356% ’17

Dev. Bank of Kazakhstan - J.P. Morgan Recommendation History


Jun-24-11 Overweight 5.50% ’15

VEB - J.P. Morgan Recommendation History


Jun-24-11 Neutral 6.80% ’25

BBVA - J.P. Morgan Recommendation History


Feb-12-08 Neutral 5-year CDS

Dubai Holding Commercial Operations Group - J.P. Morgan Recommendation History


Jun-11-10 Overweight 6.0% ’17



October 4, 2011

28

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