Guide to the MarketsGuide to the Markets · 9. Earnings Estimates and Valuations by Style 10. Corporate Profits 11. Sources of Earnings per Share Growth 12. Confidence and the Capital

4Q | 20124Q | 2012As of September 30, 2012

Guide to the Markets®Guide to the Markets

Table of Contents

EQUITIES

ECONOMY

FIXED INCOME

4

17

32FIXED INCOME

INTERNATIONAL

ASSET CLASS

32

41

55

U.S. Market Strategy TeamDr. David P. Kelly, CFA [email protected]

Andrew D. Goldberg [email protected]

Joseph S Tanious CFA joseph s tanious@jpmorgan comJoseph S. Tanious, CFA [email protected]

Andrés Garcia-Amaya [email protected]

Brandon D. Odenath [email protected]

David M. Lebovitz [email protected]

Anthony M. Wile [email protected]

2

www.jpmorganfunds.com/mi

Past performance is no guarantee of comparable future results.

Page Reference

4. Returns by Style5. Returns by Sector6. S&P 500 Index at Inflection Points

34. Fixed Income Yields and Returns35. The Fed and the Money Supply36. The Fed Funds Rate: History and Expectations37. Credit Conditions38. High Yield Bonds

Equities

7. Bull and Bear Markets8. Stock Valuation Measures: S&P 500 Index9. Earnings Estimates and Valuations by Style10. Corporate Profits11. Sources of Earnings per Share Growth12. Confidence and the Capital Markets13. Deploying Corporate Cash

39. Municipal Finance40. Emerging Market Debt

41. Global Equity Markets: Returns and Composition42. Global Economic Growth43. Global Monetary Policy

International

3 ep oy g Co po ate Cas14. Broad Market Lagged Price to Earnings Ratio15. P/E Ratios and Equity Returns16. Equity Correlations and Volatility

17. Economic Growth and the Composition of GDP18 Cyclical Sectors

y y44. The Importance of Exports45. The Impact of Global Consumers46. European Crisis: Fiscal Challenges47. European Crisis: Sovereign Bond Yields48. European Crisis: Financial System Risks49. Chinese Growth and Economic Policy50 Global Equity Valuations – Developed Markets

Economy

18. Cyclical Sectors19. Consumer Finances20. Federal Finances: Outlays and Revenues21. Federal Finances: Deficits and Debt22. Tax Rates and the Distribution of Income & Taxes23. U.S. Political Perspectives24. The Aftermath of the Housing Bubble25 Employment

50. Global Equity Valuations Developed Markets51. Global Equity Valuations – Emerging Markets52. Emerging Market Equity Composition53. International Economic and Demographic Data54. Current Account Deficit and U.S. Dollar

55 Asset Class Returns

Asset Class25. Employment26. Employment and Income by Educational Attainment27. Consumer Price Index28. Returns in Different Inflation Environments – 40 years29. Oil and the Economy30. Global Oil Supply31. Consumer Confidence and the Stock Market

55. Asset Class Returns56. Correlations: 10-Years57. Mutual Fund Flows58. Dividend Income: Domestic and Global59. Global Commodities60. Gold61. Historical Returns by Holding Period

f

3

32. Fixed Income Sector Returns33. Interest Rates and Inflation

62. Diversification and the Average Investor63. Annual Returns and Intra-year Declines64. Cash Accounts65. Corporate DB Plans and Endowments 66. The Dow Jones Industrial Average Since 1900

Fixed Income

Returns by Style

1,500S&P 500 Index

3Q 2012 2012 YTD

Charts reflect index levels (price change only). All returns and annotations reflect total return, including dividends.

Value Blend Growth Value Blend Growth

1 300

1,350

1,400

1,450

,

Equi

ties

2012: +16.4%

3Q12: +6.4%

Larg

e

6.5% 6.4% 6.1%

Larg

e

15.7% 16.4% 16.8%

Mid 5.8% 5.6% 5.3% Mid 14.0% 14.0% 13.9%

1 600

Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Sep-12

1,250

1,300

S&P 500 Index Since 10/9/07 Peak:

Since Market Low (March 2009)Since Market Peak (October 2007)Value Blend Growth Value Blend Growth

Smal

l

5.7% 5.3% 4.8%

Smal

l

14.4% 14.2% 14.1%

1,000

1,200

1,400

1,600 Since 10/9/07 Peak: 2.7%

Since 3/9/09

Value Blend Growth Value Blend GrowthLa

rge

-6.9% 2.7% 14.2%

Larg

e

132.2% 129.6% 132.9%M

id 5.8% 8.3% 9.8% Mid 170.3% 161.4% 153.8%

Dec-06 Feb-08 Apr-09 Jun-10 Aug-11 Sep-12600

800

Source: Russell Investment Group, Standard & Poor’s, FactSet, J.P. Morgan Asset Management.

All calculations are cumulative total return including dividends reinvested for the stated period Since Market Peak represents period 10/9/07

Since 3/9/09Low: +129.6%

Smal

l

2.3% 6.2% 9.6%

Smal

l

153.1% 156.2% 158.7%

4

All calculations are cumulative total return, including dividends reinvested for the stated period. Since Market Peak represents period 10/9/07 – 9/28/12, illustrating market returns since the most recent S&P 500 Index high on 10/9/07. Since Market Low represents period 3/9/09 –9/28/12, illustrating market returns since the S&P 500 Index low on 3/9/09. Returns are cumulative returns, not annualized. For all time periods, total return is based on Russell-style indexes with the exception of the large blend category, which is reflected by the S&P 500 Index. Past performance is not indicative of future returns.

Data are as of 9/30/12.

Returns by Sector

Financia

ls

Technology

Health C

areIndus

trials

Energy

Cons. Disc

r.Cons. S

taples

Teleco

m

Utilitie

s

Materia

ls

S&P 500 In

dexEq

uitie

s S&P Weight 14.6% 20.1% 12.0% 9.8% 11.3% 11.0% 10.9% 3.3% 3.5% 3.5% 100.0%Russell Growth Weight 4.3% 32.6% 11.9% 11.8% 4.1% 16.4% 12.7% 2.3% 0.2% 3.8% 100.0%

Russell Value Weight 26.4% 6.3% 11.7% 9.1% 16.9% 7.9% 7.3% 3.8% 6.8% 3.9% 100.0%

3Q 2012 6.9 7.4 6.2 3.6 10.1 7.5 3.8 8.1 -0.5 5.1 6.4

2012 YTD 21.6 21.8 17.8 11.2 7.6 21.4 12.7 25.9 4.3 12.0 16.4

Wei

ght

rn

Since Market Peak (October 2007)

-51.4 22.8 23.3 -4.9 4.2 34.7 47.7 13.5 8.5 -3.2 2.7

Since Market Low (March 2009)

165.1 157.3 98.7 161.4 90.9 211.7 107.1 116.8 90.0 130.6 129.6

Beta to S&P 500 1.39 1.24 0.64 1.17 0.92 1.11 0.52 0.84 0.51 1.28 1.00 β

Forward P/E Ratio 10 7x 12 7x 12 8x 12 5x 11 5x 15 1x 15 8x 18 3x 14 9x 12 7x 12 9x

Ret

ur

S St d d & P ’ R ll I t t G F tS t J P M A t M t

Forward P/E Ratio 10.7x 12.7x 12.8x 12.5x 11.5x 15.1x 15.8x 18.3x 14.9x 12.7x 12.9x15-yr avg. 12.9x 24.0x 18.6x 17.0x 14.8x 18.7x 18.3x 17.5x 13.6x 16.2x 16.8x

Trailing P/E Ratio 12.4x 15.9x 18.2x 14.5x 10.9x 15.7x 18.6x 47.1x 16.5x 16.8x 15.2x20-yr avg. 15.9x 26.7x 24.1x 20.4x 18.2x 19.6x 21.1x 19.4x 14.3x 19.6x 19.6x

Dividend Yield 1.8% 1.5% 2.2% 2.5% 2.3% 1.6% 2.9% 4.6% 4.2% 2.5% 2.1%20-yr avg. 2.1% 0.6% 1.5% 1.8% 1.8% 1.0% 2.0% 3.8% 4.4% 2.1% 1.7%

P/E

Div

Source: Standard & Poor’s, Russell Investment Group, FactSet, J.P. Morgan Asset Management.

All calculations are cumulative total return, not annualized, including dividends for the stated period. Since Market Peak represents period 10/9/07 – 9/28/12. Since Market Low represents period 3/9/09 – 9/28/12.

Forward P/E Ratio is a bottom-up calculation based on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates. Trailing P/E ratios are bottom-up values defined as month-end price divided by the last 12 months of available reported earnings. Historical data can change as new information becomes available. Note that P/E ratios for the S&P 500 may differ from estimates elsewhere in this book due to the use of a bottom-up calculation of constituent earnings (as described) rather than a top-down calculation. This methodology is used to allow proper comparison of sector level data to broad index level data. Dividend yields are bottom-up values defined as the

5

This methodology is used to allow proper comparison of sector level data to broad index level data. Dividend yields are bottom up values defined as the annualized value of the most recent cash dividend as a percent of month-end price. Beta calculations are based on 10 years of monthly price returns for the S&P 500 and its sub-indices.

Past performance is not indicative of future returns.


S&P 500 Index at Inflection Points

1,600 Index level 1,527 1,565 1,441P/E ratio (fwd.) 25.6x 15.2x 12.9xDividend yield 1 1% 1 8% 2 1%

S&P 500 Index Mar. 24, 2000

P/E (fwd.) = 25.6x 1 527 Sep. 28, 2012

Oct. 9, 2007 P/E (fwd.) = 15.2x

1,565

Characteristic Mar-2000 Oct-2007 Sep-2012

1,400

Dividend yield 1.1% 1.8% 2.1% 10-yr. Treasury 6.2% 4.7% 1.6%

Equi

ties 1,527 p ,

P/E (fwd.) = 12.9x 1,441

+101%

1 000

1,200

-49%-57%

113%

+106%

800

1,000

Oct. 9, 2002 Dec. 31, 1996 M 9 2009

+113%

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12600

Source: Standard & Poor’s, First Call, Compustat, FactSet, J.P. Morgan Asset Management.

Dividend yield is calculated as the annualized dividend rate divided by price, as provided by Compustat. Forward Price to Earnings Ratio is a bottom-up calculation based

Oct 9, 00P/E (fwd.) = 14.1x

777 P/E (fwd.) = 16.0x

741 Mar. 9, 2009

P/E (fwd.) = 10.3x 677

6

y y p p y p g pon the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates. Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future results.


Bull and Bear Markets

Historical Bull Markets: Duration and Magnitude*

'87 - '00400%600%

Bear Market Cycles vs. Subsequent Bull Runs

Market Peak

Market Low

Bear Market Return

Length of Decline Bull Run Length

of Run

Yrs. to Reach Old

Peak

Equi

ties

300%

350%550%

Return Peak

5/29/46 5/19/47 -28.6% 12 257.6% 122 3.1 yrs.

7/15/57 10/22/57 -20.7% 3 86.4% 50 0.9 yrs.

12/12/61 6/26/62 -28 0% 6 79 8% 44 1 2 yrs'47 - '57

'82 - '87

Average200%

250%

arke

t Ret

urn

(%)

12/12/61 6/26/62 28.0% 6 79.8% 44 1.2 yrs.

2/9/66 10/7/66 -22.2% 8 48.0% 26 0.6 yrs.

11/29/68 5/26/70 -36.1% 18 74.2% 31 1.8 yrs.

'57 - '61'62 - '66'70 '73

'74 - 80

'02 - '07

Current Run

100%

150%

Bul

l Ma

1/5/73 10/3/74 -48.4% 21 125.6% 74 5.8 yrs.

11/28/80 8/12/82 -27.1% 20 228.8% 60 0.2 yrs.

8/25/87 12/4/87 -33.5% 3 582.1% 148 1.6 yrs.62 66

'66 - '68

70 - 73

0%

50%

0 50 100 150

Bull Market Length (months)

3/24/00 10/9/02 -49.1% 31 101.5% 60 4.6 yrs.

10/9/07 3/9/09 -56.8% 17 112.9% 43*

Average: -35.0% 14 mo's 176.0% 68 mo's 2.2 yrs.

7

Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management. Chart is for illustrative purposes only. Past performance does not guarantee future results. A bear market is defined as a peak-to-trough decline in the S&P 500 Index (price only) of 20% or more. The bull run data reflect the market expansion from the bear market low to the subsequent market peak. All returns are S&P 500 Index returns and do not include dividends. *Current bull run from 3/9/09 through 9/28/12.


u a et e gt ( o t s)

Stock Valuation Measures: S&P 500 Index

S&P 500 Index: Valuation Measures Historical AveragesValuation Measure Description

Latest 1-year ago

3-year avg.

5-year avg.

10-year avg.

15-year avg.

P/E Price to Earnings 12.9x 10.8x 12.8x 13.0x 14.3x 16.8xP/B Price to Book 2.3 2.0 2.1 2.2 2.5 3.0P/CF Price to Cash Flow 9.0 7.5 8.5 8.5 9.8 11.1P/S Price to Sales 1.3 1.0 1.2 1.1 1.3 1.5PEG Price/Earnings to Growth 1.7 0.8 0.9 1.1 1.2 1.2

Equi

ties

Div. Yield Dividend Yield 2.3% 2.4% 2.2% 2.3% 2.1% 1.9%

50x9%

10%S&P 500 Shiller Cyclically Adjusted P/EAdjusted using trailing 10-yr. avg. inflation adjusted earnings

S&P 500 Earnings Yield vs. Baa Bond Yield

S&P 500 Earnings Yield: (Inverse of fwd. P/E) 7.7%

20x

30x

40x

5%

6%

7%

8%

( )

3Q12: 22.2x

Average: 19.0x

'55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '100x

10x

'94 '96 '98 '00 '02 '04 '06 '08 '10 '123%

4% Moody’s Baa Yield: 4.7%

Source: (Top) Standard & Poor’s, FactSet, Robert Shiller Data, J.P. Morgan Asset Management. Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months. Price to Book is price divided by book value per share. Data post-1992 include intangibles and are provided by Standard & Poor’s Price to Cash Flow is price divided by consensus analyst estimates of cash flow per share for the next 12

8

post 1992 include intangibles and are provided by Standard & Poor s. Price to Cash Flow is price divided by consensus analyst estimates of cash flow per share for the next 12 months. Price to Sales is calculated as price divided by consensus analyst estimates of sales per share for the next 12 months. PEG Ratio is calculated as NTM P/E divided by NTM earnings growth. Dividend Yield is calculated as consensus analyst estimates of dividends for the next 12 months divided by price. All consensus analyst estimates are provided by FactSet. (Bottom left) Cyclically adjusted P/E uses as reported earnings throughout. (Bottom right) Standard & Poor’s, Moody’s, FactSet, J.P. Morgan Asset Management.Data are as of 9/30/12.

Earnings Estimates and Valuations by Style

24x

28xS&P 500 Index: Forward P/E Ratio Current P/E vs. 20-year avg. P/E

11.6 12.9 15.2

Value Blend Growth

ge

16x

20x

24x

Average: 16.2xEqui

ties

14.0 16.2 21.0

12.3 14.1 16.6

14.0 16.3 21.8

Larg

Mid

'94 '96 '98 '00 '02 '04 '06 '08 '10 '128x

12x

S&P 500 Operating Earnings Estimates

Sep. 2012: 12.9x

Current P/E as % of 20-year avg. P/EE.g.: Large Cap Blend stocks are 20.3%

13.0 14.4 16.2

14.2 17.1 21.3Smal

l

Value Blend Growth

Larg

e

82.7% 79.7% 72.3%$80

$100

$1203Q12: $111.86Consensus estimates of the next twelve months’ rolling earnings

g g pcheaper than their historical average.

Mid 87.8% 86.3% 75.9%

Smal

l91.2% 84.6% 75.8%

$0

$20

$40

$60

9

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12$0

Source: (Top and bottom left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Right) Russell Investment Group, IBES, FactSet. Earnings estimates are for calendar years and taken at quarter end dates throughout the year. Forward Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months. P/E ratios are calculated and provided by Russell based on IBES consensus estimates of earnings over the next 12 months except for large blend, which is the S&P 500.Data are as of 9/30/12.

Corporate Profits

S&P 500 Earnings Per ShareOperating basis, quarterly

Adjusted After-Tax Corporate Profits (% of GDP)Includes inventory and capital consumption adjustments11% 2Q12:

9 4%$26

Most recent: $25.43

2Q07: $24.06

Equi

ties

9%

10%

9.4%

$20

$23

$26

7%

8%

$14

$17

5%

6%50-yr. avg.: 6.2%

$5

$8

$11

'65 '70 '75 '80 '85 '90 '95 '00 '05 '103%

4%

-$1

$2

'12'10'08'06'04'02

10

Source: Standard & Poor’s, Compustat, BEA, J.P. Morgan Asset Management.EPS levels are based on operating earnings per share. Most recently available data is 2Q12.Past performance is not indicative of future returns.


Sources of Earnings per Share Growth

Margin Share of EPS Growth

S&P 500 Year-Over-Year EPS GrowthGrowth broken into revenue growth and margin expansion, quarterly50%

Equi

ties Margin Share of EPS Growth

Revenue Share of EPS Growth

30%

40%

0%

10%

20%

-20%

-10%

0%

-40%

-30%

2Q122Q102Q082Q062Q042Q022Q002Q982Q962Q94

11

Source: Standard & Poor’s, Compustat, J.P. Morgan Asset Management.EPS levels are based on operating earnings per share. Most recently available data is 1Q12. *2Q12 data are Standard & Poor’s estimates.Past performance is not indicative of future returns. 4Q2008, 1Q2010 and 2Q2010 reflect -101%, 92% and 51% growth in operating earnings, and are adjusted on the chart.


Confidence and the Capital Markets

110

120

24x

26x

Multiple Expansion and Contraction

Consumer SentimentForward P/ES&P 500 forward P/E based on consensus EPS estimates Est. impact of a 10pt. rise in sentiment: +2.0 multiple points*

70

80

90

100

110

16x

18x

20x

22x

24x

Equi

ties

'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '1250

60

70

10x

12x

14x

Sentiment & Real Yields Est impact of a 10pt rise in sentiment: +54 basis points*

Correlation Coefficient: 0.75

90

100

110

120

3%

4%

5%

6% Consumer SentimentReal 10-year YieldReal yield based on nominal 10-yr. yield minus year-over-year core CPI Est. impact of a 10pt. rise in sentiment: +54 basis points*

60

70

80

90

0%

1%

2%

3%

Correlation Coefficient: 0.68

12

'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '1250-1%

Source: (Top) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Bottom) U.S. Treasury, BLS, University of Michigan, J.P. Morgan Asset Management. Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next twelve months. Real 10-year Treasury yields are calculated as the daily Treasury yield less year-over-year core inflation for that month. *Estimated impact based on coefficients from regression analysis. Data are as of 9/30/12.

Deploying Corporate Cash

Corporate Cash as a % of Current AssetsS&P 500 companies – cash and cash equivalents, quarterly

28%

30%

Corporate Growth

Capital Expenditures M&A Activity

Nonfarm nonfinancial capex in billions USD, quarterly deal volume

1 400

1,600

$1 200

$1,300

Equi

ties

20%

22%

24%

26%

28%

600

800

1,000

1,200

1,400

$

$900

$1,000

$1,100

$1,200

Cash Returned to ShareholdersDividend Payout Ratio

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '1114%

16%

18%

0

200

400

$600

$700

$800

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

$100

$120

$140

$160

$24

$27

$30

50%

60%

yS&P 500 companies, rolling 4-quarter averages, billions USDS&P 500 companies, LTM

Dividends per Share

$20

$40

$60

$80

$100

$15

$18

$21

20%

30%

40%

Share Buybacks

13

$20$15'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

20%

Source: Standard & Poor’s, FRB, Bloomberg, FactSet, J.P. Morgan Securities, J.P. Morgan Asset Management.

(Top left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Top right) M&A activity is quarterly number of deals of any value and capital expenditures are for nonfarm nonfinancial corporate business. (Bottom left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Bottom right) Standard & Poor’s, Compustat, FactSet, J.P. Morgan Asset Management. Data are most recent as of 9/30/12.

Broad Market Lagged Price to Earnings Ratio

35x

Lagged P/E Ratio – All U.S. CorporationsRatio of market value of all U.S. corporations to adjusted after-tax corporate profits for prior four quarters

25x

30x

Equi

ties

Avg. During Recessions 12.6x

Avg. During Expansions 13.9x

P/E Ratios

20x

September 30, 2012 13.2x

10x

15x Average: 13.7x

Sep. 30, 2012*: 13.2x

0x

5x

'52 '55 '58 '61 '64 '67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 '12

14

'52 '55 '58 '61 '64 '67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 '12Source: BEA, Federal Reserve Board, Wilshire Associates, J.P. Morgan Asset Management.

*The September 28, 2012 price is a J.P. Morgan Asset Management estimated based on the daily value of the Wilshire Total Market Index.


P/E Ratios and Equity Returns

60%60%

P/E and Total Return Over 5-yr. Annualized PeriodsP/E and Total Return Over 1-yr. PeriodsQuarterly, 1Q 1952 to 2Q 2007Quarterly, 1Q 1952 to 2Q 2011

Current P/E: 13.2 Current P/E: 13.2

40%

9/30/12 Implied Annual Return 13.1%Standard Error 5.7%40%

9/30/12 Implied Annual Return 14.9%Standard Error 17.2%Eq

uitie

s

20%20%

0%5x 10x 15x 20x 25x 30x

0%5x 10x 15x 20x 25x 30x

-40%

-20%

-40%

-20%

15

Source: BEA, FRB, J.P. Morgan Asset Management. Prices are based on the market value of all U.S. corporations and include quarterly dividends. Valuation based on long-term PE ratio. Note: Orange line denote results of linear regression with R-squared of 0.15 for 1-yr. returns (left) and 0.35 for 5-yr. returns (right). Data are as of 9/30/12.

Equity Correlations and Volatility

60%

70%

Large Cap StocksCorrelations Among Stocks

Sovereign Debt Crisis

Lehman Bankruptcy

Great Depression /World War II

30%

40%

50%

60%

Equi

ties Bankruptcy

Tech Bust & 9/11

1987 CrashWorld War II

OPEC Oil Crisis

Cuban Missile Crisis

0%

10%

20%

'26 '32 '38 '44 '50 '56 '62 '68 '74 '80 '86 '92 '98 '04 '10

Daily Volatility of DJIA

Average: 26.7% Sep. 2012: 40.9%

2 0%

2.5%

3.0%

3.5%

60

75

90Volatility Measure ’08 Peak Average Latest DJIA (Left) 3.30% 0.72% 0.51%VIX (Right) 80.9 20.5 15.7

Daily Volatility of DJIA

DJIA vol. shownin 3-month

moving average

0.5%

1.0%

1.5%

2.0%

15

30

45

16

'30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '100.0% 0

Source: (Top) Empirical Research Partners LLC, Standard & Poor’s, J.P. Morgan Asset Management. Capitalization weighted correlation of top 750 stocks by market capitalization, daily returns, 1926 – Sep. 28, 2012. (Bottom) CBOE, Dow Jones, J.P. Morgan Asset Management. DJIA volatility are represented as three-month moving averages of the daily absolute percentage change in the Dow Jones Industrial Average.Charts shown for illustrative purposes only. Data are as of 9/30/12.

Economic Growth and the Composition of GDP

$18,00010%

Real GDP % chg at annual rate

20-yr avg. 2Q12

Components of GDP2Q12 nominal GDP, billions, USD

$12 000

$14,000

$16,000

4%

6%

8%

my

Real GDP: 2.5% 1.3%

10.7% Investment ex-housing

19.6% G ’t S di

2.4% Housing

$625 bn of output lost

$8,000

$10,000

$12,000

2%

0%

2%

Econ

om

71.0%

Gov’t Spendingp

$848 b f

$2,000

$4,000

$6,000

-6%

-4%

-2%Consumption$848 bn of

output recovered

-$2,000

$0

'04 '06 '08 '10 '12-10%

-8%

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

GDP l h i l d % h i t li d d fl t 2Q12 GDP

- 3.7% Net Exports

17

GDP values shown in legend are % change vs. prior quarter annualized and reflect 2Q12 GDP.


Cyclical Sectors

22

24Millions, seasonally adjusted annual rateLight Vehicle Sales

100

150

Change in Private InventoriesBillions of 2005 dollars, seasonally adjusted annual rate

2Q12: 41.4

14

16

18

20

22

my Average: 15.1

Aug. 2012:14.5

100

-50

0

50

100

Average: 28.3

Q

'94 '96 '98 '00 '02 '04 '06 '08 '10 '128

10

12

Econ

om

Real Capital Goods OrdersNon defense capital goods orders ex aircraft $ bn seasonally adjusted

Housing StartsTh d ll dj t d l t

'95 '00 '05 '10-200

-150

-100

60

65

70

75

1,600

2,000

2,400

Non-defense capital goods orders ex. aircraft, $ bn, seasonally adjusted Thousands, seasonally adjusted annual rate

Average: 57.4Average: 1 388

'98 '00 '02 '04 '06 '08 '10 '1240

45

50

55

'95 '00 '05 '100

400

800

1,200

Aug. 2012: 750 Aug. 2012:53.4

Average: 1,388

18

Source: (Top left) BEA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, FactSet, J.P. Morgan Asset Management. (Bottom left) Census Bureau,FactSet, J.P. Morgan Asset Management. (Bottom right) Census Bureau, FactSet, J.P. Morgan Asset Management. Capital goods orders deflated using the producer price index for capital goods.


Consumer Finances

$80

Personal Savings Rate

12%Annual, % of disposable income

Consumer Balance SheetTrillions of dollars outstanding, not seasonally adjusted

Total Assets $76 1 tn 2Q-’07 Peak: $81.5tn

$60

$70

4%

6%

8%

10%Total Assets: $76.1 tn

Homes: 25%

my

YTD 2012:4.2%

1Q-’09 Low: $65.2tn

$40

$50'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

0%

2%

Household Debt Service RatioDebt payments as % of disposable personal income, seasonally adjusted

Deposits: 10%

Pension funds: 18%

Other tangible: 7%

Econ

om

13%

14%

15%

$20

$30

Pension funds: 18%

Other financial

Revolving (e.g.: credit cards): 6%Non-revolving: 14%Other Liabilities: 7%

3Q07:14.1%

10%

11%

12%

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12$0

$10

Total Liabilities: $13.5 tnOther financial assets: 40%

Mortgages: 73%

1Q80: 11.1%

3Q12*: 10.5%

19

Source: (Left) FRB, J.P. Morgan Asset Management. Data includes households and nonprofit organizations. (Right) BEA, FRB, J.P. Morgan Asset Management. Personal savings rate is calculated as personal savings (after-tax income – personal outlays) divided by after-tax income. Employer and employee contributions to retirement funds are included in after-tax income but not in personal outlays, and thus are implicitly included in personal savings. Savings rate data as of August 2012. *3Q12 Household Debt Service Ratio is a J.P. Morgan Asset Management estimate. All other data are as of 2Q12 which is most recently available as of 9/30/12.

Federal Finances: Outlays and Revenues

$4.0 26%

The 2012 Federal BudgetCBO Baseline forecast, trillions USD

$

Federal Outlays and Receipts1960 – 2012, % of GDP

$3.0

$3.5

24%

my

Total Spending: $3.6tn

Other$482bn (14%)

Non defense

Net Int.: $220bn (6%)Borrowing:

$1,128bn (32%)2012*: 24.3%

$2.0

$2.5

20%

22%

Econ

om

Defense:$669bn (19%)

Non-defenseDiscretionary:$620bn (17%)

Average: 20.5%

$1.0

$1.5

18%Social Security:$768bn (22%)

Revenues:$2,435bn (68%) Average: 17.9%

2012*: 15.8%

$0.0

$0.5

Total Government Spending Sources of Financing14%

16%

1960 1970 1980 1990 2000 2010S U S T BEA CBO J P M A M

Medicare & Medicaid:$804bn (23%)

RevenuesOutlays

20

Source: U.S. Treasury, BEA, CBO, J.P. Morgan Asset Management.2012 Federal Budget is based on the CBO’s August 2012 Baseline Scenario. *2012 revenues and outlays are forecasts from the Congressional Budget Office (CBO). Note: Years shown are fiscal years (Oct. 1 through Sep. 30). Data are as of 9/30/12.

Federal Finances: Deficits and Debt

-12% 100%

Federal Budget Surplus/Deficit Federal Debt (Accumulated Deficits)% of GDP, 2007 – 2022 % of GDP, 2007 – 2022

ForecastFiscal Cliff Fiscal Ledge Fiscal Ladder2011 Actual 8 7% 8 7% 8 7%

-10%80%

my

2011 actual: 67.7%

2022*: 75.1%Forecast

2022*: 83.2%2011 Actual -8.7% -8.7% -8.7%2012 Est. -7.3% -7.3% -7.3%2013 Proj. -4.0% -5.7% -6.5%

-8%

-6%

40%

60%

Econ

om

Fiscal CliffFiscal Ledge Scenario

2022 : 75.1%

2022: 58.5%Fiscal Ladder Scenario

Fiscal Ladder Scenario

-4%

-2%

20%

40%

Fiscal CliffFiscal Ledge Scenario

Fiscal Cliff Fiscal Ledge Fiscal Ladder2011 Actual 67 7% 67 7% 67 7%

0%'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22

0%'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22

Source: U.S. Treasury, BEA, CBO, J.P. Morgan Asset Management.2011 numbers are actuals Fiscal Cliff is based on the CBO Baseline scenario *Fiscal ledge scenario assumes Bush tax cuts are extended only for

2011 Actual 67.7% 67.7% 67.7%2012 Est. 72.8% 72.8% 72.8%2022 Proj. 58.5% 75.1% 83.2%

21

2011 numbers are actuals. Fiscal Cliff is based on the CBO Baseline scenario. Fiscal ledge scenario assumes Bush tax cuts are extended only for households earning less than $250k per year, the AMT is fixed, dividend and capital gain tax rates increase to 20%, the payroll tax cut expires, extended unemployment benefits expire on schedule, higher Medicare taxes take effect and both sets of spending cuts agreed to last fall are implemented. Fiscal Ladder scenario assumes Bush tax cuts are extended in full for 2013 and for households earnings less than $250k per year for 2014 the AMT fix, dividend and capital gain tax rates increase to 20% in 2014 payroll tax cut is maintained in 2013, phased down to 1% in 2014 and eliminated in 2016 extended unemployment benefits expire on schedule higher Medicare taxes take effect and only the first round of spending cuts take effect. Note: Years shown are fiscal years (Oct. 1 through Sep. 30). Chart on the left displays federal surplus/deficit (revenues – outlays).Data are as of 9/30/12.

Tax Rates and the Distribution of Income & Taxes

80%

100%Historical Average Maximum Tax Rates by Decade Share of Income and Taxes by Income Level

Based on adjusted gross income and federal taxes, 2009

DividendsIncome

20%

40%

60%

Top 5%31.7%

5% to 25%34.1%Wage Income

Capital Gains

Dividends

my

0%

20%

1930's 1940's 1950's 1960's 1970's 1980's 1990's 2000's Current

Bottom 75%34.2%

Potential Tax Rate ChangesCurrent and scheduled 2013 maximum federal tax rates under current law Taxes

Econ

om

60%

Top 5%58.7%

5% to 25%28.6%

Scheduled 20132012

37.9% 35.0%

43.4%

23.8%

43.4%

55.0%

30%

40%

50%

60%

58.7%

Bottom 75%12.7%

Source: (Top left) IRS J P Morgan Asset Management Wage income tax rates include employer and employee contributions to the Medicare tax (Bottom left) IRS The Tax

15.0% 15.0%10.4% 12.4%

0%

10%

20%

Wage Income Capital Gains* Dividends* Payroll Tax** Estate Tax***

22

Source: (Top left) IRS, J.P. Morgan Asset Management. Wage income tax rates include employer and employee contributions to the Medicare tax. (Bottom left) IRS, The Tax Foundation, J.P. Morgan Asset Management. Tax rates based on maximum U.S. individual income tax. Wage income tax rates include employer and employee contributions to the Medicare tax. *Includes recently enacted healthcare tax of 3.8%. **In 2011 and 2012, the payroll tax cut reduced the employee’s share of Social Security taxes by 2%. Rates shown include both employer and employee contributions to the payroll tax. ***In 2013, the estate tax exemption amount was expected to fall to $1 million from $5.12 million in 2012. (Right) IRS, J.P. Morgan Asset Management. Taxes paid are based on federal individual income taxes, which are responsible for about 25% of the nation's taxes paid. Data are as of 9/30/12.

U.S. Political Perspectives

Congressional & Presidential Approval RatingsPolitical Polarization% of Representatives voting with the majority of their party*

Senate95%

100%

70%

80%

90%

my

House

80%

85%

90%

95%

30%

40%

50%

60%

70%

Econ

om

Annual Market Returns by Political Party ControlPolitical Party DominanceParties identified as President/Senate/House number of years 1937 2011

PresidentialCongressional

Democratic % of major party seats

70%

75%

1901 1919 1937 1955 1973 1991 200910%

20%

30%

1941 1951 1961 1971 1981 1991 2001 2011

60%

70%

80%Parties identified as President/Senate/House, number of years, 1937-2011

Democratic President Senate

House

Democratic % of major party seats

17.4%15.4%

10%12%14%16%18%20%

40%

50%

60%

1939 1951 1963 1975 1987 1999 2011

6.5%

10.6%

0%2%4%6%8%

10%

RRR (6) RSPLIT (30) DDD (30) DSPLIT (9)

23

1939 1951 1963 1975 1987 1999 2011Source: U.S. House of Representatives, U.S. Senate, Gallup Inc., FactSet, J.P. Morgan Asset Management.

*In roll call votes where the majority in one party voted the opposite way to the majority in the other. Data compiled by Professors Keith T. Poole and Howard Rosenthal, available at www.voteview.com. Stock market returns are total return and calculated by calendar year. RSPLIT denotes Republican president and split government, and DSPLIT denotes Democratic President and split government.


RRR (6) RSPLIT (30) DDD (30) DSPLIT (9)

The Aftermath of the Housing Bubble

$

$1,100160

Monthly Rent vs. Monthly Mortgage PaymentVacant propertiesIndexed to 100, seasonally adjusted

Home Prices

MonthlyCase Shiller 20-city

$500

$650

$800

$950

140

150

my

3Q12*:$725

Monthly Mortgage Payment

Case Shiller 20-cityFHFA Purchase OnlyAverage Existing Home

$200

$350

'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12130Econ

om

Home InventoriesMilli l t ll dj t d

3Q12*: $477Monthly Rent

3 0

3.5

4.0

4.5

110

120 Millions, annual rate, seasonally adjusted

'94 '96 '98 '00 '02 '04 '06 '08 '10 '121.5

2.0

2.5

3.0

'03 '04 '05 '06 '07 '08 '09 '10 '11 '1290

100Aug. 2012: 2.4

24

Sources: (Left) National Association of Realtors, Standard & Poor’s, FHFA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, J.P. Morgan Asset Management. Monthly mortgage payment assumes a 20% down payment at prevailing 30-year fixed-rate mortgage rates; analysis based on median asking rent and median mortgage payment based on asking price. (Bottom right) Census Bureau, National Association of Realtors, J.P. Morgan Asset Management. *3Q12 rent and mortgagepayment values are J.P. Morgan Asset Management estimates.


Employment

60012%

Civilian Unemployment Rate Employment – Total Private Payroll Seasonally adjusted Total job gain/loss (thousands)

200

400

10%

11%

my 8.9mm

jobs lost

-200

0

7%

8%

9%

Econ

om

Aug. 2012: 8.1%4.6mm jobs

gained

-600

-400

5%

6%

50-yr. avg.: 6.1%

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12-1,000

-800

'70 '80 '90 '00 '103%

4%

Source: BLS FactSet J P Morgan Asset Management Source: BLS FactSet J P Morgan Asset Management

25

Source: BLS, FactSet, J.P. Morgan Asset Management.

Data are as of 9/30/12.Source: BLS, FactSet, J.P. Morgan Asset Management.

Employment and Income by Educational Attainment

18%

Average Annual Earnings by Highest Degree EarnedFull-time workers aged 25 and older, 2009, USD

$87,194$90,000

Unemployment Rate by Education Level

12%

14%

16%

my

$70,000

$80,000

+31K

Aug 2012:

Less than High School DegreeHigh School No CollegeSome CollegeCollege or Greater

8%

10%

12%

Econ

om $56,665

$40 000

$50,000

$60,000

+26K

Aug. 2012:8.8%

Aug. 2012:12.0%

4%

6%$30,627

$20,000

$30,000

$40,000

Aug. 2012:

Aug. 2012:6.6%

0%

2%

'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Source: Census Bureau J P Morgan Asset Management

$0

$10,000

High School Graduate Bachelor's Degree Advanced DegreeSource: BLS FactSet J P Morgan Asset Management

g4.1%

26

Source: Census Bureau, J.P. Morgan Asset Management.Source: BLS, FactSet, J.P. Morgan Asset Management.

Unemployment rates shown are for civilians aged 25 and older.


Consumer Price Index

CPI Components

Weight in CPI

12-month Change

Food & Bev. 15.3% 2.0%15%

CPI and Core CPI50-yr. Avg. Aug. 2012

Headline CPI: 4.2% 1.7%

% change vs. prior year, seasonally adjusted

Housing 41.0% 1.4%

Apparel 3.6% 1.6%

Transportation 16.9% 1.4%

12%

my

Core CPI: 4.1% 1.9%

Medical Care 7.1% 4.1%

Recreation 6.0% 1.2%

Educ. & Comm. 6.8% 1.5%

Other 3.4% 2.4%

6%

9%

Econ

om

Other 3.4% 2.4%

Headline CPI 100.0% 1.7%

Less:

Energy 9.7% -0.6%0%

3%

Food 13.7% 2.0%

Core CPI 76.6% 1.9%'65 '70 '75 '80 '85 '90 '95 '00 '05 '10-3%

Source: BLS, FactSet, J.P. Morgan Asset Management.

27

CPI values shown are % change vs. 1 year ago and reflect August 2012 CPI data. CPI component weights are as of December 2011 and 12-month change reflects non-seasonally adjusted data through August 2012. Core CPI is defined as CPI excluding food and energy prices.


Returns in Different Inflation Environments – 40 years

High and Rising InflationOccurred 14 times since 1972

High and Falling InflationO d 6 ti i 1972

Falling inflation scenariosRising inflation scenarios

my

Occurred 14 times since 1972 Occurred 6 times since 1972

e m

edia

n

5%2%

7%13%

0%5%

10%15%20%25%

18%23%

8%

0%5%

10%15%20%25%

Econ

om

Low and Rising Inflation Low and Falling Inflation

Abo

ve

Median Inflation:

3.3%

-15%-10%-5%0%

Bonds Equities Cash Commodities

-15%-15%-10%-5%0%


Low and Rising InflationOccurred 7 times since 1972

Low and Falling InflationOccurred 13 times since 1972 B

elow m

edi

3.3%

6%

20%

3%

17%

10%15%20%25%

8%12%

4% 6%5%

10%15%20%25%

Source: BLS Barclays Capital Robert Shiller Federal Reserve Strategas/Ibbotson Standard & Poor’s FactSet J P Morgan Asset Management

ian3%

-15%-10%-5%0%5%

Bonds Equities Cash Commodities-15%-10%-5%0%5%


28

Source: BLS, Barclays Capital, Robert Shiller, Federal Reserve, Strategas/Ibbotson, Standard & Poor s, FactSet, J.P. Morgan Asset Management.High or low inflation distinction is relative to median CPI-U inflation for the period 1971 to 2011. Rising or falling inflation distinction is relative to previous year CPI-U inflation rate. Bond returns are based on the Barclays U.S. Aggregate index since its inception in 1976 and a composite bond index prior to that. Equity returns based on S&P 500 price return and annual dividend yield. Cash returns are based on the Barclays 1-3 Month T-Bill index since its inception in 1992 and 3-month T-Bill rates prior to that. Commodities returns based on GSCI.For illustrative purposes only. Past performance is not indicative of comparable future returns.Data are as of 9/30/12.

Oil and the Economy

$160$4.50

4%

WTI Crude Oil & Retail Gasoline PricesOilGas 12/31/00 9/30/12

Oil $26.72 $92.19Gas $1 41 $3 83

Economic Drag From Oil PricesU.S. petroleum imports as a % of GDP 3Q12*: 2.9%

3Q08: 3.8%

$120

$140

$3.50

$4.00

2%

3%

my

Gas $1.41 $3.83

$80

$100

$2.50

$3.00

'70 '75 '80 '85 '90 '95 '00 '05 '100%

1%

Econ

om

Oil Prices and Consumption per Country

$40

$60

$1.50

$2.00Energy Spending by Income Level% of after-tax income

p p yGasoline price per gallon, USD, annual barrels of oil consumed per capita

$8.67 $8.06 $8.48

20bbls

25bbls

30bbls

$8

$10

$12 Annual Barrels of Oil Consumed per Capita (Right)Gasoline Price per Gallon (Left)

$0

$20

$0.50

$1.00$3.97

$5.38 $5.22

0bbls

5bbls

10bbls

15bbls

$-

$2

$4

$6

29

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12$0$0.50

Source: U.S. Department of Energy, FactSet, J.P. Morgan Asset Management. Price of gas based on U.S. retail national average of all formulations and WTI for crude.


Source: (Top) BEA, FactSet, J.P. Morgan Asset Management. (Bottom) EIA, J.P. Morgan Asset Management. *3Q12 drag on growth is a J.P. MorganAsset Management estimate.

0bbls$US UK France Germany China India

Global Oil Supply

250KuwaitSyria

Middle East Energy Production & Chokepoints Percent of global liquid fuel production, 2011

U.S. Commercial & Strategic Oil StocksDays of net imports

Aug. 2012:235 days

100

150

200

Iran4.9%

Iraq3.0%

3.1%Syria0.5%

Suez Canal2.2%

U.S. Commercial Oil Stocks

my

Oct. 2005:129 days

0

50

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Libya0.6%

Egypt0.8%

S d

Saudi Arabia12.8%

Strait of Hormuz17 0% OPEC Surplus Production Capacity

U.S. Strategic Petroleum Reserve

Econ

om

4

5

6

Sudan0.5%

UAE3.6%

17.0%

Bab el-Mandeb

OPEC Surplus Production CapacityMillions of barrels per day

EIA forecast

1

2

3

Bab el Mandeb3.4% Average: 2.7mm bbl/day

Major Producers Major ConsumersPercent of global total, 2011 Percent of global total, 2011

Saudi Arabia 13% China 5% United States 22% India 4%Russia 12% Iran 5% China 10% Saudi Arabia 3%

30

0'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

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

Forecast from the September EIA Short Term Energy Outlook.


Russia 12% Iran 5% China 10% Saudi Arabia 3%United States 12% Canada 4% Japan 5% Brazil 3%

Consumer Confidence and the Stock Market

130Consumer Sentiment Index – University of Michigan

Average 12-month S&P 500 index return…After a peak: +1 1% After a trough: +22 2% Total period: +6 6%

110

120

my

Mar 1984

Jan. 2000-2.0%

Jan. 2004+4.4%

Aug 1972

After a peak: +1.1% After a trough: +22.2% Total period: +6.6%

80

90

100

Average: 85.3

Econ

om

Mar. 1984+13.5%

May 1977+1.2%

Aug. 1972-6.2% Jan. 2007

-4.2%

60

70

80

Oct. 1990

Mar. 2003+32.8% Oct. 2005

+14.2%

'72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '1240

50

Feb. 1975+22.2%

May 1980+19.2%

+29.1%Nov. 2008

+22.3%Aug. 2011

+15.4%

31

'72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12Source: University of Michigan, FactSet, J.P. Morgan Asset Management.

Peak is defined as the highest index value before a series of lower lows, while a trough is defined as the lowest index value before a series of higher highs. Subsequent 12-month S&P 500 returns are price returns only, which excludes dividends.


Fixed Income Sector Returns

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD 3Q12 Cum. Ann.

TIPS High Yield EMD EMD High Yield TIPS Treas. High Yield High Yield TIPS EMD EMD EMD EMD

10-yrs '02 - '11

16.6% 29.0% 11.9% 12.3% 11.8% 11.6% 13.7% 58.2% 15.1% 13.6% 14.2% 6.8% 185.6% 11.1%

EMD EMD High Yield Asset Alloc. EMD Treas. MBS EMD EMD Muni High Yield High Yield High Yield High Yield

12.2% 26.9% 11.1% 3.6% 10.0% 9.0% 8.3% 34.2% 12.8% 10.7% 12.1% 4.5% 133.6% 8.9%

Treas. Asset Alloc. TIPS Muni MBS Barclays

AggBarclays

Agg Corp. Corp. Treas. Corp. Corp. TIPS TIPS

11 8% 9 7% 8 5% 3 5% 5 2% 7 0% 5 2% 18 7% 9 0% 9 8% 8 7% 3 8% 107 5% 7 6%11.8% 9.7% 8.5% 3.5% 5.2% 7.0% 5.2% 18.7% 9.0% 9.8% 8.7% 3.8% 107.5% 7.6%Barclays

Agg TIPS Asset Alloc. TIPS Asset

Alloc. MBS Asset Alloc.

Asset Alloc.

Asset Alloc.

Asset Alloc.

Asset Alloc.

Asset Alloc.

Asset Alloc.

Asset Alloc.

10.3% 8.4% 6.3% 2.8% 5.1% 6.9% -1.4% 15.8% 7.6% 8.9% 6.7% 2.7% 96.0% 7.0%

Corp. Corp. Corp. Treas. Muni Asset Alloc. TIPS Muni Barclays

Agg Corp. TIPS Muni Corp. Corp.

10.1% 8.2% 5.4% 2.8% 4.8% 6.2% -2.4% 12.9% 6.5% 8.1% 6.2% 2.3% 85.2% 6.4%

ncom

e

Asset Alloc. Muni MBS High Yield Barclays

Agg EMD Muni TIPS TIPS Barclays Agg Muni TIPS Barclays

AggBarclays

Agg10.0% 5.3% 4.7% 2.7% 4.3% 5.2% -2.5% 11.4% 6.3% 7.8% 6.1% 2.1% 75.4% 5.8%

Muni Barclays Agg Muni MBS Corp. Corp. Corp. Barclays

Agg Treas. EMD Barclays Agg

Barclays Agg Treas. Treas.

9.6% 4.1% 4.5% 2.6% 4.3% 4.6% -4.9% 5.9% 5.9% 7.0% 4.0% 1.6% 74.3% 5.7%Barclays Barclays

Fixe

d In

MBS MBS Barclays Agg

Barclays Agg Treas. Muni EMD MBS MBS MBS MBS MBS MBS MBS

8.7% 3.1% 4.3% 2.4% 3.1% 3.4% -14.7% 5.9% 5.4% 6.2% 2.8% 1.1% 73.9% 5.7%

High Yield Treas. Treas. Corp. TIPS High Yield High Yield Treas. Muni High Yield Treas. Treas. Muni Muni

-1.4% 2.2% 3.5% 1.7% 0.4% 1.9% -26.2% -3.6% 2.4% 5.0% 2.1% 0.6% 68.8% 5.4%Source: Barclays Capital, FactSet, J.P. Morgan Asset Management.

32

Past performance is not indicative of future returns. Fixed income sectors shown above are provided by Barclays Capital and are represented by: Barclays Capital U.S. Aggregate Index; MBS: Fixed Rate MBS Index; Corporate: U.S. Corporates; Municipals: Muni Bond Index; Emerging Debt: Emerging Markets Index; High Yield: Corporate High Yield Index; Treasuries: Barclays Capital U.S. Treasury; TIPS: Barclays Capital TIPS. The “Asset Allocation” portfolio assumes the following weights:10% in MBS, 20% in Corporate, 15% in Municipals, 10% in Emerging Debt, 10% in High Yield, 25% in Treasuries, 10% in TIPS. Asset allocation portfolio assumes annual rebalancing.Data are as of 9/30/12.

Interest Rates and Inflation

20%Nominal and Real 10-year Treasury Yields

15%

Sep. 30, 1981: 15.84%Average 9/30/12

Nominal Yields 6.46% 1.65%Real Yields 2.58% -0.27%

5%

10%

ncom

e

Sep. 30, 2012: 1.65%

Nominal 10-year Treasury Yield

0%Fixe

d In

Sep. 30, 2012: -0.27%

-10%

-5% Real 10-year Treasury Yield

33

'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '1010%

Source: Federal Reserve, BLS, J.P. Morgan Asset Management.Real 10-year Treasury yields are calculated as the daily Treasury yield less year-over-year core inflation for that month except for September 2012, where real yields are calculated by subtracting out August 2012 year-over-year core inflation.


Fixed Income Yields and Returns

U.S. Treasuries # of issues Mkt. Value Avg. Maturity 9/30/2012 9/30/2011 2012 YTD 3Q12

Yield ReturnSource: U.S. Treasury, Barclays Capital, FactSet, J.P. Morgan Asset Management.Fixed income sectors shown above are provided by Barclays Capital and are

t d b B d M k t U S 2-Year 2 years 0.23% 0.25% 0.25% 0.21%

5-Year 5 0.62 0.96 2.30 0.83

10-Year 10 1.65 1.92 4.37 0.93

30-Year 30 2.82 2.90 3.66 -0.28

Sector

represented by – Broad Market: U.S. Barclays Capital Index; MBS: Fixed Rate MBS Index; Corporate: U.S. Corporates; Municipals: Muni Bond Index; Emerging Debt: Emerging Markets Index; High Yield: Corporate High Yield Index. TIPS: Treasury Inflation Protection Securities (TIPS). T iti d t f # f i

# of issues: 164

Total value: $5.067 tn

Broad Market 7,967 $16,815 bn 6.7 years 1.61% 2.35% 3.99% 1.58%

MBS 861 5,052 3.8 1.77 2.82 2.80 1.13

Corporates 4,231 3,551 10.7 2.79 3.83 8.66 3.83

Municipals 46,180 1,339 13.7 2.17 3.02 6.06 2.32

Emerging Debt 525 798 11 1 4 61 6 59 14 19 6 77ncom

e

Treasury securities data for # of issues and market value based on U.S. Treasury benchmarks from Barclays Capital. Yield and return information based on Bellwethers for Treasury securities.

Change in bond price is calculated i b th d ti d it Emerging Debt 525 798 11.1 4.61 6.59 14.19 6.77

High Yield 1,931 1,082 6.7 6.51 9.51 12.13 4.53

TIPS 33 823 9.2 1.46 1.86 6.25 2.12

Fixe

d In using both duration and convexity

according to the following formula:New Price = (Price + (Price * -Duration * Change in Interest Rates))+(0.5 * Price * Convexity * (Change in Interest Rates)^2)

*Calculation assumes 2-year Treasury i t t t f ll 0 23% t 0 00% d

Price Impact of a 1% Rise/Fall in Interest Rates +1%-1%

20.1%20%25%

interest rate falls 0.23% to 0.00% and the 5-year Treasury falls 0.62% to 0.00%, as interest rates can only fall to 0.00%.

Chart is for illustrative purposes only. Past performance is not indicative of comparable future results.

-1%

-2.0%-4.9%

9 1%

-2.4% -4.0% -4.9% -5.3% -6.8% -6.9% -7 2%

0.5%3.0%

9.1%

2.3% 4.0% 4.8% 5.3% 6.8% 6.9% 7.2%

-10%-5%0%5%

10%15%20%

34

Data are as of 9/30/12.-9.1%

-20.1%

6.8% 6.9% 7.2%

-25%-20%-15%

2-Year 5-Year 10-Year 30-Year MBS High Yield Broad Mkt.

TIPS EMD Munis Corp.

The Fed and the Money Supply

$

$3.5tn

Money MultiplierM2 / Monetary Base

Fed’s Balance Sheet: Assets$ trillions

9x

10x

Oth

$1 0t

$1.5tn

$2.0tn

$2.5tn

$3.0tn

5x

6x

7x

8x

9xOtherU.S. TreasuriesAgency MBS

Aug. 2012:3.8x

$0.0tn

$0.5tn

$1.0tn

'03 '04 '05 '06 '08 '09 '10 '11

Fed’s Balance Sheet: Liabilities$ t illinc

ome

Money Supply Growth

'03 '04 '05 '06 '07 '08 '09 '10 '11 '122x

3x

4x

$ trillions

Fixe

d In

8%

10%

12%

14%

Year-over-year growth in M2

Aug. 2012: 6.3%

Monetary Base$1 5tn

$2.0tn

$2.5tn

$3.0tn

'85 '90 '95 '00 '05 '100%

2%

4%

6%

8%Excess Reserves

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12$0.0tn

$0.5tn

$1.0tn

$1.5tn

35

Source: Federal Reserve, FactSet, J.P. Morgan Asset Management.

Monetary base is defined as the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. Money multiplier defined as M2 divided by the monetary base.


85 90 95 00 05 10

The Fed Funds Rate: History and Expectations

12%

Federal Funds Rate & FOMC Interest Rate Projections

10%

6%

8%

ncom

e

Long-term Fed projection

4%Fixe

d In projection

0%

2% Sep. 30, 2012:0.0%-0.25%

36

0%'84 '88 '92 '96 '00 '04 '09 '12 '14

Source: Federal Reserve, J.P. Morgan Asset Management.Fed Funds Rate projections are based on an average of the FOMC interest rate projections for a given year.


Credit Conditions

760 60%

Consumer & Industrial Loan DemandNet percent of banks reporting stronger demand

31%

Lending Standards for Approved Mortgage LoansAverage FICO score based on origination date

Aug. 2012: 750

660

680

700

720

740

-40%

-20%

0%

20%

40% 31%

22%

620

640

660

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Delinquency RatesAll b k ll dj t dnc

ome

Common Equity as a % of Total AssetsAll FDIC insured institutions 1934 2011

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12-80%

-60%

-40%

Large & Medium FirmsSmall Firms

10%

12%

14%

8%

10%

12%

Consumer LoansResidential Mortgages

All banks, seasonally adjusted

Fixe

d In

Commercial and Industrial Loans

10.6%

All FDIC insured institutions, 1934 – 2011

2011:11.1%

4%

6%

8%

'34 '41 '48 '55 '62 '69 '76 '83 '90 '97 '04 '11'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

2%

4%

6%

1.4%

2.8%

Average: 7.6%

37

34 41 48 55 62 69 76 83 90 97 04 11Source: (Top left) McDash, J.P. Morgan Securitized Product Research, J.P. Morgan Asset Management. (Top right) Federal Reserve, FactSet, J.P. Morgan Asset Management. (Bottom left): Federal Reserve, FactSet, J.P. Morgan Asset Management. (Bottom right) FDIC, J.P. Morgan Asset Management.All data reflect most recently available releases. Data are as of 9/30/12.

High Yield Bonds

15%

20% Average Latest HY Spreads 5.9% 5.9%HY Defaults 4.2% 1.8%

High Yield Spreads and Defaults

S d

5%

10%

15% Spreads

Default Rates

0%'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

ncom

e

Historical High Yield Recovery RatesHigh yield bonds, cents on the dollar

Annual Flows into High Yield Mutual Funds & ETFsBillions USD YTD 2012: $35 0

$10bn

$20bn

$30bn

$40bn

40¢

50¢

60¢

70¢

Fixe

d In

g y e d bo ds, ce ts o t e do a

Average: 39.2¢

o s US YTD 2012: $35.0

-$20bn

-$10bn

$bn

'03 '04 '05 '06 '07 '08 '09 '10 '11 '120¢

10¢

20¢

30¢

'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

38

Source (Top chart): U.S. Treasury, J.P. Morgan, J.P. Morgan Asset Management. Default rates are defined as the par value percentage of the total market trading at or below 50% of par value and include any Chapter 11 filing, prepackaged filing or missed interest payments. (Bottom left): J.P Morgan, Moody’s, J.P. Morgan Asset Management. (Bottom right): Strategic Insight, J.P. Morgan Asset Management. Yield to worst is defined as the lowest potential yield that can be received on a bond without the issuer actually defaulting and reflects the possibility of the bond being called at an unfavorable time for the holder. Spreads indicated are benchmark yield to worst less comparable maturity Treasury yields. Past performance is not indicative of comparable future results. 2011 recovery rates are as of March 30, 2012.Data are as of 9/30/12.

Municipal Finance

8%

State & Local Government Debt ServicePercent of current expenditures

Muni/Treasury RatioRatio of Barclays 10-year Municipal Bond yield to 10-year Treasury240%

5%

6%

7%

200%

220%

2Q12: 5.1%

4%

5%

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

ncom

e

Municipal Bond Issuance*Billions USD, revenue and GO issues140%

160%

180%

Sep. 30, 2012:122%

Fixe

d In

o s US , e e ue a d GO ssues

100%

120%

140%

$300

$400

$500

'98 '00 '02 '04 '06 '08 '10 '1260%

80%

$0

$100

$200

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

39

Source (Left chart): Barclays Capital, U.S. Treasury, FactSet, J.P. Morgan Asset Management. (Top right) BEA, J.P. Morgan Asset Management. (Bottom right) SIFMA,J.P. Morgan Asset Management.*Excludes maturities of 13 months or less and private placements. 2012 issuance data is as of August 2012.


Emerging Market Debt

10%

12%

Emerging Markets Debt SpreadsSpread to Treasuries of USD-denominated debt, percent

Index Breakdown – USD Denominated EMD

Index Average Spread

Middle East & Africa 7%

Middle East & Africa 10%100%

4%

6%

8%

10% Index Spread (9/30/12)EMBIG 3.9% 3.1%CEMBI 3.3% 3.6%

Europe 32%Europe 16%

Latin America 43%

Latin America 39%

40%

60%

80%

0%

2%

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

ncom

e

Annual Flows into EMD Mutual Funds & ETFsBillions USD

Emerging Market Debt Credit RatingEMBIG average monthly credit rating, inverse scale Aug 2012: BBB- YTD 2012 $16 7

Asia 18%Asia 35%

0%

20%

EMBIG CEMBI

$8bn

$12bn

$16bn

$20bn

Fixe

d In

g y g Aug. 2012: BBB

BB+

BBB-

BB

BB-

YTD 2012: $16.7

-$4bn

$bn

$4bn

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12'93 '95 '97 '99 '01 '03 '05 '07 '09 '11

B-

B

B+

40

Source: J.P. Morgan, IMF, MorganMarkets, FactSet, Strategic Insight, J.P. Morgan Asset Management. Spreads measure the credit risk premium over comparable maturity U.S. Treasury bonds. The J.P. Morgan EMBI Global (EMBIG) Index is a USD-denominated external debt index tracking bonds issued by sovereigns and quasi-sovereigns in developing nations. The J.P. Morgan Corporate Emerging Bond Index (CEMBI)is a USD-denominated external debt index tracking bonds issued by corporations. The J.P. Morgan GBI-EM index is a local currency-denominated index tracking bonds issued by emerging market governments. Past performance is not indicative of comparable future results.Data are as of 9/30/12.

Global Equity Markets: Returns and Composition

Country / Region

3Q12 YTD 2012

Local USD Local USD

Weights in MSCI All Country World Index% global market capitalization

Europe ex-

Regions / Broad IndexesUSA (S&P 500) - 6.4 - 16.4

EAFE 4.7 7.0 9.6 10.6

Europe ex U K 8 0 9 7 13 1 12 8

United States47%

Europe exU.K.15%

U.K. 8%

EmergingMarkets

13%Europe ex-U.K. 8.0 9.7 13.1 12.8

Pacific ex-Japan 9.5 11.0 15.5 17.6

Emerging Markets 6.0 7.9 11.4 12.3

MSCI: Selected CountriesShare of Global GDPBased on purchasing power parity

13%

Japan7%

MSCI: Selected CountriesUnited Kingdom 4.0 7.1 6.5 10.7

France 5.9 7.4 11.7 10.7

Germany 12.4 13.9 22.8 21.7

Japan -3 2 -0 8 3 6 2 4

Canada 2%

onal

Based on purchasing power parity

Emerging

United States19%

Japan -3.2 -0.8 3.6 2.4

China 4.7 4.7 8.9 9.1

India 9.0 15.4 24.5 25.4

Brazil 5.3 4.8 5.4 -3.1

R i 6 0 9 4 8 9 11 6

Inte

rnat

i EmergingMarkets

50%Japan 5% Other

Developed4%Europe ex-

U.K.17%

41

Russia 6.0 9.4 8.9 11.6

Source: Standard & Poor’s, MSCI, IMF, FactSet, J.P. Morgan Asset Management.All return values are MSCI Gross Index (official) data. Share of global GDP based on purchasing power parity (PPP) as calculated by the IMF for 2012. Definition of emerging markets is based on MSCI and IMF data sources, respectively. Percentages may not sum to 100% due to rounding.Data as of 9/30/12.

U.K. 3%

Global Economic Growth

8%

10%Year-over-year % chg. – forecasts from JPMSIEmerging Market Country Real GDP Growth

3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

Historical

2Q13

JPMSI Forecast

0%

2%

4%

6%

8%

-4%

-2%

Emerging Markets China India Russia Mexico South Africa Korea Brazil

Developed Market Country Real GDP GrowthHistorical JPMSI Forecast

4%

6%

8%

10%Year-over-year % chg. – forecasts from JPMSI

onal

3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

Historical

2Q13

JPMSI Forecast

-4%

-2%

0%

2%

Developed Countries

Japan Canada U.S. Germany France U.K. Italy

Inte

rnat

i

42

Source: J.P. Morgan Global Economic Research, J.P. Morgan Asset Management.

Forecast and aggregate data come from J.P. Morgan Global Economic Research.


Global Monetary Policy

30%

35%Central Bank Assets – Percent of Nominal GDP Real Policy Rates – Monthly

3%

4%

10%

15%

20%

25%

European Central Bank

Bank of Japan

-1%

0%

1%

2%

0%

5%

10%

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Developed Markets

Country Level Monetary Policy and Inflation

Emerging Markets

Inflation Rate Real Policy RateTarget Policy Rate

U.S. Federal Reserve-3%

-2%

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

onal

Inflation Rate Real Policy RateTarget Policy Rate

0.0%

3.5%

7.0%

10.5%

14.0%

Inte

rnat

i

D l d M k t E i M k t

-7.0%

-3.5%

Hon

g Ko

ng

U.K

.

U.S

.

Euro

are

a

Can

ada

Japa

n

Aust

ralia

Turk

ey

Indi

a

Sout

h Af

rica

Taiw

an

Thai

land

Kore

a

Mex

ico

Pola

nd

Indo

nesia

Col

ombi

a

Rus

sia

Braz

il

Chi

na

43

Source: J.P. Morgan Global Economics Research, J.P. Morgan Asset Management.(Top charts) Emerging and Developed Economy GDP growth and real policy rates represent GDP weighted aggregates estimated by J.P. Morgan Global Economics Research. (Bottom chart) Target policy rates are the short-term target interest rates set by central banks. Inflation rates shownrepresent year-over-year quarterly rates for 2Q12. Real policy rates are short-term target interest rates set by central banks minus year-over-year inflation.Data are as of 9/30/12.

Developed Markets Emerging Markets

The Importance of Exports

Goods exports onlyExports as a % of GDP – 2011

1 0% 2 1% 2 2% 4 9% 10 3%Brazil US Eurozone BRIC Other Total

0.8%

4.5%

2.0%

1.0%

9.5%

4.4%

3.1%

2.1%

2.1%

1.7%

2.3%

2.2%

14.4%

15.5%

10.2%

4.9%

26.8%

26.1%

17.6%

10.3%

Russia

China

India

Brazil US Eurozone BRIC Other Total

2.2% 1.7%

1.5%

4.0%

1.4%

6.2%

6.9%

14.0%

9.8%

6 8%

Japan

U.S.

onal

1.4%

1.1%

1.9%

12.4%

12.7%

10.0%

2.0%

1.5%

1.3%

7.6%

5.8%

4.8%

23.4%

21.1%

18.0%

Italy

France

U.K.

Source: IMF J P Morgan Asset Management

Inte

rnat

i

2.2%

19.2%

21.8%

2.5%

4.2%

1.6%

10.7%

2.8%

38.9%

26.0%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Germany

Canada

44

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

Numbers represent exports of goods only and would be higher if services were included.


The Impact of Global Consumers

35%40%

Share of Global Nominal Consumption Foreign Sales, % of Total Sales

30%35% Mega Cap (Russell 200)

20%

25%

25%

30%

Large Cap (Russell 1000)

15%20%

onal

U.S. Consumption % of GlobalEM Consumption % of Global

Small Cap (Russell 2000)

10%'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

15%1990 1994 1998 2002 2006 2010

Source: FactSet, Compustat, Russell, J.P. Morgan Global Economics Research, J.P. Morgan Asset Management.Estimates of global consumption for 2010 and 2011 provided by J.P. Morgan Global Economics Research.Foreign sales as a percentage of total sales is calculated as an unweighted average of individual index constituent companies’ reported sales figures

Inte

rnat

i Small Cap (Russell 2000)

45

g p g g g p p gand does not capture all index members due to differences in reporting practices.


European Crisis: Fiscal Challenges

8%

Example of Fiscal Redistribution in the U.S.GDP Growth, Debt to GDP and Borrowing Costs

Bubble size = 10-year government bond yield

EM

4%

6%

013)

= 5%

= 10%

France

Germany

IrelandE.U.

U.S.2%

The E.U. Lacks a Similar Fiscal Mechanism

row

th (2

011

–20

Greece

Italy

Portugal

Spain

-2%

0%

onal R

eal G

DP

G

-6%

-4%

20% 40% 60% 80% 100% 120% 140% 160%

Inte

rnat

i

46

Source: IMF, BLS, J.P. Morgan Asset Management.Maps are for illustrative purposes only and are intended to show the current sources of stress in each region. The U.S. state colors are based on level of unemployment rate. European country colors are based on levels of sovereign stress, including but not exclusively, the measure shown in the above chart on the left. Growth and debt data based on the April 2012 World Economic Outlook. Bond yields as of 9/30/12.Data are as of 9/30/12.

Net Debt-to-GDP Ratio (2012 est.)

European Crisis: Sovereign Bond Yields

16%

European Sovereign Funding Costs10-year benchmark bond yields, daily

Introductionof the Euro

9/30/12Portugal 8.39%Ireland 7.19%Spain 5.97%

12%

14%

of the Euro Italy 5.03%France 2.18%Germany 1.46%

8%

10%

4%

6%

onal

0%

2%

Inte

rnat

i

47

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Source: FactSet, ECB, J.P. Morgan Asset Management.Data are as of 9/30/12.

European Crisis: Financial System Risks

European Bank Exposure Euribor and Libor Spreads3M Euribor - EONIA, 3M Libor - OISBillions USD4.0%

SpainSpain

Greece

Ireland

Italy 3.0%

3.5%

U.K.

Libor SpreadPortugal

2.0%

2.5%

Germany

onal Euribor Spread

1.0%

1.5%

$0 $100 $200 $300 $400 $500 $600

France

Inte

rnat

i

0.0%

0.5%

'07 '08 '09 '10 '11 '12

48

$0 $100 $200 $300 $400 $500 $600

Source: Bloomberg, BIS, J.P. Morgan Asset Management.The Libor OIS spread is the difference between the interest rate at which banks borrow unsecured funds from other banking institutions and overnight indexed swaps at the effective federal funds rate. The Euribor EONIA spread is the difference between the interest rate at which European Union banks borrow unsecured funds from other Euro banking institutions and the standard interest rate for Euro area deposits calculated by the European Central Bank. Both are standard measures of perceived risk in banking institutions. Data are as of 9/30/12.

07 08 09 10 11 12

Chinese Growth and Economic Policy

30%

%

10%Share of year-over-year change in nominal global GDPChina and U.S. Contribution to Global GDP Growth Chinese Inflation and the Money Supply

Year-over-year % change

U it d St tChina Most Recent

CPI (LHS) 2 0%35%

40%

20%

25%

2%

4%

6%

8%United States CPI (LHS) 2.0%M2 (RHS) 13.5%

15%

20%

25%

30%

35%

10%

15%

-2%

0%

'00 '02 '04 '06 '08 '10 '12

China Export Growth3 month moving average year over year %

Mortgage DebtPercentage of GDP

0%

5%

10%

'81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14

15%

25%

35%

45%

71%

73%

75%

77%

14%

16%

18%

onal

3-month moving average year-over-year %

Aug. 2012:5.0%

Percentage of GDP

1Q12: 14.0%United States (Right)

-25%

-15%

-5%

5%

Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-1261%

63%

65%

67%

69%

8%

10%

12%

'05 '06 '07 '08 '09 '10 '11 '12

Inte

rnat

i

1Q12: 62.9%

China (Left)

49

eb 08 Sep 08 p 09 o 09 Ju 0 Ja ug a 05 06 07 08 09 10 11 12Source: (Top left) IMF, J.P. Morgan Asset Management. (Top right) National Bureau of Statistics, J.P. Morgan Economics, J.P. Morgan Asset Management. (Bottom left) IMF, J.P. Morgan Asset Management. (Bottom right) Barclays Capital, Federal Reserve, J.P. Morgan Asset Management. *In 2009, global growth was negligible, while Chinese growth was robust, which resulted in China contributing more than 1200% to global growth.Calculations based on PPP exchange rates and 2012 – 2016 growth forecasts are from the IMF.


Global Equity Valuations – Developed Markets

Developed Market Countries

Ave

rage

Expensive relative to

world

Example

3 Std D

+5 Std Dev+4 Std Dev

+6 Std Dev

d D

ev fr

om G

loba

l A

Expensive relative to own

history

Cheap relative to own history

Average

Current

Cheap

+3 Std Dev

+2 Std Dev

+1 Std DevAverage

-1 Std Dev-2 Std Dev

-3 Std Dev

Fwd P/E P/B P/CF Div Yld Fwd P/E P/B P/CF Div Yld

Current Composite

Index

Current 10-year avg.

World (ACWI)

EAFE Index

France Japan U.K. Germany Australia Canada Switzerland United States

Std Cheap

relative to world


Fwd. P/E P/B P/CF Div. Yld. Fwd. P/E P/B P/CF Div. Yld.

World (ACWI) -0.88 12.0 1.7 6.9 2.8% 13.4 2.1 7.0 2.5% EAFE Index -1.88 10.9 1.3 5.5 3.7% 12.9 1.7 6.2 3.3%

France -2.39 10.2 1.1 5.2 4.2% 11.5 1.6 5.8 3.7%Japan -2.00 11.5 0.9 3.9 2.7% 17.9 1.4 6.2 1.9%U.K. -1.78 10.2 1.6 6.1 4.1% 11.4 2.0 7.1 3.9%G 1 69 9 8 1 4 6 6 3 6% 11 8 1 5 4 6 3 3%

Index

onal

Germany -1.69 9.8 1.4 6.6 3.6% 11.8 1.5 4.6 3.3%Australia -1.48 12.1 1.7 6.5 4.9% 13.4 2.2 8.2 4.5%Canada -0.92 12.7 1.8 5.1 2.8% 13.8 2.1 7.2 2.4%Switzerland 0.34 12.2 2.0 11.9 3.5% 13.7 2.4 9.8 2.9%

United States 0.55 12.6 2.2 8.2 2.0% 14.4 2.4 8.4 2.0%

Source: MSCI, FactSet, J.P. Morgan Asset Management.

Inte

rnat

io

50

Note: Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (Fwd. P/E), price to current book (P/B), price to last 12 months’ cash flow (P/CF) and price to last 12 months’ dividends. Results are then normalized using means and average variability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). See disclosures page at the end for metric definitions.


Global Equity Valuations – Emerging Markets

Emerging Market Countries

vera

ge +5 Std Dev+4 Std Dev

+6 Std DevExpensive relative to

world

Example

Dev

from

Glo

bal A

v

+3 Std Dev+2 Std Dev+1 Std Dev

Average


-3 Std Dev

Expensive relative to own

history

world

Cheap relative to own history

Average

Current

Cheap

Current Composite

Current 10-year avg.

World(ACWI)

EM Index

Russia China Brazil Taiwan South Africa

Korea Mexico India

Std

3 Std Dev-4 Std Dev-5 Std Dev

Cheap relative to

world

Fwd. P/E P/B P/CF Div. Yld. Fwd. P/E P/B P/CF Div. Yld.

World(ACWI) -0.88 12.0 1.7 6.9 2.8% 13.4 2.1 7.0 2.5% EM Index -1.43 10.3 1.6 6.1 2.9% 10.9 1.9 5.7 2.7%

Russia -3.71 5.2 0.8 3.6 3.6% 7.9 1.3 4.9 2.2%China -2.28 9.0 1.5 4.5 3.3% 12.2 2.1 4.1 2.8%Brazil -1.92 10.8 1.4 6.2 4.1% 9.6 1.9 5.5 3.5%

pIndex

onal

Taiwan -0.74 15.0 1.8 5.9 3.3% 15.2 1.8 6.5 3.5% South Africa -0.21 11.6 2.3 9.7 3.5% 10.9 2.3 7.5 3.4%

Korea 0.19 8.7 1.3 5.7 1.1% 9.4 1.5 5.0 1.8%Mexico 1.76 16.7 2.9 6.3 1.6% 13.4 2.6 5.6 2.0%India 2.69 14.0 2.5 12.7 1.5% 15.1 3.2 12.0 1.5%


Inte

rnat

io

51


Note: Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (Fwd. P/E), price to current book (P/B), price to last 12 months’ cash flow (P/CF) and price to last 12 months’ dividends. Results are then normalized using means and average variability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). See disclosures page at the end for metric definitions.


Emerging Market Equity Composition

8%

MSCI EM Index by Region MSCI EM Index by Sector

8%

60%

10%

22%

Africa/Mideast

Asia/Pacific ex Japan

Europe

Latin America

20%

25%

14%

16% Other

Commodities

Financials

Tech25%

Tech

Consumer

MSCI EM Country Index by Sectory y

onal

13%37%

69%

21%22%

19%

14%

16% 12% 17% 24%34%

16%

60%

80%

100%

Other

Commodities

Inte

rnat

i

17%4%

18% 11%

38%23%

4%16%

7%

33%26%

15%

28%

37%9%

69% 19%

20%

40%Financials

Tech

Consumer

52

Source: MSCI, FactSet, J.P. Morgan Asset Management. “Other” is comprised of Healthcare, Industrials, Telecom, and Utilities sectors. *Mexican Telecom sector accounts for 28% of the country’s market capitalization. Values may not sum to 100% due to rounding.Data are as of 9/30/12.

4% 11%0%

Brazil Russia India China Mexico* Korea

International Economic and Demographic Data

Economics DemographicsGDP USD

(B$s) GDP Per Capita

GDP Growth

Unempl. Rate

Inflation (CPI)

C.A. (%GDP) Population

Population Growth

Median Age

Migration per 1000p g p

DevelopedU.S. $15,094 $48,387 1.3% 8.1% 1.7% -3.6% 314 mm 0.9% 37.1 yrs +3.6

Canada 1,737 50,436 1.9 7.3 1.4 -2.5 34 0.8 41.2 +5.7

U.K. 2,418 38,592 2.0 8.1 2.5 -2.3 63 0.6 40.2 +2.6

Germany 3 577 43 742 0 3 6 8 2 0 5 3 81 0 2 45 3 7Germany 3,577 43,742 0.3 6.8 2.0 5.3 81 -0.2 45.3 +.7

France 2,776 44,008 -0.3 10.2 2.2 -1.9 66 0.5 40.4 +1.1

Japan 5,869 45,920 -2.0 4.3 -0.4 1.5 127 -0.1 45.4 -

Italy 2,199 36,267 -2.5 10.6 3.2 -2.3 61 0.4 43.8 +4.7

Emerging

Russia 1,850 12,993 2.0 5.2 6.9 5.4 143 -0.5 38.8 +0.3

Mexico 1,155 10,153 3.5 5.4 4.6 -0.4 115 1.1 27.4 -3.1

Brazil 2,493 12,789 4.8 5.3 5.3 -2.1 199 1.1 29.6 -0.1

China 7,298 5,414 7.4 4.1 2.0 2.8 1,343 0.5 35.9 -0.3

India 1 676 1 389 5 2 9 8 7 7 2 5 1 205 1 3 26 5 0 1onal

India 1,676 1,389 5.2 9.8 7.7 -2.5 1,205 1.3 26.5 -0.1

Source: FactSet, Eurostat, CIA, J.P. Morgan Securities, J.P. Morgan Asset Management.

GDP levels represent 2011 data and are from the April 2012 World Economic Outlook published by the IMF, except for the U.S. levels, which come directly from the BEA. All GDP Growth data are from J.P. Morgan Economics and expressed as % change versus prior quarter annualized. All GDP growth data are for 3Q12. India unemployment is from CIA estimates and is as of 2011. CPI Inflation is shown as % change versus a year ago and all data are for August 2012, except for Japan, which is as of July 2012. Unemployment rate for developed countries comes from FactSet Economics, Eurostat and Statistics Canada and represent the most recently available data. Demographic data provided by CIA World Factbook at CIA.gov.

Inte

rnat

i

53

Current Account (C.A.) represents each country’s current account balance as of 6/30/12. Russia, China and Brazil’s current accounts are as of 12/31/11.


Current Account Deficit and U.S. Dollar

115-8%

Current Account Balance, % of GDP U.S. Dollar IndexNominal trade-weighted exchange index: major currencies

100

105

110

-6%

4Q05:-6.5%

90

95

100

-4% 2Q12:-3.0%

Mar 2009:

75

80

85

-2%

onal

Mar. 2009: 84.0

'94 '96 '98 '00 '02 '04 '06 '08 '10 '1265

70

75

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12

0%

Inte

rnat

i

Mar. 2008: 70.3

Sep. 2012: 72.5

54

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

Data are as of 9/30/12 and are reported quarterly.

Source: Federal Reserve, FactSet, J.P. Morgan Asset Management.


Asset Class Returns

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD 3Q12 Cum. Ann.DJ UBSCmdty

MSCIEME

REITs MS CIEME

REITs MS CIEME

Ba rc la ys Agg

MS CIEME

REITs REITs S&P5 0 0

DJ UBSCmdty

MSCIEME

MSCIEME

23 .9 % 5 6 .3 % 3 1.6 % 3 4 .5 % 3 5 .1% 3 9 .8 % 5 .2 % 7 9 .0 % 2 7 .9 % 8 .3 % 16 .4 % 9 .7 % 2 7 7 .1% 14 .2 %

10-yrs '02 - '11

Ba rc la ys Agg

Russe ll 2 0 0 0

MSCIEME

DJ UBSCmdty

MS CIEME

MS CI EAFE

Ca sh MS CI EAFE

Russe ll 2 0 0 0

Ba rc la ys Agg

REITs MSCIEME

REITs REITs

10 .3 % 4 7 .3 % 2 6 .0 % 17 .5 % 3 2 .6 % 11.6 % 1.8 % 3 2 .5 % 2 6 .9 % 7 .8 % 16 .1% 7 .9 % 16 4 .2 % 10 .2 %Ma rke t Ne utra l

MSCI EAFE

MSCI EAFE

MS CI EAFE

MS CI EAFE

DJ UBSCmdty

Ma rke t Ne utra l

REITs MS CIEME

Ma rke t Neutra l

Russe ll 20 0 0

MSCI EAFE

Asse t Alloc .

Asse t Alloc .

7 .4 % 3 9 .2 % 2 0 .7 % 14 .0 % 2 6 .9 % 11.1% 1.1% 2 8 .0 % 19 .2 % 4 .5 % 14 .2 % 7 .0 % 8 2 .8 % 6 .2 %

REITs REITs Russe ll 2 0 0 0

REITs Russe ll 2 0 0 0

Ma rke t N t l

Asse t All

Russe ll 2 0 0 0

DJ UBSC dt

S&P5 0 0

MSCIEME

S&P5 0 0

Ba rc la ys A

Ba rc la ys A2 0 0 0 2 0 0 0 Ne utra l Alloc . 2 0 0 0 Cmdty 5 0 0 EME 5 0 0 Agg Agg

3 .8 % 3 7 .1% 18 .3 % 12 .2 % 18 .4 % 9 .3 % - 2 4 .0 % 2 7 .2 % 16 .7 % 2 .1% 12 .3 % 6 .4 % 7 5 .4 % 5 .8 %

Ca sh S &P5 0 0

Asse t Alloc .

Asse t Alloc .

S &P5 0 0

Asse t Alloc .

Russe ll 2 0 0 0

S &P5 0 0

S &P5 0 0

Ca sh MSCI EAFE

Russe ll 2 0 0 0

Russe ll 2 0 0 0

Russe ll 2 0 0 0

1.7 % 2 8 .7 % 12 .4 % 8 .1% 15 .8 % 7 .2 % - 3 3 .8 % 2 6 .5 % 15 .1% 0 .1% 10 .6 % 5 .3 % 7 2 .8 % 5 .6 %Asse t Alloc .

Asse t Alloc .

S &P5 0 0

Ma rke t Ne utra l

Asse t Alloc .

Ba rc la ys Agg

DJ UBSCmdty

Asse t Alloc .

Asse t Alloc .

Asse t Alloc .

Asse t Alloc .

Asse t Alloc .

Ma rke t Ne utra l

Ma rke t Ne utra l

5 8 % 2 5 0 % 10 9 % 6 1% 14 9 % 7 0 % 3 6 6 % 2 2 2 % 12 5 % 0 6 % 9 8 % 4 5 % 7 2 1% 5 6 %- 5 .8 % 2 5 .0 % 10 .9 % 6 .1% 14 .9 % 7 .0 % - 3 6 .6 % 2 2 .2 % 12 .5 % - 0 .6 % 9 .8 % 4 .5 % 7 2 .1% 5 .6 %MSCIEME

DJ UBSCmdty

DJ UBSCmdty

S &P5 0 0

Ma rke t Ne utra l

S &P5 0 0

S &P5 0 0

DJ UBSCmdty

MS CI EAFE

Russe ll 2 0 0 0

DJ UBSCmdty

Ba rc la ys Agg

MSCI EAFE

MSCI EAFE

- 6 .0 % 2 2 .7 % 7 .6 % 4 .9 % 11.2 % 5 .5 % - 3 7 .0 % 18 .7% 8 .2 % - 4 .2 % 5 .6 % 1.6 % 6 4 .8 % 5 .1%MSCI EAFE

Ma rke t Ne utra l

Ma rke t Ne utra l

Russe ll 2 0 0 0

Ca sh Ca sh REITs Ba rc la ys Agg

Ba rc la ys Agg

MS CI EAFE

Ba rc la ys Agg

REITs DJ UBSCmdty

DJ UBSCmdty

- 15 .7 % 7 .1% 6 .5 % 4 .6 % 4 .8 % 4 .8 % - 3 7 .7 % 5 .9 % 6 .5 % - 11.7 % 4 .0 % 1.0 % 5 8 .0 % 4 .7 %Russe ll Ba rc la ys Ba rc la ys Ba rc la ys Russe ll MS CI Ma rke t DJ UBS Ma rke t S &P S&PRusse ll

2 0 0 0Ba rc la ys

AggBa rc la ys

AggCa sh Ba rc la ys

AggRusse ll

2 0 0 0MS CI EAFE

Ma rke t Ne utra l

Ca sh DJ UBSCmdty

Ca sh Ma rke t Ne utra l

S &P5 0 0

S&P5 0 0

- 2 0 .5 % 4 .1% 4 .3 % 3 .0 % 4 .3 % - 1.6 % - 4 3 .1% 4 .1% 0 .1% - 13 .4 % 0 .1% 0 .8 % 3 3 .4 % 2 .9 %S&P5 0 0

Ca sh Ca sh Ba rc la ys Agg

DJ UBSCmdty

REITs MS CIEME

Ca sh Ma rke t Ne utra l

MS CIEME

Ma rke t Ne utra l

Ca sh Ca sh Cash

- 2 2 .1% 1.0 % 1.2 % 2 .4 % - 2 .7 % - 15 .7 % - 5 3 .2 % 0 .1% - 0 .8 % - 18 .2 % - 0 .5 % 0 .0 % 2 0 .2 % 1.9 %

setC

lass

Source: Russell, MSCI, Dow Jones, Standard & Poor’s, Credit Suisse, Barclays Capital, NAREIT, FactSet, J.P. Morgan Asset Management. The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EMI,

55

As The Asset Allocation portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EMI,

25% in the Barclays Capital Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the CS/Tremont Equity Market Neutral Index, 5% in the DJ UBS Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. All data except commodities represent total return for stated period. Past performance is not indicative of future returns. Data are as of 9/30/12, except for the CS/Tremont Equity Market Neutral Index, which reflects data through 8/31/12. “10-yrs” returns represent annualized total return. These returns reflect the period from 1/1/02 – 12/31/11. Please see disclosure page at end for index definitions. *Market Neutral returns include estimates found in disclosures.Data are as of 9/30/12.

Correlations: 10-Years

Large Cap

Small Cap EAFE EME

Core Bonds

Corp. HY EMD Cmdty. REITs

Hedge Funds

Eq Market

Neutral*

Large Cap 1 00 0 95 0 92 0 84 -0 21 0 78 0 67 0 53 0 79 0 81 0 59Large Cap 1.00 0.95 0.92 0.84 -0.21 0.78 0.67 0.53 0.79 0.81 0.59

Small Cap 1.00 0.88 0.79 -0.27 0.73 0.59 0.46 0.84 0.76 0.55

EAFE 1.00 0.93 -0.15 0.75 0.66 0.59 0.72 0.87 0.72

EME 1 00 0 09 0 79 0 73 0 64 0 64 0 90 0 62EME 1.00 -0.09 0.79 0.73 0.64 0.64 0.90 0.62

Core Bonds 1.00 -0.03 0.27 -0.27 0.00 -0.22 -0.09

Corp. HY 1.00 0.85 0.56 0.70 0.78 0.44

EMD 1.00 0.44 0.61 0.65 0.40

Commodities 1.00 0.40 0.72 0.50

REITs 1.00 0.59 0.50

Source: Standard & Poor’s, Russell, Barclays Capital Inc., MSCI Inc., Credit Suisse/Tremont, NCREIF, DJ UBS, J.P. Morgan Asset Management.

Indexes used – Large Cap: S&P 500 Index; Small Cap: Russell 2000; EAFE: MSCI EAFE; EME: MSCI Emerging Markets; Bonds: Barclays C it l A t C HY B l C it l C t Hi h Yi ld EMD B l C it l E i M k t C dt DJ UBS C dit I d

setC

lass

Hedge Funds 1.00 0.60

Eq Market Neutral* 1.00

56

Capital Aggregate; Corp HY: Barclays Capital Corporate High Yield; EMD: Barclays Capital Emerging Market; Cmdty.: DJ UBS Commodity Index; Real Estate: NAREIT Equity REIT Index; Hedge Funds: CS/Tremont Multi-Strategy Index; Equity Market Neutral: CS/Tremont Equity Market Neutral Index. *Market Neutral returns include estimates found in disclosures.

All correlation coefficients calculated based on quarterly total return data for period 9/30/02 to 9/30/12.

This chart is for illustrative purposes only.

As

Mutual Fund Flows

Billions, USD AUM YTD 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998

Domestic Equity 4 270 (77) (132) (81) (28) (148) (65) (0) 18 101 120 (26) 55 261 176 149

Fund Flows

Domestic Equity 4,270 (77) (132) (81) (28) (148) (65) (0) 18 101 120 (26) 55 261 176 149World Equity 1,492 18 4 58 28 (80) 139 149 106 71 24 (3) (22) 53 11 8

Taxable Bond 2,724 169 135 230 311 22 97 45 26 5 40 125 76 (36) 8 59Tax-exempt Bond 562 39 (12) 11 69 8 11 15 5 (15) (7) 17 11 (14) (12) 15

Hybrid 946 39 31 24 10 (26) 42 18 37 49 38 9 9 (36) (14) 10

Money Market 2 554 (138) (124) (525) (539) 637 654 245 62 (157) (263) (46) 375 159 194 235

$1,400 $40

Difference Between Flows Into Stock and Bond FundsBillions, USD, U.S. and international funds, monthly

Bond flows exceeded equity flows b $51 billi i A t 2012

Cumulative Flows into Stock & Bond FundsIncludes both mutual funds and ETFs, $ billions

Aug. ’12: $1,288 billion into bond funds and fixed income ETFs since ’07

Money Market 2,554 (138) (124) (525) (539) 637 654 245 62 (157) (263) (46) 375 159 194 235

$600

$800

$1,000

$1,200

$0

$20by $51 billion in August 2012and fixed income ETFs since ’07

Aug ’12: $209 billion

$0

$200

$400

$600

'07 '08 '09 '10 '11 '12-$60

-$40

-$20

M '08 M '09 J '10 N '10 S '11 J l '12setC

lass Bonds

Stocks

Aug. 12: $209 billion into stock funds and equity ETFs since ’07

57

'07 '08 '09 '10 '11 '12 May '08 Mar '09 Jan '10 Nov '10 Sep '11 Jul '12

Source: Investment Company Institute, J.P. Morgan Asset Management.Data include flows through August 2012 and exclude ETFs. ICI data are subject to periodic revisions. World equity flows are inclusive of emerging market, global equity and regional equity flows. Hybrid flows include asset allocation, balanced fund, flexible portfolio and mixed income flows.Data are as of 9/30/12.

As

Dividend Income: Domestic and Global

S&P 500 Total Return: Dividends vs. Capital AppreciationAverage annualized returns Capital Appreciation

Dividends

15%

20%

4.7% 5.4% 6.0% 5.1% 3.3% 4.2% 4.4% 2.5%1.8% 4.1%

13.9%

5 3%

3.0%

13.6%

4.4%1.6%

12.6% 15.3%

-2.7%

5.5%

0%

5%

10%

15%

Equity Dividend YieldsREIT Dividend YieldsMajor world markets by capitalization Major world markets by capitalization10 year government

-5.3%

-10%

-5%

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

3.5%

5.5% 5.5% 5.4%5.0%

4.7%

4.2% 4.0%4%

5%

6%Major world markets by capitalization Major world markets by capitalization10-year government

bond yield 10-year government bond yield

4.8%

4.1%3.8%

3.4%

2 9% 2 8%

4%

5%

6%

0%

1%

2%

3%

setC

lass

2.2%

2.9% 2.8% 2.6%

0%

1%

2%

3%

58

0%U.S. France Australia Singapore Canada Japan Global U.K.

Source: (Top chart) Standard & Poor’s, Ibbotson, J.P. Morgan Asset Management. (Bottom left) FactSet, NAREIT, J.P. Morgan Asset Management. Yields shown are that of the appropriate FTSE NAREIT REIT index, which excludes property development companies. (Bottom right) FactSet, MSCI, J.P. Morgan Asset Management. Yields shown are that of the appropriate MSCI index.


As 0%

U.S. Australia France U.K. Switzerland Canada ACWI Japan

Global Commodities

600

Commodity Prices Weekly index prices rebased to 100

Oil Demand: Emerging Markets ShareEmerging markets as % of total global oil consumption40%

500

Precious Metals

Industrial Metals34%

36%

38%

300

400

Commodity Prices and Inflation

30%

32%

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

4%

6%

8%

40%

60%

80%

200

Energy

Grains

yYear-over-year % chg.

DJ-UBS Commodity Index (Y/Y % chg.)

-4%

-2%

0%

2%

-40%

-20%

0%

20%

100

setC

lass

Livestock

Grains

Headline CPI (Y/Y % chg.)

59

'94 '96 '98 '00 '02 '04 '06 '08 '10 '12-6% -60%

'03 '04 '05 '06 '07 '08 '09 '10 '11 '120

Source: Dow Jones/UBS, FactSet, J.P. Morgan Asset Management.

Commodity prices represented by the appropriate DJ/UBS Commodity sub-index.


Source: (Top) BP Statistical Review of World Energy, J.P. Morgan Asset Management. (Bottom) BLS, DJ/UBS, FactSet, J.P. Morgan Asset Management.


As

Gold

$3,000

Gold Prices$ / oz Year Troy Ounces Total Value

2000 83.3 mm $23 bn

World Gold Production

$2,500

Jan. 1980: $2,480.36

Gold, Inflation AdjustedGold

2001 83.6 mm $23 bn

2002 82.0 mm $25 bn

2003 81 7 $30 b

$1,500

$2,000Sep. 2012: $1,763.00

2003 81.7 mm $30 bn

2004 77.8 mm $32 bn

2005 79.4 mm $35 bn

$1,000 Jan. 1980: $850.00

2006 76.2 mm $46 bn

2007 75.6 mm $53 bn

2008 73.3 mm $64 bn

$0

$500

setC

lass 2009 79.1 mm $77 bn

2010 82.3 mm $101 bn

2011 86 8 mm $136 bn

60

'75 '80 '85 '90 '95 '00 '05 '10Source: (Left chart) EcoWin, BLS, U.S. Department of Energy, FactSet, J.P. Morgan Asset Management. (Right table) U.S. Geological Survey, World Gold Council, J.P. Morgan Asset Management. CPI adjusted gold values are calculated using month averages of gold spot prices divided by the CPI value for that month. CPI is rebased to 100 at the end of the chart. 2011 world production is a U.S. Geological Survey estimate. Data are as of 9/30/12.

As 2011 86.8 mm $136 bn

Historical Returns by Holding Period

Annual total returns, 1950 – 2011Range of Stock, Bond and Blended Total Returns

Annual Avg. T t l R t

Growth of $100,000 20

60%

50/50 Portfolio 8.9% $552,853Bonds 6.3% $337,713Stocks 10.8% $771,337

Total Return over 20 years

51%

43%

30%

40%

50%

32%28%

23% 21% 19%16% 17% 18%

12% 14%10%

20%

30%

Stocks

-8%

-15%

-2% -2% 1% -1% 1% 2%6%

1%5%

-10%

0%

setC

lass 50/50 Portfolio

Bonds

-37%

-40%

-30%

-20%

61

As

Sources: Barclays Capital, FactSet, Robert Shiller, Strategas/Ibbotson, Federal Reserve, J.P. Morgan Asset Management.

Returns shown are based on calendar year returns from 1950 to 2011.


1-yr. 5-yr. rolling 10-yr. rolling 20-yr. rolling

Diversification and the Average Investor

Equity Mkt. Neutral

Commodities

(Top) Indexes and weights of the traditional portfolio are as follows: U.S. stocks: 55% S&P 500, U.S. bonds: 30% Barclays Capital Aggregate. International stocks: 15% MSCI EAFE. Portfolio with 25%

Traditional Portfolio More Diversified PortfolioMaximizing the Power of Diversification (1994 – 2011)

8%8%

8%

22%13%4%

26%

Commodities

REIT

S&P 500

Russell 2000

MSCI EAFE

in alternatives is as follows: U.S. stocks: 22.2% S&P 500, 8.8% Russell 2000; International Stocks: 4.4% MSCI EM, 13.2% MSCI EAFE; U.S. Bonds: 26.5% Barclays Capital Aggregate; Alternatives: 8.3% CS/Tremont Equity Market Neutral, 8.3% DJ/UBS Commodities, 8.3% NAREIT Equity REIT Index Return

55%

15%

30% S&P 500

MSCI EAFE

Barclays Agg. 22%9%

13% MSCI EAFE

MSCI EM

Barclays Agg.

NAREIT Equity REIT Index. Return and standard deviation calculated using Morningstar Direct.Charts are shown for illustrative purposes only. Past returns are no guarantee of future results. Diversification does not guarantee investment returns and does not eliminate risk of loss. Data are as of 9/30/12

Return: 6.75%Standard Deviation: 10.94%

Return: 7.09%Standard Deviation: 9.97%

15%y gg

20-year Annualized Returns by Asset Class (1992 – 2011)9/30/12. (Bottom) Indexes used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Barclays Capital U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Gold: USD/troy oz, Inflation: CPI Average asset allocation

10.9%

8.6%7 8% 7 6%

10%

12%

CPI. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period se

tCla

ss

7.8% 7.6%

6.5%

4.0%

2.5% 2.5% 2.1%

4%

6%

8%

62

ending 12/31/11 to match Dalbar’smost recent analysis. A

s

0%

2%

REITs Oil S&P 500 Gold Bonds EAFE Inflation Homes Average Investor

Annual Returns and Intra-year Declines

50%

S&P 500 Intra-year Declines vs. Calendar Year ReturnsDespite average intra-year drops of 14.5%, annual returns positive in 25 of 32 years

26

1517

26

15

27 26

34

20

3127

20

26

14

23

20%

35%

-10

15

1

15

2

12

-7 47 -2 -10 -13 -23

9

3

14

4-38

13

0

6 6 -5-3

10%

5%

-17 -17-14

-7

-12-8 -9 -8 -8

-20

-6 -6 -5-9 -8

-11

-19

-12-17

-26

32

-14

-8 -7 -8-10

-28

-16-19-25%

-10%

-34 -32

-47-55%

-40%

'80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11setC

lass

63

Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management.Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops over periods of 6 months or less. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2011.Data are as of 9/30/12.

As

Cash Accounts

$8,000

$10,000Annual Income Generated by $100,000 Investment in a 6-month CD

2006: $5 240

$ BillionsWeight in

Money Supply

Money SupplyComponent

$2,000

$4,000

$6,000

2011: $419

2006: $5,240

M2-M1 7,688 76.7%

Retail MMMFs 641 6.4%

$01986 1990 1994 1998 2002 2006 2010

6-month CD rate vs. Core CPICash AccountsCash as a % of Total Household Financial Assets28%

Mar ’09 S&P 500 low

Savings deposits 6,348 63.3%

Small time deposits 700 7.0%

16%

20%

24% Oct. ’02 S&P 500 low

Mar. 09 S&P 500 low Institutional MMMFs 1,723 17.2%

616 6.1% Cash in IRA & Keogh accounts

setC

lass

Source: Federal Reserve, St. Louis Fed, Bankrate.com, J.P. Morgan Asset Management. All cash measures obtained from the Federal Reserve are seasonally adjusted monthly numbers. All numbers are in billions of U.S. dollars.Small denomination time deposits are those iss ed in amo nts of less than $100 000 All IRA and Keogh acco nt balances at commercial banks

'98 '00 '02 '04 '06 '08 '10 '12

12% Total 10,026 100.0%

64

As Small-denomination time deposits are those issued in amounts of less than $100,000. All IRA and Keogh account balances at commercial banks

and thrift institutions are subtracted from small time deposits. Annual income is for illustrative purposes and is calculated based on the 6-month CD yield on average during each year and $100,000 invested.IRA and Keogh account balances at money market mutual funds are subtracted from retail money funds. Past performance is not indicative of comparable future results. Data are as of 9/30/12.

Corporate DB Plans and Endowments

UnderfundedDefined Benefit Plans – Funded Status: S&P 500 Companies

8%Overfunded

Asset Allocation: Corporate DB Plans vs. Endowments

Corporate Defined Benefit PlansEndowments

45.3%

13.0%

32.0%

Fixed Income

Equities

92%

8%

78%

22%Corporate Defined Benefit Plans

2.7%

35.5%

10 7%

21.9%Hedge Funds

Fixed Income

Pension Return Assumptions: S&P 500 companies

20101999

78%

27%29%

20%

16% 16%

33%

27%

20%

30%

40%

3.1%

4.7%

6.1%

10.7%

Real Estate

Private Equity

pani

es

2010: Average 7.4%1999: Average 9.2%

2% 1%5%

9%7%

16% 16%

8%

0% 0% 0%0%

10%

< 7% 7 to 7.5 to 8 to 8.5 to 9 to 9.5 to > 10%4.7%

4.1%

4.0%

12.2%

Cash

Other

% o

f Com

p

setC

lass

% of total

65

7.5% 8% 8.5% 9% 9.5% 10%0% 10% 20% 30% 40% 50% Return Assumption

Source: NACUBO (National Association of College and University Business Officers), Towers Watson, Compustat/FactSet, J.P. Morgan Asset Management. Endowments represents dollar-weighted average data of 842 colleges and universities. Pension Return Assumptions based on all available and reported data from S&P 500 Index companies. Funded Status based on 351 companies reporting pension funding status as of 3/31/11. Return assumption bands are inclusive of upper range. All information is shown for illustrative purposes only. Data are as of 9/30/12.

As

The Dow Jones Industrial Average Since 1900

Dow Jones Industrial Index, Price Return (Since 1900)

Log Scale

10,000

2000 – present

3,000

1,0001966 – 1982

400

100

1937 – 1949

'10 '20 '30 '40 '50 '60 '70 '80 '90 '00 '10

1906 – 1924

setC

lass

66

Source: IDC, FactSet, J.P. Morgan Asset Management.

Data shown in log scale to best illustrate long-term index patterns.

Past performance is not indicative of future returns. Chart is for illustrative purposes only.


As

J.P. Morgan Asset Management – Index Definitions

All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index.

The MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2009 the MSCI ACWI consisted of 45 country indices comprising 23 developed and 22 emerging market country indices.

The MSCI Small Cap IndicesSM target 40% of the eligible Small Cap universe within each industry group, within each country. MSCI defines the Small Cap universe as all listed securities that have a market capitalization in the range of USD200 1 500 million

The S&P 400 Mid Cap Index is representative of 400 stocks in the mid-range sector of the domestic stock market, representing all major industries.The Russell 3000 Index® measures the performance of the 3,000 largest U.S. companies based on total market capitalization. The Russell 1000 Index ® measures the performance of the 1,000 largest companies in the Russell 3000. The Russell 1000 Growth Index ® measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

range of USD200-1,500 million.

The MSCI Value and Growth IndicesSM cover the full range of developed, emerging and All Country MSCI Equity indexes. As of the close of May 30, 2003, MSCI implemented an enhanced methodology for the MSCI Global Value and Growth Indices, adopting a two dimensional framework for style segmentation in which value and growth securities are categorized using different attributes - three for value and five for growth including forward-looking variables. The objective of the index design is to divide constituents of an underlying MSCI Standard Country Index into a value index and a growth index, each targeting 50% of the free float adjusted market capitalization of the underlying country index. Country Value/Growth indices are then aggregated into regional Value/Growth indices. Prior to May 30, 2003, the indices used Price/Book Value (P/BV) ratios to divide the

The Russell 1000 Value Index ® measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell Midcap Index ® measures the performance of the 800 smallest companies in the Russell 1000 Index. The Russell Midcap Growth Index ® measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth index. The Russell Midcap Value Index ® measures the performance of those Russell Midcap companies with lower

y ( )standard MSCI country indices into value and growth indices. All securities were classified as either "value" securities (low P/BV securities) or "growth" securities (high P/BV securities), relative to each MSCI country index.

The following MSCI Total Return IndicesSM are calculated with gross dividends:This series approximates the maximum possible dividend reinvestment. The amount reinvested is the dividend distributed to individuals resident in the country of the company, but does not include tax credits.

The MSCI Europe IndexSM is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of June 2007, the MSCI Europe Index consisted of the following 16 developed market country indices: Austria Belgium Denmark Finland France Germany Greece The Russell Midcap Value Index ® measures the performance of those Russell Midcap companies with lower

price-to-book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000 Value index. The Russell 2000 Index ® measures the performance of the 2,000 smallest companies in the Russell 3000 Index.The Russell 2000 Growth Index ® measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000 Value Index ® measures the performance of those Russell 2000 companies with lower price-to book ratios and lower forecasted growth values

following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

The MSCI Pacific IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Pacific region. As of June 2007, the MSCI Pacific Index consisted of the following 5 Developed Market countries: Australia, Hong Kong, Japan, New Zealand, and Singapore.

Credit Suisse/Tremont Hedge Fund Index is compiled by Credit Suisse Tremont Index, LLC. It is an asset-weighted hedge fund index and includes only funds, as opposed to separate accounts. The Index uses the Credit Suisse/Tremont database, which tracks over 4500 funds, and consists only of funds with a minimum of US$50 to-book ratios and lower forecasted growth values.

The MSCI® EAFE (Europe, Australia, Far East) Net Index is recognized as the pre-eminent benchmark in the United States to measure international equity performance. It comprises 21 MSCI country indexes, representing the developed markets outside of North America.

The MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 2007, the MSCI Emerging Markets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco,

Suisse/Tremont database, which tracks over 4500 funds, and consists only of funds with a minimum of US$50 million under management, a 12-month track record, and audited financial statements. It is calculated and rebalanced on a monthly basis, and shown net of all performance fees and expenses. It is the exclusive property of Credit Suisse Tremont Index, LLC.

The NCREIF Property Index is a quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market for investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors - the great majority being pension funds. As such, all properties are held in a fiduciary environment.

67

Co o b a, C ec epub c, gyp , u ga y, d a, do es a, s ae , Jo da , o ea, a ays a, e co, o occo,Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The NAREIT EQUITY REIT Index is designed to provide the most comprehensive assessment of overall industry

performance, and includes all tax-qualified real estate investment trusts (REITs) that are listed on the NYSE, the American Stock Exchange or the NASDAQ National Market List.

J.P. Morgan Asset Management – Index Definitions

The Barclays Capital Taxable Municipal Bond Index is a rules-based, market-value weighted index engineered for the long-term taxable bond market. To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies if all three rate the bond: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate and must be at least one year from their maturity date. Remarketed issues (unless converted to

All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses.

The Dow Jones-UBS Commodity Index is composed of futures contracts on physical commodities and represents nineteen separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc.

fixed rate), bonds with floating rates, and derivatives, are excluded from the benchmark. Municipal Bond Index: To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives are excluded from the benchmark.The Barclays Capital Emerging Markets Index includes USD denominated debt from emerging markets in the

The S&P GSCI Index is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. Individual components qualify for inclusion in the index on the basis of liquidity and are weighted by their respective world production quantities.

The Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis. This U S Treasury Index is a component of the U S Government index The Barclays Capital Emerging Markets Index includes USD-denominated debt from emerging markets in the

following regions: Americas, Europe, Middle East, Africa, and Asia. As with other fixed income benchmarks provided by Barclays Capital, the index is rules-based, which allows for an unbiased view of the marketplace and easy replicability.The Barclays Capital MBS Index covers the mortgage-backed pass-through securities of Ginnie Mae, Fannie Mae, and Freddie Mac. Aggregate components must have a weighted average maturity of at least one year, must have $250 million par amount outstanding, and must be fixed rate mortgages.The Barclays Capital Corporate Bond Index is the Corporate component of the U.S. Credit index.The Barclays Capital TIPS Index consists of Inflation Protection securities issued by the U S Treasury

This U.S. Treasury Index is a component of the U.S. Government index.

West Texas Intermediate (WTI) is the underlying commodity for the New York Mercantile Exchange's oil futures contracts.

The Barclays Capital High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, and 144-As are also included.

The Barclays Capital TIPS Index consists of Inflation-Protection securities issued by the U.S. Treasury.The J.P. Morgan EMBI Global Index includes U.S. dollar denominated Brady bonds, Eurobonds, traded loans and local market debt instruments issued by sovereign and quasi-sovereign entities.The J.P. Morgan Domestic High Yield Index is designed to mirror the investable universe of the U.S. dollar domestic high yield corporate debt market. The CS/Tremont Equity Market Neutral Index takes both long and short positions in stocks with the aim of minimizing exposure to the systematic risk of the market (i.e., a beta of zero).The CS/Tremont Multi-Strategy Index consists of funds that allocate capital based on perceived opportunities

The Barclays Capital 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non convertible.

The Barclays Capital General Obligation Bond Index is a component of the Barclays Capital Municipal Bond Index. To be included in the index, bonds must be general obligation bonds rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, th ti t b i t t d Th t h t t di l f t l t $7 illi d b i d The CS/Tremont Multi-Strategy Index consists of funds that allocate capital based on perceived opportunities

among several hedge fund strategies. Strategies adopted in a multi-strategy fund may include, but are not limited to, convertible bond arbitrage, equity long/short, statistical arbitrage and merger arbitrage.*Market Neutral returns for November 2008 are estimates by J.P. Morgan Funds Market Strategy, and are based on a December 8, 2008 published estimate for November returns by CS/Tremont in which the Market Neutral returns were estimated to be +0.85% (with 69% of all CS/Tremont constituents having reported return data). Presumed to be excluded from the November return are three funds, which were later marked to $0 by CS/Tremont in connection with the Bernard Madoff scandal. J.P. Morgan Funds believes this distortion is not an accurate representation of returns in the category. CS/Tremont later published a finalized November return of -

the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives, are excluded from the benchmark.

The Barclays Capital Revenue Bond Index is a component of the Barclays Capital Municipal Bond Index. To be included in the index, bonds must be revenue bonds rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a

68

p g y p40.56% for the month, reflecting this mark-down. CS/Tremont assumes no responsibility for these estimates.

be investment grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives, are excluded from the benchmark.

The Barclays High Yield Municipal Index includes bonds rated Ba1 or lower or non-rated bonds using the middle rating of Moody’s, S&P and Fitch.

J.P. Morgan Asset Management – Definitions, Risks & Disclosures

There is no guarantee that the use of long and short positions will succeed in limiting an investor's exposure to domestic stock market movements, capitalization, sector swings or other risk factors. Investing using long and short selling strategies may have higher portfolio turnover rates. Short selling involves certain risks, including additional costs associated with covering short positions and a possibility of unlimited loss on certain short sale positions.

Opinions and estimates offered constitute our judgment and are subject to change without notice as are

Past performance is no guarantee of comparable future results.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise.The price of equity securities may rise, or fall because of changes in the broad market or changes in a company’s financial condition sometimes rapidly or unpredictably These price movements may result from factors affecting Opinions and estimates offered constitute our judgment and are subject to change without notice, as are

statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

All cases studies shown for illustrative purposes only and should not be relied upon as advice or interpreted as

financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries, or the securities market as a whole, such as changes in economic or political conditions. Equity securities are subject to “stock market risk” meaning that stock prices in general may decline over short or extended periods of time.

Small-capitalization investing typically carries more risk than investing in well-established "blue-chip" companies since smaller companies generally have a higher risk of failure. Historically, smaller companies' stock has experienced a greater degree of market volatility than the average stock.

Mid-capitalization investing typically carries more risk than investing in well-established "blue-chip" companies. Hi t i ll id i ' t k h i d t d f k t l tilit th th All cases studies shown for illustrative purposes only and should not be relied upon as advice or interpreted as

a recommendation. Results shown are not meant to be representative of actual investment results.

The views expressed are those of J.P. Morgan Asset Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited which is regulated by the Financial Services Authority; in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Switzerland by J.P. Morgan (Suisse) SA,

hi h i l t d b th S i Fi i l M k t S i A th it FINMA i H K b JF A t

Historically, mid-cap companies' stock has experienced a greater degree of market volatility than the average stock.

Real estate investments may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower.

International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some

which is regulated by the Swiss Financial Market Supervisory Authority FINMA; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, all of which are regulated by the Securities and Futures Commission; in India by JPMorgan Asset Management India Private Limited which is regulated by the Securities & Exchange Board of India; in Singapore by JPMorgan Asset Management (Singapore) Limited which is regulated by the Monetary Authority of Singapore; in Japan by JPMorgan Securities Japan Limited which is regulated by the Financial Services Agency; in Australia by JPMorgan Asset Management (Australia) Limited which is regulated by the Australian Securities and Investments Commission; in Brazil by Banco J.P. Morgan S.A. which is regulated by The Brazilian Securities and Exchange Commission (CVM) and Brazilian Central Bank (Bacen); and in Canada by JPMorgan Asset Management (Canada) Inc. which is a registered Portfolio Manager and Exempt Market D l i C d (i l di O t i ) d i dditi i i t d I t t F d M i B iti h

g p ,overseas markets may not be as politically and economically stable as the United States and other nations. Investments in emerging markets can be more volatile. As mentioned above, the normal risks of investing in foreign countries are heightened when investing in emerging markets. In addition, the small size of securities markets and the low trading volume may lead to a lack of liquidity, which leads to increased volatility. Also, emerging markets may not provide adequate legal protection for private or foreign investment or private property.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and Dealer in Canada (including Ontario) and in addition, is registered as an Investment Fund Manager in British

Columbia. This communication is issued in the United States by J.P. Morgan Investment Management Inc. which is regulated by the Securities and Exchange Commission. Accordingly this document should not be circulated or presented to persons other than to professional, institutional or wholesale investors as defined in the relevant local regulations. The value of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.

JPMorgan Distribution Services, Inc., member FINRA/SIPC.

© JPMorgan Chase & Co., October 2012.

particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.Derivatives may be riskier than other types of investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the original investment. The use of derivatives may not be successful, resulting in investment losses, and the cost of such strategies may reduce investment returns.

Price to forward earnings is a measure of the price-to-earnings ratio (P/E) using forecasted earnings. Price to book value compares a stock's market value to its book value. Price to cash flow is a measure of the market's expectations of a firm's future financial health Price to dividends is the ratio of the price of a share on a stock

69

g ,Unless otherwise stated, all data are as of September 30, 2012 or most recently available.

Prepared by: Andrew D. Goldberg, Joseph S. Tanious, Andrés Garcia-Amaya, David M. Lebovitz, Brandon D. Odenath, Anthony M. Wile and David P. Kelly.

NOT FDIC INSURED ı NO BANK GUARANTEE ı MAY LOSE VALUEJP-LITTLEBOOK

expectations of a firm s future financial health. Price to dividends is the ratio of the price of a share on a stock exchange to the dividends per share paid in the previous year, used as a measure of a company's potential as an investment.

Documents

Guide to the MarketsGuide to the Markets · 9. Earnings Estimates and Valuations by Style 10. Corporate Profits 11. Sources of Earnings per Share Growth 12. Confidence and the Capital