Emerging Markets Research J.P. Morgan Securities Inc.

January 5, 2010

Emerging Markets Outlook and Strategy

Review of 2009 for Emerging Markets fixed income investors
EM debt returns were the highest registered since 1996, solidly outperforming US credit and equities January effect apparent as EMBIG and CEMBI Broad spreads close inside our 2009 targets, boasting 28.2% and 37.5% total returns, respectively, in 2009 Higher beta sovereigns lead the rally with Pakistan, Argentina and Ukraine each reaching total returns well over 100%, with spreads collapsing by over 1,000bp Although EM corporates suffered from a bout of volatility in the final stages of the year, driven by events in Dubai which prompted UAE quasisovereigns to lose -1.5% in December, overall corporate valuations remain supported by expectations for the EM high yield corporate default rate to fall to only 1.8% in 2010 compared to 11.1% in 2009 EM local currency caught up with the credit rally in 2H09, with the GBI-EM Global Diversified returning 22% for the full year, led by Latin Americas strong performance (+34.3%) Record level of EM debt issuance reached in 2009 US$210 billion, surpassing the new record level for US high yield issuance, which ended 2009 at US$178 billion; we forecast US$196 billion of EM debt issuance for 2010 EM local currency to outperform in 2010 and we forecast 12% returns (USD unhedged) for the GBI-EM Global Diversified compared to projected total returns of 3.0-6.5% for the EMBIG and 4.0-7.0% for the CEMBI Broad Strategic inflows into EM fixed income reached US$22.9 billion in 2009 and should rise to US$30-35 billion in 2010 This report contains charts and tables that provide an overview of key events in 2009, as well as our top trade recommendations for 2010
EM fixed income outperformed other asset classes in both 2008 and 2009
returns (%)
S&P 500 EM equities Commodities1 UST US High Yield US High Grade EMBIG CEMBI Broad GBI-EM Global div ELMI+ Global Agg
2

Spreads and yieldsactual and forecast

Current Year Forecast ago End-Dec 10

EMBIG GBI-EM Global Div CEMBI Broad Fed funds 10-year bond
Source: J.P. Morgan

295 7.32 354 0.125 3.75

685 7.40 959 0.25 2.49

250 7.90 325 0.125 4.50

EMBI Global, GBI-EM, JPMHY, S&P 500

Return index, Nov 28, 2008 = 100
170 160 150 140 130 120 110 100 90 80 70 Nov 08 US HY EMBIG

GBI-EM Global Div. (USD unhedged) S&P

Feb 09 May 09

Aug 09

Nov 09

Source: J.P. Morgan

-38.5 -54.5 -35.0 -18.0 -26.6 -1.9 -10.9 -16.8 -5.2 -3.8 11.7

23.5

74.5

20.5 22.0 58.2 16.7 28.2 37.5 22.0 4.8 6.9

Joyce ChangAC
(1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities Inc.

2008

2009

1. J.P. Morgan commodity total return index 2. Barclays Capital Global Aggregate Source: J.P. Morgan The certifying analyst(s) is indicated by the notation AC. See last page of the report for analyst certification and important legal and regulatory disclosures.

www.morganmarkets.com

Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com

J.P. Morgan Securities Inc. Luis OganesAC (1-212) 834-4326 luis.oganes@jpmorgan.com

Market Overview
The January effect supports higher beta credits
Since we issued our 2010 year-ahead report on November 30, 2009, EM fixed income has rallied, with the exception of EM European local currencies that suffered amid the EUR weakening on the back of negative news from Greece and Dubai. There are few signs of the EM rally losing momentum this month and CEEMEA currencies appreciated on the first two trading days of the year amid dollar weakness. Inflows into EM are on the rise and increasingly diversified, including sovereign wealth funds, Japanese retail flows, crossover investors and US pension funds. We continue to forecast robust growth in EM (5.9%oya versus 2.8% in developed market economies), declining default rates, and rating upgrades that will bring the EMBIG into investment grade this year. We stay with our year-end 2010 forecasts of 250bp and 325bp for the EMBIG and CEMBI Broad, respectively, although we believe that these levels could be achieved as early as 1Q10 as strong technicals factors support spreads. The January effect is apparent as investors bought assets starting in December in anticipation of new institutional funds being deployed in the new year. EM spreads have tightened during the December-January period in 9 of the last 10 years. Our client survey for December 2009 also showed that trading accounts significantly reduced risk into year-end, a move we believe is consistent with broader reductions in hedge fund risk across multiple markets and into cash. We expect this de-risking to similarly contribute to stronger performance at the beginning of this year as cash is redeployed. In addition, coupons and amortizations for the EMBIG are highest this quarter and exceed US$21 billion, which is nearly 40% of the US$56.4 billion of sovereign cash flows estimated for the whole year. We forecast only US$67.5 billion of sovereign issuance this year, with Argentina, Poland, Russia, Turkey, and Venezuela to account for nearly half of the projected total. We reiterate 10 investment themes and risk to monitor in 2010 and see the balance of risk for EM skewed to the upside this year (see Emerging Markets Outlook and Strategy for 2010, November 30, 2009): 1) EM economic growth to exceed potential, prompting earlier tightening in EM than DM countries 2) EM policymakers become increasingly interventionist 3) EM countries will consolidate fiscal accounts much faster than DM countries
2

4) Commodity windfalls could substantially lower the financing needs for EM oil exporters 5) Official creditor support for EM countries remains strong 6) Access down the credit curve to increase as EM issuance goes up 7) EM fixed income inflows will play catch up in 2010 8) EM ratings upgrades will exceed downgrades during 2010, with EMBIG reaching investment grade status 9) Heavy election calendar could contribute to greater market volatility in 2H10 10) AUM benchmarked to the EM family of indices to increase

EM sovereigns to outperform US credit

The strongest performing EM sovereign bonds on the year were the countries that began at the highest spread. Pakistan, Argentina and Ukraine each posted total returns well over 100%, with spreads collapsing by over 1,000bp. We begin 2010 with overweight positions in EM sovereign high-yielders such as Argentina, Belize, Dominican Republic and Jamaica. While returns may be modest in 2010, we keep core overweight positions in investment grade sovereigns such as Mexico, Russia and Poland, which should outperform US High Grade credit. Indeed, we now increase duration by rebalancing our bond holdings in both Mexico (swap out of 13s and 14s into 19Ns) and Russia (switch out of 30s into 28s) to take advantage of recent curve moves; these changes make Mexico and Russia the largest overweights in our EMBIG model portfolio. While the YTM for the EMBIG has declined to 6.7%, it still offers a substantial pick up to US High Grade bonds, where the YTM has declined to 5.2%. For crossover investors, EM spreads still appear attractive relative to similarly rated corporates in the US. Chart 1 highlights that global bond yields are near all-time lows, with only US High Yield offering close to double-digit yields at 9.06%.
Chart 1: Global bond yields near all time lows with only US High yield offering close to double-digit yields
% yield 22
19 16 13 10 7 4 1 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 US HY GBI-EM Global div Global Agg EMBIG US HG

Source: J.P. Morgan January 5, 2010

Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. (1-212) 834-4203 Joyce joyce.chang@jpmorgan.com J.P. Morgan Securities Ltd. William Oswald (44-20) 7777-3020 william.a.oswald@jpmorgan.com ChangAC

J.P. Morgan Securities Inc. Warren MarAC (1-212) 834-4274 warren.j.mar@jpmorgan.com

EM corporates to outperform EM sovereigns

EM Corporates closed the year at their tightest level for 2009 (but still considerably wider than the all-time tight of 141bp recorded on January 25, 2007) for a total return of 37.5%. Although suffering from a short bout of volatility in late November amid developments in Dubai, the rally in corporate spreads continued over the course of December to push the spread on the CEMBI Broad to 346bpone-third of the 960bp spread recorded at the start of the yearand a yield-to-maturity of 6.9% as of yearend. CEEMEA posted the strongest performance of the three EM regions, delivering a full-year return of 52%, with Emerging Asia and Latin America each returning 30%. EM corporate issuance totaled US$136.6 billion for the year, with net supply of US$65.8 billion, growing the outstanding EM corporate bond stock to just over US$600 billion as of December 31. Quasi-sovereign issuers dominated supply in 2009, accounting for more than half of total issuance with the balance split relatively evenly between high grade and high yield corporates, respectively. Corporate defaults (including distressed debt exchanges) reached US$21 billion or 11.1% of the EM high yield bond stock at the beginning of the year (compared with the 10.9% recorded in the US high yield market in 2009) with defaults as a percentage of their respective high yield segments reaching 11% in Asia, 7.1% in Latin America, 18.4% in Emerging Europe, and 2.9% in the Middle East and Africa, respectively. We forecast defaults for 2010 to fall to 1.8% of the EM high yield corporate bond stock of US$196.5 billion as of December 31, 2009, significantly below the 4% forecast for the US high yield market, as refinancing risks are likely to be much more subdued in 2010 given that capital markets reopened already in 2H09.

We maintain our forecast for EM corporate spreads to reach 325bp at the end of 2010, with risks to the upside as the potential negative implications from the standstill at Dubai World on broader markets has been modest as expected. We see the relative value arguments on a likefor-like credit basis for crossover investors remaining firmly in place, while the continuing rebalancing of EM corporate indices toward higher-quality assets is likely to continue as quasi-sovereign and high grade corporate supply is expected to account for approximately 80% of our US$128 billion 2010 new issue forecast. We continue to favor the new-issue market for adding risk in 1Q10 as EM corporate issuers move to meet their external financing needs as early in the new year as possible, while interest rates remain at record low levels. Looking out further into 2010, we would favor a more active approach to rotating out of lower-beta credits and into higher-beta opportunities in order to enhance overall returns, while selectively taking profits in names that participate in an expected early 2010 credit rally and reach aggressive stand-alone credit valuations.

EM local currency to outperform EM credit this year

We expect the GBI-EM Global diversified to gain around 12% (unhedged), solidly outperforming the EMBIG and CEMBI Broad, where we expect modest returns in the 3.0-6.5% and 4.0-7.0% ranges, respectively, depending on the magnitude of UST moves. Although EM European currencies suffered in December as the EUR weakened on the back of negative news from Greece and Dubai, we see the highest annualized returns in Central and Eastern Europe. EM currencies closed lower on the first trading day of the decade yesterday on the back of rising equities, capital inflows and exporter USD selling. While our general macro

Table 1: GBI-EM total returns to reach close to 12% in 2010

Country GBI-EM Global Div Russia Poland Hungary Turkey South Africa Brazil Indonesia Mexico Malaysia Thailand Peru Egypt Colombia
Source: J.P. Morgan January 5, 2010 3

Forecast return

Now to end-2010 11.8% 17.8% 17.4% 17.4% 16.2% 14.4% 11.8% 9.4% 9.2% 7.1% 7.1% 6.1% 5.1% 4.0%

Yield 7.1% 8.0% 5.7% 7.1% 8.9% 8.8% 11.8% 10.4% 7.7% 3.9% 4.1% 5.9% 7.9% 7.2%

Forecast 7.9% 8.0% 5.5% 6.9% 10.5% 8.3% 11.8% 11.0% 7.6% 5.0% 4.9% 6.3% 10.0% 7.8%

Local return 2.7% 2.4% 5.0% 4.7% -0.1% 4.9% 4.6% 1.6% 3.5% 0.2% -0.0% 3.8% -5.8% 1.9%

Current FX 28.8 2.78 180 1.49 7.53 1.73 9,575 13.0 3.39 33.2 2.88 5.46 1969

Forecast FX 26.7 2.54 167 1.38 7.40 1.75 9,500 13.0 3.15 31.0 2.80 5.40 2,000

FX return 8.9% 15.0% 11.8% 12.1% 16.3% 9.0% 6.8% 7.7% 5.5% 6.9% 7.1% 2.2% 11.6% 2.1%

Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. J.P. Morgan Securities Ltd. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com William Oswald (44-20) 7777-3020 william.a.oswald@jpmorgan.com

outlook remains for the short USD trade to continue, we are wary of near-term USD strength. The market is beginning 2010 with renewed interests to be short USD, but USDbuying remains a risk near-term should the US economic data and employment outlook continue to improve. Table 1 on the previous page highlights our bottoms-up forecasts for EM local markets debt returns for 2010 as tracked in the GBI-EM Global Diversified, which is the dominant EM local markets benchmark (USD unhedged).

Inflows rebounded after April, with Japanese flows accelerating by year-end

Flow data from US and European retail funds, in addition to our proprietary estimates on strategic fund flows, showed a strong pickup in interest from end-April onwards as the recovery in asset prices gathered pace. We estimate that these sources alone contributed close to US$21 billion in 2009 (chart 3), with the pace of inflows from end-April to year-end (US$22.9 billion) only marginally behind the record US$25 billion set in 2007.
Chart 3: EM Debt Strategic and Retail Flows yearly, cumulative
US$ billion 40
30 20 10 0 -10 -20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -11.9 2005 2008 2006 2009 2007 31.9 34.1 23.4 20.9

EM debt issuance reached record levels as financing gaps grew

Total issuance in Emerging Markets reached record highs in 2009, with the total across sovereigns, quasisovereigns, banks and corporates reaching US$210 billion. While neither the non-sovereign issuance (US$135 billion in 2009 against US$149 billion in 2007) nor the sovereign one (US$75 billion in 2009 versus US$83 billion in 2000) reached its record high, which occurred in different years, the combined issuance figures did reach the new high in 2009 (chart 2). This issuance occurred primarily from sovereigns, quasi-sovereigns and highly rated corporates, as financing gaps opened up. Much of the sovereign issuance, however, came from non-traditional (that is, non EMBIeligible) countries, including significant supply from the Middle East, which accounted for over one-third of all EM sovereign issuance last year. However, as traditional EM investors participated in many of these transactions, we include these countries in our estimates.
Chart 2: Total sovereign and non-sovereign issuance reached a record high of US$210 billion in 2009
US$ billion
250 200 150 100 50 Non Sovereign Sovereign

Source: J.P. Morgan

Our new unique dataset on Japanese investment trust flows to Emerging Markets, not included above, showed a strong pickup throughout 2009. Most of the inflows to EM local currency funds were allocated to Brazilian domestic government debt, but inflows to EM hard currency funds reached US$7.5 billion by year-end, almost all of this coming in 4Q09. These inflows, however, were dominated by double-decker FX overlay strategies, with end-investors buying EM sovereign credit overlaid with long BRL positions. We expect this strong carry focus from Japanese investors to remain an important source of inflows in 2010.

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: J.P. Morgan

January 5, 2010

Emerging Markets Outlook and Strategy JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-24613 david.fernandez@jpmorgan.com Bert GochetAC (852) 2800-8325 bert.j.gochet@jpmorgan.com Claudio PironAC (65) 6882-2218 claudio.piron@jpmorgan.com Yen Ping HoAC (65) 6882-2216 yenping.ho@jpmorgan.com

JPMorgan Chase Bank N.A., Singapore Branch

2010 Top Trade Recommendations

Top Emerging Asia trade recommendations
EM Asia external debt Indonesia: Move to neutral We still like Indonesia's fundamental story, but positioning has become crowded and supply concerns have risen given expected issuance this year of up to US$4 billion. Bonds are trading near record levels and tension between technocrats and vested political interests has not been resolved. Thus, we do not see much more upside in the near term and reduce our position. The Philippines underperformed the EMBIG last year. Although remittances should remain strong in 2010 and market positioning and entry levels look attractive, we are hesitant to move to overweight given concern over public finances and upcoming elections in May. However, if political noise remains low, a move to overweight via the '19Ns or '34s once this month's issuance has been completed could be in the offing. Pakistan was the best performer in the EMBIG in 2009 (+147.4%) but political uncertainty is increasing rapidly. Sri Lanka on the other hand is on a much more positive track now that the civil war is over and a peaceful election is expected later this month. We recommend taking profit by selling PK '17s and buying Sri Lankan '15s. The CDS spread has narrowed about 30bp since the government devalued VND at end of November. Though much of the recent deterioration in economic fundamentals is now priced in, we expect data in coming months to get worse as inflation tends to rise around Tet New Year and as stronger domestic demand lifts the import bill. Despite our bearish economic views, we do note that the yield on VN '16s is attractive relative to similarly rated and maturity equivalent Indonesia and Philippines bonds.

Philippines: Remain neutral

Pakistan: Sell Pakistan bonds vs. buy Sri Lanka bonds Vietnam: Buy 5-year CDS

EM Asia FX China: Short 12-month USD/CNY NDF

Entry: 6.7960; stop: 6.9150; last: 6.7373. Robust macro data are underlining our view for eventual monetary tightening via rates and FX this year. While policy inaction remains likely near-term, the data are tracking our longer-term tightening view. Position via longer-dated NDFs. Our 12-month NDF position entered August 21 is currently up 84bp and we remain in this trade. Entry 10,230; stop 9,900; last 9,339. USD/IDR should remain under pressure in view of conducive risk appetites and attractive carry. USD strength is a risk to this trade, but the central bank, having intervened to cap USD/IDR upside, appears to show little appetite for a weaker IDR. Our NDF position entered August 13 is currently up 953bp. We remain biased to sell into short-term market rallies. Stop: -200bp; last: +358bp. We were long KRW, TWD, and SGD against USD as a core exposure to recovery trades in EM Asia. The position expired at a 358bps profit in December. We see further scope for gains in this trade but await the passage of key data risks this week (US payrolls could turn positive) before re-entering.

Indonesia: Short 6-month USD/IDR NDF

Asia: Be long KRW, INR, and SGD against USD EM Asia rates China: 2s/5s steepeners Pay 5-year repo IRS

We expect the IRS curve to rise in 2010, in a bear steepening move in 1Q. The short end of the IRS curve will remain anchored by an unchanged monetary policy in 1Q, until PBoC lets its 1-year bill yield rise (sometime in 2Q). The long end of the IRS curve (5-year) should face upward pressure all year, as a climbing CPI and bond supply take their toll. Hence, we stay with our 1s/5s IRS curve steepener, which is currently trading at 163bp, and target 190bp. Also, we suggest a new trade where we pay 5-year IRS outright at 3.70% (target 4.20%). In 2010, we expect India's OIS curve to rise by a further 50bp. This will happen when liquidity drops, RBI's tightening picks up pace, and when bond supply takes its toll (on the long end). However, significant liquidity withdrawal is not imminent, and the call rate might continue to hug the bottom of the corridor even if RBI hikes CRR by 50bp in January. Hence we pay 5y swap, but we hedge the costly negative carry on the position by receiving 1/3rd of the DV01 with a received position in 1y swap. For the technical details of the trade, see our research piece. Finally, we keep the 3s/10s steepener in Taiwan swaps at 83bp. We do not see that much upside to the curve itself, perhaps 10bp on a three-month horizon. But this is one of our favorite carry trades in the region. The CBC will only hike when the Fed does, i.e., in 2011, and even then it will only do so symbolically in very tiny steps, just as it has done in the past. Meanwhile, the back end of the swap curve will be supported by payers from both onshore and offshore.

India: Pay 5-year (partially hedged by receiving 1-year to neutralize negative carry) Taiwan: Open 3s/10s steepeners
Source: J.P. Morgan

January 5, 2010

Emerging J.P. Morgan Markets Securities Outlook Inc., and NewStrategy York J.P. Morgan Securities Inc. J.P. Morgan Securities Ltd. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com Michael MarreseAC (1-212) 834-4876 michael.marrese@jpmorgan.com J.P. Morgan Securities Ltd. Robert BeangeAC (44-20) 7777-3246 robert.m.beange@jpmorgan.com William OswaldAC (44-20) 7777-3020 william.a.oswald@jpmorgan.com J.P. Morgan Securities Ltd. Michael TrounceAC (44-20) 7777-4356 michael.j.trounce@jpmorgan.com

2010 Top Trade Recommendations (continued)

Top CEEMEA trade recommendations
CEEMEA external debt Russia: We increase overweight We have been running this trade for a month and a half, and it has remained stable but produced positive carry as expected.We increase our overweight in Russian Eurobonds in our EMBIG model portfolio from 0.4 to 1.1 by selling 7 million of the Russia 30s and buying 3.4 million of the 28s. We expect Russias 2010 issuance of new Eurobonds (predicting US$9 billion of issuance in 1H10) to be SEC-registered, which may be followed by an exchange of the existing non-SEC-registered Russia 18s, 28s, and 30s for SEC-registered bonds. These developments will most likely trigger inclusion of these bonds in the Barclays Capital US Aggregate Index, and attract a new client pool to purchase Russian SEC-registered issues. The '28s are even more likely than the 30s to be included in an exchange for SECregistered debt. Also, the Russian 30s have outperformed the Russian '28s by 42bp between the closes on November 3 and January 5. In addition, the Russian '28s are trading 68bp and 55bp wide of their Brazilian and Mexican counterparts, respectively.

CEEMEA FX Turkey: Sell 6-month USD/TRY Russia: Sell 6-month USD/RUB Hungary: Sell 2-month USD/HUF Poland: Sell 12-month EUR/PLN Nigeria: Sell USD/NGN

Target 1.40; stop 1.55; last 1.52. Retail buying of USD, which kept USD/TRY rangebound in 2H09, should slow as the economy recovers from recession. Target 25.5; stop 31.2; last 30.63. USD weakness and rising commodity prices are expected to support RUB. While there is a near-term risk that measures are taken to curb FX borrowing, we believe that the CBR will accept faster appreciation as growth recovers. Target 172; stop: 195; last: 193.90. Hungary is alone in CEEMEA in reporting improving current account and budget deficits. In our view, investor positions in HUF do not reflect the improving economic fundamentals or the high yield. Target 3.80; stop 4.40; last 4.30. PLN is the CEEMEA regions most undervalued currency, in our view, and fear over rising public debt levels should diminish as growth rebounds more strongly than expected. Buy naira based on our confidence that buoyant oil prices and rising oil production will support the Nigerian currency. We see value in selling USD/NGN on temporary spikes above 150 (currently at 149.25) with a 6% yield pickup. We also recommend owning NGN-denominated AAA supranational Eurobonds at yields of around 8%.

CEEMEA Rates South Africa: Long R186 Russia: long 3-year OFZ Turkey: 2-year/5-year steepener, one year forward

Target: 8.3%; stop: 9.5%; current 9.11%. The market is very underweight both outright and relative to the high level of yields. Local issuance remains a concern, but the yield pickup more than reflects this. With the SARB on hold for the medium term and inflation falling, the long end should perform best. Target: 7.25, stop: 10, current: 8.43. The CBR continues to provide liquidity to the local market, both directly and through continued rate reductions, while also emphasizing a need for banks to improve balance sheet quality. With investors also underweight Russia, this combination of carry and active support should continue to move bond yields lower. Stop: -25bp; target: +90bp. The 2-year/5-year slope is only 22bp positively sloped one year forward currently and yet is at 131bp in the spot market. As we believe the CBRT has now paused and potentially ended its easing cycle, we expect the curve to earn significant slide as it remains relatively static (3-month slide on this trade is 44bp).

The combination of local yields above 20% and good prospects for cedi appreciation support our recommendation to Ghana: Long Ghanaian cedi through FX hold a long GHC position through FX forwards (with an expected return of 30%). Current spread: -7bp; 3-year low: -103bp; 3-year high: +13bp. Almost carry; defensive trade. The skew of this pair is forwards for a tighter (more negative) spread. Local specifics were a major drag for the Mexican economy in 2009, while global drivers may dominate in 2010. For Colombia, the conflict with Venezuela, sub-par growth, and a heavy political calendar point to higher risks next year.
Source: J.P. Morgan

January 5, 2010

Emerging J.P. Morgan Markets Securities Outlook Inc., and NewStrategy York J.P. Morgan J.P. Morgan Securities Inc. AC (1-212) Inc. Joyce ChangSecurities 834-4203 joyce.chang@jpmorgan.com Felipe PianettiAC (1-212) 834-4043 felipe.q.pianetti@jpmorgan.com Banco J.P. Morgan S.A. Carlos CarranzaAC (54-11) 4348-3425 carlos.j.carranza@jpmorgan.com Vladimir WerningAC (1-212) 834-4144 vladimir.werning@jpmorgan.com J.P. Morgan Securities Inc. Ben RamseyAC (1-212) 834-4308 benjamin.h.ramsey@jpmorgan.com

2010 Top Trade Recommendations (continued)

Top Latin America trade recommendations
Latin America external debt Mexico/Colombia: Sell Mexico 5-year CDS vs. buy Colombia 5-year CDS Colombia: Sell 2-year CDS vs. buy 5-year CDS (2x1) Argentina: We remain overweight Mexico: Increase overweight, extending duration into '19Ns to take advantage of front-end steepness Dominican Republic: We remain overweight Jamaica: We remain overweight Current spread -7bp; 3-year low: -103bp; 3-year high: +13bp. Almost flat carry; defensive trade. The skew of this pair is for a tighter (more negative) spread. Local specifics were a major drag for the Mexican economy in 2009, while global drivers may dominate in 2010. For Colombia, the conflict with Venezuela, sub-par growth, and a heavy political calendar point to higher risks next year. Current spread 50bp; 3-year low: 15bp; 3-year high: +134bp; 6-month carry = 6bp of spread (breakeven = 43bp) and positive slide. Caveat is liquidity. We believe the 2s5s steepeners in Colombia offer the best risk-rewards among positive carry and roll, defensive trade in Latin America. The spread is near the bottom of the historical range, and in line with higher-rated countries like Mexico and Peru. We remain overweight Argentina ahead of the debt swap, which we believe will generate a high participation rate. However, in October the spread difference between Boden 12s and Boden 15s widened 240bp. Thus, we recommend reducing all remaining exposure to Boden 12, in favor of increasing exposure to Boden 15s. External debt underperformed in 2009 amid Mexico's numerous and well known challenges. With ratings actions behind, and many of these drags now fading or no longer existent, we see further room for spread compression. We stay overweight Mexico external debt in our EMBIG model portfolio but swap out of '13s and '14s into '19Ns in order to take advantage of the relative steepness of the mid-part of the curve and extend duration. The move increases our Mexico overweight, taking the beta to 1.0 from 0.4. We believe the Dominican Republics proven resilience to external shocks (GDP grew an estimated 3.5% in 2009), improving fundamental prospects, ample multilateral support, and, despite its year-to-date rally, the still relatively high yield of its global bonds, make it an attractive diversification play. Despite further delays in negotiations with the IMF for a Stand-By Arrangement worth US$1.3 billion and lingering investor concerns regarding a possible debt restructuring, Jamaica outperformed the broader market rally in December. Our base case is that an IMF agreement will indeed be reached and a near-term debt reprofiling, if any, would most likely be restricted to domestic debt. Even after a 60%ytd rally, the BZ29s with a low dollar price of US$55 have the widest spread in the EMBIG (1,200bp). The ongoing US recovery and high oil prices along with multilateral and bilateral loans should support a domestic recovery in 2010. J.P. Morgans new forecast pencils in a BRL peak in 2Q10, but intervention risks warrant strategies with defined maximum loss in our view. In the structure above, the maximum profit if knocked in is 740.7bp (2.72x leverage). If not knocked in the maximum profit is 1,153.8bp (4.24x leverage). RKI cost 9.75bp more than vanilla spread but give 413.1bp of more potential profit. Target 12.25; stop: 13.50. The private sector flow of funds surplus should reach more than US$17 billion this year following a US$3 billion deficit in 2009. Mexico is emerging from its deepest multi-year recession, and the peso seems undervalued and under-owned. Badlar-linked paper offers the best carry trade among Argentina local instruments. We do not expect ARS to weaken further than 4% through midyear due to the favorable terms of trade and strong performance of its main trading partners. The 18% yield is in line with CER bonds (total yield) but does not carry the index stigma, and compares favorably to 12% (implied yield) in 1-year NDF. The balance of risks have been shifting fast towards inflation, as the government's fiscal expansion drive continues despite the fact that we are past the worst of the economic slump and are fast approaching pre-crisis levels for a slew of activity indicators. While inflation expectations are just below the mid-point of target, we believe the skew is on the upside, and on today's communiqu, the CB seems to be willing to take that risk. From mid-2007 to 3Q of 2008 the IPCA moved from 3% to 6%. The 2s5s slope of the DI curve anticipated a great part of that move, and is currently suggesting that the inflation risks are not negligible (chart below). We reckon that trying to predict turning points using yield curves is tricky for developed markets, let alone for EM countries, but the current 2s5s slope is too high to be ignored, in our view. DV01 neutral. Current spread: +43bp; carry and roll in 6-month = 43bp. Breakeven spread + 0bp in 6-month. Besides positive carry and slide, this spread offers potential for capital gain, as the Jan13 continues to look cheap in the curve. The 2-year inflation breakeven is below 2% versus the 3% central target. Near-term inflation carry is a drag for UF swaps (-7bp per month) as the market is pricing in deflation through February, but we think the level implied in the 2-year tenor is overdone, as it extrapolates the deflation into a medium-term base scenario.

Belize: We remain overweight Latin America FX: Brazil: Buy 6-month 1.74/1.62 RKI 1.56 USD put/BRL call (indicative cost 272.4bp) Mexico: Sell USD/MXN Latin America rates Argentina: Buy Bonar 14

Brazil Linkers: Buy May11 inflation Breakeven (Buy NTN-B May11 vs. Pay Apr11 DI + buy 1-month USD/BRL NDF). Target: 6%, Stop 4.5%, last 5.18%. 3-month carry: +0.78% a.r. Brazil DI futures: Receive Jan13 (12.32%) vs. pay Jan15 (12.74%)steepener Chile: Receive 2-year UF swaps
Source: J.P. Morgan January 5, 2010

Emerging Article Title Markets Outlook and Strategy J.P. Morgan Securities Inc. Inc., New York
AC (1-212) (1-212) 834-4203 834-4203 Joyce ChangAC joyce.chang@jpmorgan.com

J.P. Morgan Securities Inc. Inc., New York

AC Gloria Luis Oganes KimAC (1-212) (1-212) 834-4153 834-4326 luis.oganes@jpmorgan.com gloria.m.kim@jpmorgan.com

Appendix: Review of 2009 EM performance

Chart 4: Performance of key EM indices in 2009: EMBIG, CEMBI Broad and GBI-EM Global Div
EMBI Global YTD total returns, % GBI-EM Global Div YTD total returns, %

EMBI Global Pakistan Argentina Ecuador Ukraine Iraq Ghana Dominican Rep Georgia Sri Lanka Serbia Gabon Kazakhstan Venezuela Belize Indonesia El Salvador Russia Uruguay Jamaica Vietnam Bulgaria Lebanon Panama South Africa Hungary Turkey The Philippines Peru Colombia Tunisia Chile Malaysia Mexico Egypt Poland Brazil China
Source: J.P. Morgan

28.18 147.39 132.78 118.30 117.90 99.46 96.80 90.79 81.11 75.31 74.49 72.40 67.90 62.09 60.70 46.91 42.09 41.41 36.67 35.12 32.75 28.19 28.12 25.36 24.83 24.21 24.13 23.75 22.21 16.70 15.73 13.05 12.63 12.25 12.13 12.01 11.38 7.73

CEMBI Broad Ukraine Indonesia Egypt Turkey Nigeria Russia Taiwan Jamaica Argentina China Kazakhstan India Peru Thailand Qatar Korea Mexico Colombia Brazil Panama Philippines UAE Hong Kong Singapore Israel Malaysia Lebanon Bahrain Chile Saudi Arabia Venezuela-16.08

37.49 121.29 108.61 101.58 82.73 78.59 74.66 73.56 56.40 54.15 52.96 50.11 46.74 44.73 38.37 37.03 35.87 35.69 30.33 28.40 27.70 25.73 23.25 21.82 20.30 19.65 18.65 16.33 14.97 13.40 6.41

FX Return -20 GBI-EM Global Div Brazil Broad Indonesia Colombia Peru Egypt Turkey Chile South Africa Russia Hungary Mexico Poland Malaysia Thailand

US$ Hedged 0 20 40 60

January 5, 2010

Emerging Article Title Markets Outlook and Strategy J.P. Morgan Securities Inc. Inc., New York
AC (1-212) (1-212) 834-4203 834-4203 Joyce ChangAC joyce.chang@jpmorgan.com

J.P. Morgan Securities Ltd. Inc., New York

AC AC William Luis Oganes Oswald (1-212) (44-20) 834-4326 7777-3020 william.a.oswald@jpmorgan.com luis.oganes@jpmorgan.com

Total EM sovereign requirements for 2010 are modest at only US$67.5 billion CEEMEA region accounts for nearly 60% of sovereign financing needs Only five countriesArgentina, Poland, Russia, Turkey and Venezuelaaccount for nearly 50% of total EM sovereign issuance needs

Table 2: EM gross sovereign external issuance requirements total only US$67.5 billion in 2010
Country China Indonesia Malaysia Pakistan Philippines Sri Lanka Thailand Vietnam Asia subtotal Angola Belarus Bulgaria Croatia Egypt Gabon Georgia Ghana Hungary Iraq Ivory Coast Kazakhstan Latvia Lebanon Lithuania Morocco Nigeria Poland Romania Russia Serbia South Africa Turkey Ukraine CEEMEA subtotal Argentina Bahamas Barbados Belize Brazil Chile Colombia Costa Rica Dominican Republic Ecuador El Salvador Guatemala Jamaica Mexico Panama Peru Trinidad and Tobago Uruguay Venezuela Latin America subtotal Total
Source: J.P. Morgan

Gross issuance 0 4,000 1,500 0 2,000 750 0 1,000 9,250 1,000 750 1,000 2,500 0 0 500 0 1,817 0 0 500 0 1,000 1,500 500 500 7,200 1,482 9,000 741 3,000 5,500 0 38,490 4,000 0 150 0 2,000 0 1,500 0 600 0 1,000 0 0 3,000 500 1,500 500 0 5,000 19,750 67,490

2010 forecast Cash flows 127 1,222 131 111 3,456 69 3 52 5,170 0 0 197 1,048 88 76 38 64 2,583 157 276 0 25 2,268 346 40 0 4,653 1,281 4,118 144 524 5,818 324 24,066 8,388 0 0 28 5,339 108 1,493 0 223 372 257 88 288 4,686 604 789 33 569 3,874 27,140 56,423

Net issuance -127 2,778 1,369 -111 -1,456 681 -3 948 4,080 1,000 750 803 1,452 -88 -76 463 -64 -766 -157 -276 500 -25 -1,268 1,154 460 500 2,547 201 4,882 597 2,476 -318 -324 14,424 -4,388 0 150 -28 -3,339 -108 7 0 377 -372 743 -88 -288 -1,686 -104 711 467 -569 1,126 -7,390 11,067

January 5, 2010

Emerging Article Title Markets Outlook and Strategy J.P. Morgan Securities Inc. Inc., New York Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities Ltd. Victoria MilesAC (44-20) 7777-3582 victoria.miles@jpmorgan.com

J.P. Morgan Securities Inc. Inc., New York

AC (1-212) Warren Luis Oganes MarAC (1-212) 834-4274 834-4326 warren.j.mar@jpmorgan.com luis.oganes@jpmorgan.com

We forecast US$128 billion of new issuance from EM corporates for 2010 Quasi-sovereign issuance should decline this year to less than 50% of total corporate issuance vs. 65% in 2009 Issuance will continue to be concentrated in investment-grade corporates, accounting for nearly 80% of our full year forecast Heaviest refinancing needs concentrated in the CEEMEA region, with Russia and UAE standing out

Table 3: EM corporate bond and syndicated loan maturities for 2010 exceed US$200 billion
US$ million Country China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Emerging Asia Russia Kazakhstan Ukraine Hungary Kuwait South Africa UAE CEEMEA Argentina Brazil Chile Colombia Mexico Latin America Total Emerging Markets
* Estimates external borrowings issued in foreign currencies. Source: Bloomberg, Dealogic, Bond Radar, and J.P.Morgan.

Loans 7,698 4,324 5,173 3,692 5,352 2,556 1,825 3,539 3,644 1,198 39,754 22,441 2,383 1,667 5,393 2,958 4,767 9,645 83,604 1,040 3,749 3,485 348 7,261 17,262 140,620

Bonds 1,056 4,059 3,005 870 11,427 500 150 1,033 350 320 22,948 12,183 1,548 1,775 2,161 500 423 6,659 30,884 1,278 2,436 300 43 3,483 7,771 61,603

2010 Total 8,754 8,383 8,178 4,562 16,779 3,056 1,975 4,572 3,994 1,518 62,702 34,624 3,931 3,442 7,554 3,458 5,189 16,304 114,488 2,318 6,185 3,785 390 10,744 25,033 202,223

10

January 5, 2010

Emerging Article Title Markets Outlook and Strategy J.P. Morgan Securities Inc. Inc., New York Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities Ltd. Michael MarreseAC (1-212) 834-4876 michael.marrese@jpmorgan.com

J.P. Morgan Securities Inc. Inc., New York Luis OganesAC (1-212) 834-4326 luis.oganes@jpmorgan.com JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com

Current and potential official support to EM sovereigns exceeds US$500 billion Total of 32 new IMF agreements approved for EM countries since 2008 IMF agreements mainly concluded in EM Europe and Latin America

Table 4: High level of current and potential official creditor support to EM sovereigns
Country US$ billion % of GDP Details Current official support for the Latin America region Argentina 3.3 1.2 New 3.5-year World Bank commitment, which implies net US$0.17 billion per annum inflow versus net US$0.90 billion per annum outflows in past three years. Colombia 2.4 1.0 The bulk of the multilateral lending in governments financing plan is from the World Bank and IADB, and to a lesser degree CAF. Ecuador 1.0 1.8 Through October the government had received about half of the US$1.5 billion it was targeting from regional multilaterals IADB, CAF, and FLAR, but this was supplemented with a US$1 billion oil-linked loan from PetroChina and the IMF SDR allocation (US$350 million). Mexico 77.0 8.6 US$30 billion US Fed swap line and US$47 billion flexible credit line from IMF. Peru 0.6 0.4 World Bank lending is the largest component. Potential official support for the Latin America region Brazil 30.0 2.1 US$30 billion US Fed swap line. Colombia 10.4 4.25 IMF FCL; the government has called this precautionary and it is not intended for use. Peru n/a n/a The government does not rule out the IMFFCL as a possibility, but no formal request has been made. Venezuela n/a n/a Multilaterals (mainly IADB and CAF) increased by US$300 million in 2009 to US$3.2 billion, and this trend could increase in 2010. Current official support for the CEEMEA region Belarus 2.9 4.2 US$2.5 billion from IMF, plus World Bank, EBRD, EIB, and IFC. Ghana 1.8 12.7 US$615 million from IMF, US$1.2 billion from World Bank. Hungary 25.8 19.0 EUR12.5 billion from IMF, EUR6.5 from EU, EUR1 billion from World Bank. Latvia 9.6 34.0 EUR1.7 billion from IMF, EUR3.1 billion from the EU + a total of EUR2.7 billion from neighboring countries, EBRD, WB. Nigeria 0.5 0.3 US$500 million in budget support from the World Bank, within a portfolio of around US$4 billion in total lending. Poland 21.8 5.5 Flexible Credit Line from the IMF (being treated as precautionary). Romania 26.0 15.5 EUR12.9 billion from IMF, EUR5.0 billion from EU, EUR1 billion from EBRD, and EUR1 billion from World Bank. Serbia 3.2 10.0 US$2.0 billion from IMF, US$325 million from EU, and US$900 million from the World Bank. Sub-Saharan 44.5 5.4 Loans outstanding include US$31 billion from the World Bank, US$10.3 billion Africa from the AfDB, and US$3.2 billion from the IMF. Ukraine 19.0 17.0 US$16.4 billion from IMF, plus World Bank, EBRD, EIB and IFC (about US$2.5 billion over the next two years). Potential official support for the CEEMEA region Turkey 45.0 7.3 US$45 billion from multilateral institutions (IMF, World Bank, and EBRD). Bulgaria 7.6 15.0 EUR6 billion from IMF, the EU, EBRD, and World Bank. Lithuania 7.6 15.0 EUR6 billion from IMF, the EU, EBRD, and World Bank. Sub-Saharan 10+ 1.2+ The World Bank provided US$7.8 billion in interest-free credits and grants in Africa FY2009 and expects to match this in the current fiscal year. The AfDB has set up a US$1.5 billion Emergency Liquidity Facility and US$1 billion Trade Finance Initiative, and stands ready to provide budget support too. Current official support for the EM Asia China 7.0 0.2 US$7 billion Chiang Mai Initiative Bilateral Swap Agreement. Hong Kong 29.0 13.5 RMB200 billion PBoC swap line (US$29 billion). Indonesia 34.0 6.6 US$5.5 billion World Bank Public Expenditure Support Facility funded by WB (US$2 billion), ADB (US$1 billion), Australia (US$1 billion), and Japan (US$1.5 billion); RMB100 billion PBoC swap line (US$15 billion); US$14 billion Chiang Mai Initiative Bilateral Swap Agreement. Korea 74.0 8.0 US$30 billion Fed swap line; RMB180 billion PBoC swap line (US$ 26 billion); US$20 billion BoJ swap line; US$23 billion Chiang Mai Initiative Bilateral Swap Agreement. Malaysia 18.0 8.1 RMB80 billion PBoC swap line (US$12 billion); US$6 billion Chiang Mai Initiative Bilateral Swap Agreement. Philippines 11.5 6.8 US$11.5 billion Chiang Mai Initiative Bilateral Swap Agreement. Singapore 30.0 16.5 US$25 billion Fed swap line; US$5 billion Chiang Mai Initiative Bilateral Swap Agreement. Thailand 11.0 4.1 US$11 billion Chiang Mai Initiative Bilateral Swap Agreement.
Note: PBoC swap lines are intended for trade financing; the agreed swap line currency is Yuan, but the possibility to draw financing in reserve currencies is under consideration. Source: J.P. Morgan

January 5, 2010

11

Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com

J.P. Morgan Securities Inc. Felipe PianettiAC (1-212) 834-4043 felipe.q.pianetti@jpmorgan.com

Chart 5: REER valuations for global currencies not back to the previous peak for most EM countries
REER: Percent deviation of current versus 30-year average (except for CEE3 - 12-year average)
40 30 20 10 0 -10 -20 -30 -40 -50 -60 -53.7 AUD NOK BRL NZD CZK PEN IDR CHF HUF PLN PHP EUR CLP COP INR TRY ZAR JPY MYR CAD SEK THB MXN GBP KRW TWD ARS
Source: J.P. Morgan

28.8 28.1 26.5 24.3 22.5 14.8 12.9 12.3 11.1 8.1 7.0 6.7 4.4

1.6

1.4

0.7 -0.2 -2.4 -5.8

-7.2

-8.6 -10.1 -10.4 -13.0 -28.3 -30.7

EM FX currency appreciation has been concentrated in commodity currencies Valuations have not reached their previous peak

Chart 6: Current/30-year average (Y-axis); Peak/30-year average (X-axis)

40% 30% 20% Current / Avg 10% 0% -10% -20% -30% -40% -40%
Source: J.P.Morgan

AUD NOK BRL NZD CZK CHF PEN HUF IDR PHP PLN CLP COP EUR TRY

Mexico is the main underperformer in Latin America, while TWD and KRW stand out in EM Asia

SEK

JPY MYR CAD THB MXN GBP

TWD KRW -30% -20% -10% 0% Peak / Avg 10% 20% 30% 40%

12

January 5, 2010

Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities Inc. Michael MarreseAC (1-212) 834-4876 michael.marrese@jpmorgan.com

J.P. Morgan Securities Inc. Luis OganesAC (1-212) 834-4326 luis.oganes@jpmorgan.com JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com

Fears of financial asset and property bubbles, as well as a rise in inflation, have prompted EM central bankers to turn their focus to exit strategies We forecast that 17 of 32 EM countries will move towards monetary policy normalization in 2010 But policymakers will be slow to move and it will be difficult to bring interest rates up as long as central banks resist exchange rate appreciation

Table 5: Many EM countries likely to hike rates in 2010

Current rate Developed markets United States United Kingdom Euro area Japan Latin America Brazil Chile Colombia Mexico Peru CEEMEA Czech Republic Hungary Israel Poland Romania Russia South Africa Turkey Emerging Asia China India Indonesia Korea Malaysia Philippines Taiwan Thailand
Source: J.P. Morgan

Policy stance to end-2010 On hold Tightening On hold On hold Tightening Tightening On hold Tightening Tightening Tightening Easing Tightening Tightening Easing Easing Tightening Tightening Tightening Tightening On hold Tightening Tightening Tightening Tightening Tightening

Timing of initial rate hike 3Q10 1Q10 3Q10 2Q10 3Q10 3Q10 3Q09 3Q10 4Q10 3Q10 3Q10 1Q10 1Q10 3Q10 2Q10 4Q10 3Q10

End 2010 rate forecast 0.125 1.00 1.00 0.10 11.75 2.00 3.50 5.25 2.75 2.25 5.50 4.00 4.00 7.00 3.00 7.50 8.00 5.85 5.50 6.50 3.00 2.50 5.00 1.375 1.75

0.125 0.50 1.00 0.10 8.75 0.50 3.50 4.50 1.25 1.00 6.25 1.25 3.50 7.50 4.00 7.00 6.50 5.31 4.75 6.50 2.00 2.00 4.00 1.25 1.25

January 5, 2010

13

Emerging Article Title Markets Outlook and Strategy J.P. Morgan Securities Inc. Inc., New York
AC (1-212) (1-212) 834-4203 834-4203 Joyce ChangAC joyce.chang@jpmorgan.com

J.P. Morgan Securities Inc. Inc., New York

AC (1-212) Luis OganesAC (1-212) 834-4326 834-4326 luis.oganes@jpmorgan.com

J.P. Morgan Securities Inc. Michael MarreseAC (1-212) 834-4876 michael.marrese@jpmorgan.com

JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com

EM has contributed more to global GDP growth than all of the developed markets for the past four years We forecast 6.0% growth for EM countries in 2010, above the estimated 5.5% average potential growth rate EM Asia will lead with 7.3% growth, Latin America will benefit from Brazils 6.2% outperformance and also grow above potential

Table 6: 2010 Real GDP growth expected to exceed potential

%oya Developed markets United States Japan Euro area United Kingdom Emerging Economies Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela Emerging Asia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand CEEMEA Bulgaria Czech Republic Egypt GCC Hungary Israel Kazakhstan Nigeria Poland Romania Russia Serbia South Africa Turkey Ukraine
Source: J.P. Morgan

2009 -3.4 -2.5 -5.3 -3.9 -4.8 1.0 -3.2 -4.0 0.1 -1.7 0.3 -1.0 -7.0 1.0 -2.7 4.3 8.6 -3.3 6.8 4.4 0.2 -2.4 1.0 -2.1 -3.0 -2.9 -3.2 -5.8 -4.0 4.7 1.7 -6.5 0.0 0.1 3.2 1.7 -6.0 -8.5 -4.0 -1.9 -5.3 -15.2

2010 2.7 3.3 1.9 2.5 1.7 6.0 4.3 4.0 6.2 5.0 3.0 2.0 3.5 5.5 1.0 7.4 9.5 4.5 7.8 5.5 4.9 5.0 5.0 6.5 5.8 5.5 4.3 -1.5 2.5 5.0 4.9 1.0 3.0 2.5 9.2 3.5 2.0 5.0 1.0 3.0 5.0 3.0

2011 2.8 3.1 1.9 2.6 3.1 5.7 3.4 3.0 4.0 5.0 4.1 3.0 2.5 6.0 2.5 7.2 9.3 4.1 8.3 6.0 4.1 5.0 4.3 5.0 4.8 5.0 4.8 4.5 4.0 5.5 4.5 4.0 4.5 3.0 8.0 4.2 5.0 5.0 2.0 3.5 5.5 5.0

Potential GDP growth 1.6 2.0 1.7 0.8 1.5 5.5 3.4 3.5 4.0 4.2 4.5 3.0 2.5 6.0 3.0 6.9 9.0 4.1 8.0 5.0 4.0 5.5 4.5 4.5 4.5 5.0 4.6 5.0 4.0 6.0 4.4 3.5 4.0 7.0 8.0 4.5 5.0 4.0 6.0 3.2 5.5 4.5

14

January 5, 2010

Emerging Article Title Markets Outlook and Strategy J.P. Morgan Securities Inc. Inc., New York
AC (1-212) (1-212) 834-4203 834-4203 Joyce ChangAC joyce.chang@jpmorgan.com

J.P. Morgan Securities Inc. Inc., New York

AC (1-212) Luis OganesAC (1-212) 834-4326 834-4326 luis.oganes@jpmorgan.com

J.P. Morgan Securities Inc. Michael MarreseAC (1-212) 834-4876 michael.marrese@jpmorgan.com

JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com

EM policymakers will not tighten fiscal policy too much and have the resources to sustain counter-cyclical measures. EM countries will run an average deficit equivalent to 3% of GDP, down from 4.0% of GDP in 2009, and sharply below the 8.5% of GDP deficit that J.P. Morgan is forecasting for developed market countries There will be fiscal consolidation across all CEEMEA countries in 2010 due in part to the constraints of IMF programs or a desire to enter the Euro area

Table 7: Developed country fiscal deficits now more than double the level of EM countries
% of GDP Developed markets United States Japan Euro area United Kingdom Emerging Economies Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela CEEMEA Czech Republic Hungary Israel Kazakhstan Poland Romania Russia South Africa Turkey Ukraine Emerging Asia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand
Source: J.P. Morgan

2008 -3.3 -3.1 -6.6 -2.0 -6.2 -0.9 -0.8 1.3 -2.0 8.7 0.1 -0.5 -2.0 2.1 -2.2 -0.1 -2.1 -3.8 -2.0 -2.5 -3.6 -5.5 4.1 -1.0 -1.8 -1.4 -1.3 -0.4 0.1 -7.8 0.1 1.3 -4.8 -0.9 5.0 -0.7 -2.5

2009 -8.6 -9.9 -11.3 -6.1 -12.1 -4.1 -3.1 -1.5 -4.3 -3.8 -2.7 -3.5 -2.1 -1.9 -3.5 -6.2 -6.0 -3.9 -5.0 -3.8 -5.6 -8.0 -6.3 -7.4 -6.3 -7.5 -3.8 -3.3 -3.3 -7.3 -2.4 -2.7 -7.1 -3.2 1.0 -3.6 -3.9

2010 -8.5 -9.5 -10.4 -7.1 -11.2 -3.2 -2.8 -1.0 -3.4 -1.6 -3.7 -1.5 -2.8 -1.8 -4.0 -4.9 -4.0 -3.8 -4.0 0.0 -5.5 -6.0 -5.5 -6.2 -3.7 -6.2 -2.8 -2.1 -1.0 -6.8 -1.5 -1.5 -5.0 -2.5 2.5 -3.0 -6.0

January 5, 2010

15

Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities Inc. Michael MarreseAC (1-212) 834-4876 michael.marrese@jpmorgan.com

J.P. Morgan Securities Inc. Luis OganesAC (1-212) 834-4326 luis.oganes@jpmorgan.com JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com

Nearly 40% of the countries in the EMBIG by market capitalization are classified as oil exporters and another 24% are characterized as soft commodity or metals exporters The majority of countries are budgeting the price of oil conservatively at US$45-65/bbl, well below J.P. Morgans 2010 forecast for WTI to average US$78.25/bbl

Table 8: Many EM Countries will benefit from an oil windfall at current 2010 oil price assumptions
Oil exports1 % of total 28.4 66.8 13.5 93.7 98.1 97.7 47.1 85.9 97.7 65.5 96.5 89.5 61.0 1.1 17.0 21.3 0.0 18.1 2.5 24.2 5.6 5.4 Impact of Impact of Oil $1 change in $1 change imports fiscal accounts in exports % of total (%GDP) %GDP US$ million 3.3 19.0 8.2 10.4 0.0 0.0 16.4 0.5 0.0 0.0 2.0 0.0 0.0 10.2 30.0 23.7 19.7 10.7 15.7 28.6 15.5 21.7 0.02 0.13 0.10 0.15 0.70 0.45 0.00 0.19 1.05 0.14 0.29 0.49 0.15 0.00 0.15 -0.01 0.02 0.00 0.00 0.00 0.00 0.00 0.05 0.25 0.23 0.33 0.84 0.67 0.04 0.73 1.15 0.36 0.40 1.00 0.18 0.00 0.03 0.06 0.17 0.01 0.50 0.06 0.04 140 140 500 1,000 1,130 517 41 85 228 420 674 562 3,250 236 300 307 379 13 859 196 101 2010 oil price budget 75.2 65.0 59.0 40.0 37.0 58.0 44.7 n/a 60.0 50.0 57.0 40.0 58.0 n/a 70.0 70.0 63.0 75.0 n/a n/a n/a 80.0 Implicit WTI assumption in 2010 budget 88.2 71.2 61.2 46.2 37.0 58.0 50.0 n/a 60.0 52.0 57.0 40.0 60.0 n/a n/a n/a n/a

Country Latin America Colombia Ecuador Mexico2 Venezuela CEEMEA Algeria Angola Egypt Gabon Iraq Kazakhstan Nigeria Qatar Russia EM Asia China India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand

1. Including oil derivatives and in some cases natural gas. 2. The impact of $1 change in fiscal accounts represents an estimate of how much goes to the stabilization fund for every $1 above the oil price budget assumption. If the price is below the budget assumption, the price is offset by the oil hedge. Source: J.P. Morgan

16

January 5, 2010

Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com

J.P. Morgan Securities Inc. Juliet LimAC (1-212) 834-2516 juliet.lim@jpmorgan.com

Number sovereign upgrades to exceed downgrades in 2010, while ratings in DM countries will remain under pressure EMBIG average rating is expected to move to investment grade in 2010 with 60% of the index in the investment grade bucket

Chart 7: EM sovereign rating upgrades are expected to exceed downgrades once again in 2010
45 40 35 30 25 4.0 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD 2009 2010 F 3.0 2.0 1.0 0.0 Rating Upgrades Rating Downgrades Up/Down ratio 8.0 7.0 6.0 5.0

* The total number of upgrades and downgrades include both S&P and Moodys actions. Source: J.P. Morgan

January 5, 2010

17

Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com

J.P. Morgan Securities Inc. Gloria KimAC (1-212) 834-4153 gloria.m.kim@jpmorgan.com

Assets under management for the external debt EMBI series increased to US$217 billion at end-2009 compared to US$200 billion at end-2008 GBI-EM assets managed against the index series increased to US$55 billion from US$35.8 billion during the same time period Assets under management for the EM corporate market have attracted a small following at US$6.4 billion

Table 9: AUM benchmarked against EM indices increased to US$280 billion during 2009
AUM ($mm) EM Indices Local Market Debt GBI-EM Global Diversified GBI-EM GBI-EM Diversified GBI-EM Broad Diversified GBI-EM Broad GBI-EM Global Total External Debt EMBI Global Diversified EMBI Global EMBI+ Total Corporate External Debt CEMBI Broad Diversified CEMBI Diversified CEMBI Broad CEMBI Total TOTAL AUM managed against EM indices
Source: J.P. Morgan

December 2008

December 2009 14,120 9,045 4,775 6,455 50 1,420 35,865 29,626 11,913 8,193 5,070 105 150 55,056

120,152 54,094 24,750 198,996

144,274 52,646 20,639 217,559

0 234,861

4,942 950 500 6,392 279,007

18

January 5, 2010

Emerging Markets Outlook and Strategy J.P. Morgan Securities Inc. Joyce ChangAC (1-212) 834-4203 joyce.chang@jpmorgan.com J.P. Morgan Securities Inc. Michael MarreseAC (1-212) 834-4876 michael.marrese@jpmorgan.com

J.P. Morgan Securities Inc. Luis OganesAC (1-212) 834-4326 luis.oganes@jpmorgan.com JPMorgan Chase Bank N.A., Singapore Branch David FernandezAC (65) 6882-2461 david.fernandez@jpmorgan.com

29 elections scheduled in EM countries between now and end-2011 Key elections to monitor in Latin America: Colombia and Brazil Key elections to monitor in CEEMEA region: Ukraine and Latvia

Table 10: Heavy election calendar over the next two years in EM
Country Latin America Argentina Brazil Colombia Costa Rica Dominican Republic Guatemala Mexico Peru Venezuela CEEMEA Bahrain Bulgaria Central African Republic Croatia Czech Republic Egypt Gabon Hungary Iraq Latvia Nigeria Poland Russia Turkey Ukraine Emerging Asia Philippines Singapore Sri Lanka Thailand Vietnam
Source: www.electionguide.org

Presidential October 2011 First round: October 3, 2010 Second round: October 31, 2010 First round: May 30, 2010 Second round: June 20, 2010 February 07, 2010 August 2011 April 2011

Legislative/Parliamentary/Municipal

October 3, 2010 March 14, 2010 February 07, 2010 May 16, 2010 August 2011 July 04, 2010 October 03, 2010 April 2011 September 26, 2010 November 2010

October 2011 First round: March 2010

September 2011

June 2010 May 2011 April 2011 First round: October 2010

First round: March 2010 November 2011 June 2010 May 2010 November 2010 December 2011 April or May 2010 January 16, 2010 October 02, 2010 April 2011 Spring 2011 or October 2011 December 2011 July 2011

First round: January 17, 2010 Second round: February 2010 May 10, 2010 March 2010 November 2011 June 2011 May 10, 2010 May 2011 March 2010 2H10

January 5, 2010

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J.P. Morgan Emerging Markets Research Contact Information

Joyce Chang Global Head of Emerging Markets and Credit Research (1-212) 834-4203 joyce.chang@jpmorgan.com G LOBAL S TRATEGY
william.a.oswald@jpmorgan.com victor.dituro@jpmorgan.com gloria.m.kim@jpmorgan.com jarrad.k.linzie@jpmorgan.com MD, EM Quantitative Strategy / CEEMEA Strategy ED, Analytics ED, Index Management VP, Index Management

AND

Q UANTITATIVE A NALYSIS
ann.m.fausto@jpmorgan.com andrew.j.szmulewicz@jpmorgan.com Assoc, Analytics Assoc, Index Management Analyst, Index Management Analyst, Analytics Analyst, Analytics (1-212) 834-7037 (1-212) 834-4029 (1-212) 834-7139 (1-212) 834-7190 (1-212) 834-2475

(44-20) 7777-3020 (1-212) 834-7072 (1-212) 834-4153 (1-212) 834-7041

rudolph.e.chen@jpmorgan.com andre.r.harvey@jpmorgan.com trang.m.nguyen@jpmorgan.com

L ATIN A MERICA
luis.oganes@jpmorgan.com fabio.akira@jpmorgan.com felipe.q.pianetti@jpmorgan.com vladimir.werning@jpmorgan.com julio.c.callegari@jpmorgan.com gabriel.casillas@jpmorgan.com benjamin.h.ramsey@jpmorgan.com MD, Strategy / Economics (Latin America and Andean Region) ED, Economics (Brazil) ED, Strategy (Latin America) (1-212) 834-4326 (55-11) 3048-3634 (1-212) 834-4043 neeraj.x.arora@jpmorgan.com isabela.p.bacchi@jpmorgan.com tejal.t.ray@jpmorgan.com carlos.j.carranza@jpmorgan.com juliet.lim@jpmorgan.com Assoc, Strategy (Latin America) Assoc, Corporate Strategy Assoc, Strategy Analyst, Strategy (Latin America) Analyst, Corporate Strategy (1-212) 834-4321 (1-212) 834-4317 (1-212) 834-8580 (54-11) 4348-3425 (1-212) 834-2516 jacob.a.steinfeld@jpmorgan.com franco.a.uccelli@jpmorgan.com VP, Corporate Strategy (1-212) 834-4066

VP, Strategy (Central America and Caribbean) (1-305) 579-9415

ED, Strategy / Economics (Argentina and Chile) (1-212) 834-4144 VP, Economics (Brazil, Colombia and Peru) VP, Economics (Mexico) VP, Strategy (Andean Region) (55-11) 3048-3369 (52-55) 5540-9558 (1-212) 834-4308

C ENTRAL E ASTERN E UROPE , M IDDLE E AST

michael.marrese@jpmorgan.com MD, Strategy / Economics (Emerging Europe, (1-212) 834-4876 Russia and Turkey) MD, Corporate Strategy (CEEMEA and Latin American Banks) ED, Strategy (CEEMEA FX) ED, Corporate Strategy (CEEMEA) ED, Economics (Turkey, Bulgaria, and Baltics) ED, Corporate Strategy (CEEMEA) ED, Strategy / Economics (Kazakhstan South Africa and Sub-Saharan Africa) (44-20) 7777-3582

AND

A FRICA (CEEMEA)
VP, Economics (South Africa) VP, Economics (Czech Republic, Israel, Slovakia and Romania) VP, Economics (GCC and North Africa) VP, Economics (Poland, Hungary and Iceland) VP, Strategy (CEEMEA Local Markets) Assoc, Economics (Middle East and North Africa, Ukraine and Serbia) Assoc, Economics (Russia) Analyst, Corporate Strategy (27-11) 507-0376 (44-20) 7325-0745 (44-20) 7777-1381 (44-20) 7777-3981 (44-20) 7777-4356 (44-20) 7777-4504 (7-495) 937-7321 (44-20) 7777-3475

sonja.c.keller@jpmorgan.com miroslav.x.plojhar@jpmorgan.com brahim.x.razgallah@jpmorgan.com

victoria.miles@jpmorgan.com

robert.m.beange@jpmorgan.com allison.bellows@jpmorgan.com yarkin.cebeci@jpmorgan.com

(44-20) 7777-3246 (44-20) 7777-3843 (90-212) 319-8599

nora.szentivanyi@jpmorgan.com michael.j.trounce@jpmorgan.com neena.x.altaf@jpmorgan.com anatoliy.a.shal@jpmorgan.com nikolay.x.zhukovsky@jpmorgan.com

zafar.nazim@jpmchase.com graham.stock@jpmorgan.com

(971-4) 428-1740 (44-20) 7777-3430

E MERGING A SIA
david.g.fernandez@jpmorgan.com warren.j.mar@jpmorgan.com MD, Strategy / Economics (Emerging Asia) MD, Corporate Strategy (Asia and Latin America Credit) ED, Economics (India) ED, Corporate Strategy ED, Economics (Korea) ED, Economics (China and Taiwan) ED, Strategy (Asia FX Markets) (65) 6882-2461 (1-212) 834-4274 qian.li.wang@jpmorgan.com harsh.l.agarwal@jpmorgan.com daniel.cc.fan@jpmorgan.com (91-22) 6719-8033 (852) 2800-8028 (82-2) 758-5509 (852) 2800-7002 (65) 6882-2218 yenping.ho@jpmorgan.com gunjan.x.gulati@jpmorgan.com matt.l.hildebrandt@jpmorgan.com james.dh.lee@jpmorgan.com simon.p.song@jpmorgan.com ED, Economics (China and Hong Kong) VP, Corporate Strategy VP, Corporate Strategy VP, Strategy (Asia FX Markets) Assoc, Economics (India) Assoc, Economics (Singapore and Malaysia) Analyst, Economics / Local Markets (Korea) Analyst, Local Markets (China) (852) 2800-7009 (852) 2800-8008 (852) 2800-8080 (65) 6882-2216 (91-22) 6639-3125 (65) 6882-2253 (82-2) 758-5512 (86-21) 5200-2833

jahangir.x.aziz@jpmorgan.com andrea.k.cheng@jpmorgan.com jiwon.c.lim@jpmorgan.com grace.h.ng@jpmorgan.com claudio.piron@jpmorgan.com

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