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 Spreads and yields—actual and forecast
outperforming US credit and equities Year Forecast
Current ago End-Dec 10
• December-January effect apparent as EMBIG and CEMBI Broad spreads EMBIG 295 685 250
close inside our 2009 targets, boasting 28.2% and 37.5% total returns, GBI-EM Global Div 7.32 7.40 7.90
respectively, in 2009 CEMBI Broad 354 959 300
Fed funds 0.125 0.25 0.125
• Higher beta sovereigns lead the rally with Pakistan, Argentina and
10-year bond 3.75 2.49 4.50
Ukraine each reaching total returns well over 100%, with spreads Source: J.P. Morgan
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 quasi- EMBI Global, GBI-EM, JPMHY, S&P 500
sovereigns to lose -1.5% in December, overall corporate valuations remain Return index, Nov 28, 2008 = 100
170
supported by expectations for the EM high yield corporate default rate to 160
fall to only 1.9% in 2010 compared to 11.1% in 2009 150 US HY
140 EMBIG
• EM local currency caught up with the credit rally in 2H09, with the
130
GBI-EM Global Diversified returning 22% for the full year, led by Latin 120
America’s strong performance (+34.3%) 110 GBI-EM Global Div.
100 (USD unhedged)
• Record level of EM debt issuance reached in 2009 US$210 billion, surpassing 90 S&P
the new record level for US high yield issuance, which ended 2009 at US$178 80
billion; we forecast US$196 billion of EM debt issuance for 2010 70
Nov 08 Feb 09 May 09 Aug 09 Nov 09
• EM local currency to outperform in 2010 and we forecast 12% returns Source: J.P. Morgan
(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 -38.5
23.5
-54.5 74.5
EM equities
Commodities1 -35.0
20.5
UST 22.0
-18.0
US High Yield -26.6
58.2
US High Grade -1.9
16.7
EMBIG -10.9
28.2
CEMBI Broad -16.8
37.5
GBI-EM Global div -5.2
22.0 Joyce ChangAC
ELMI+ -3.8
11.7 (1-212) 834-4203
2
2008 2009 4.8
Global Agg joyce.chang@jpmorgan.com
6.9
J.P. Morgan Securities Inc.
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 www.morganmarkets.com
certification and important legal and regulatory disclosures.
Emerging Markets Outlook and Strategy
J.P. Morgan Securities Inc. J.P. Morgan Securities Inc.
Joyce ChangAC (1-212) 834-4203 Luis OganesAC (1-212) 834-4326
joyce.chang@jpmorgan.com 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 January 5, 2010
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 US HY EMBIG
19 GBI-EM Global div US HG
Global Agg
16
13
10
7
4
1
Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09
Source: J.P. Morgan
Emerging Markets Outlook and Strategy
J.P. Morgan Securities Inc. J.P. Morgan Securities Inc.
Joyce ChangAC (1-212) 834-4203 Warren MarAC (1-212) 834-4274
joyce.chang@jpmorgan.com warren.j.mar@jpmorgan.com
J.P. Morgan Securities Ltd.
William Oswald (44-20) 7777-3020
william.a.oswald@jpmorgan.com

EM corporates to outperform EM We maintain our forecast for EM corporate spreads to

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
346bp—one-third of the 960bp spread recorded at the start
of the year—and a yield-to-maturity of 6.9% as of year-
end. 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.
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 like-
for-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 Forecast return Now to end-2010 Yield Forecast Local return Current FX Forecast FX FX return
GBI-EM Global Div 11.8% 7.1% 7.9% 2.7% 8.9%
Russia 17.8% 8.0% 8.0% 2.4% 28.8 26.7 15.0%
Poland 17.4% 5.7% 5.5% 5.0% 2.78 2.54 11.8%
Hungary 17.4% 7.1% 6.9% 4.7% 180 167 12.1%
Turkey 16.2% 8.9% 10.5% -0.1% 1.49 1.38 16.3%
South Africa 14.4% 8.8% 8.3% 4.9% 7.53 7.40 9.0%
Brazil 11.8% 11.8% 11.8% 4.6% 1.73 1.75 6.8%
Indonesia 9.4% 10.4% 11.0% 1.6% 9,575 9,500 7.7%
Mexico 9.2% 7.7% 7.6% 3.5% 13.0 13.0 5.5%
Malaysia 7.1% 3.9% 5.0% 0.2% 3.39 3.15 6.9%
Thailand 7.1% 4.1% 4.9% -0.0% 33.2 31.0 7.1%
Peru 6.1% 5.9% 6.3% 3.8% 2.88 2.80 2.2%
Egypt 5.1% 7.9% 10.0% -5.8% 5.46 5.40 11.6%
Colombia 4.0% 7.2% 7.8% 1.9% 1969 2,000 2.1%
Source: J.P. Morgan

January 5, 2010 3
Emerging Markets Outlook and Strategy
J.P. Morgan Securities Inc. J.P. Morgan Securities Ltd.
Joyce ChangAC (1-212) 834-4203 William Oswald (44-20) 7777-3020
joyce.chang@jpmorgan.com 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 USD-
buying 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.

EM debt issuance reached record levels

as financing gaps grew Chart 3: EM Debt Strategic and Retail Flows yearly, cumulative
US$ billion
Total issuance in Emerging Markets reached record 40
highs in 2009, with the total across sovereigns, quasi- 2005 2006 2007 31.9
30 2008 2009 34.1
sovereigns, banks and corporates reaching US$210 23.4
billion. While neither the non-sovereign issuance (US$135 20
20.9
billion in 2009 against US$149 billion in 2007) nor the
10
sovereign one (US$75 billion in 2009 versus US$83 billion
in 2000) reached its record high, which occurred in different 0
years, the combined issuance figures did reach the new high -10
in 2009 (chart 2). This issuance occurred primarily from -11.9
sovereigns, quasi-sovereigns and highly rated corporates, as -20
financing gaps opened up. Much of the sovereign issuance, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

however, came from non-traditional (that is, non EMBI-
eligible) 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
Non Sovereign Sovereign
200
150
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.

100

50

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: J.P. Morgan

4 January 5, 2010
Emerging Markets Outlook and Strategy
JPMorgan Chase Bank N.A., Singapore Branch
David FernandezAC (65) 6882-24613 Claudio PironAC (65) 6882-2218
david.fernandez@jpmorgan.com claudio.piron@jpmorgan.com
JPMorgan Chase Bank N.A., Singapore Branch
Bert GochetAC (852) 2800-8325 Yen Ping HoAC (65) 6882-2216
bert.j.gochet@jpmorgan.com yenping.ho@jpmorgan.com

2010 Top Trade Recommendations

Top Emerging Asia trade recommendations
EM Asia external debt
Indonesia: We still like Indonesia's fundamental story, but positioning has become crowded and supply concerns have risen
Move to neutral 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.

Philippines: The Philippines underperformed the EMBIG last year. Although remittances should remain strong in 2010 and
Remain neutral 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: Pakistan was the best performer in the EMBIG in 2009 (+147.4%) but political uncertainty is increasing rapidly. Sri
Sell Pakistan bonds vs. buy 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
Lanka bonds expected later this month. We recommend taking profit by selling PK '17s and buying Sri Lankan '15s.

Vietnam: The CDS spread has narrowed about 30bp since the government devalued VND at end of November. Though much
Buy 5-year CDS 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.

EM Asia FX
China: Entry: 6.7960; stop: 6.9150; last: 6.7373. Robust macro data are underlining our view for eventual monetary tightening
Short 12-month USD/CNY NDF 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.

Indonesia: Entry 10,230; stop 9,900; last 9,339. USD/IDR should remain under pressure in view of conducive risk appetites and
Short 6-month USD/IDR NDF 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.

Asia: Stop: -200bp; last: +358bp. We were long KRW, TWD, and SGD against USD as a core exposure to recovery trades
Be long KRW, INR, and SGD in EM Asia. The position expired at a 358bps profit in December. We see further scope for gains in this trade but
against USD await the passage of key data risks this week (US payrolls could turn positive) before re-entering.

EM Asia rates
China: 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
2s/5s steepeners anchored by an unchanged monetary policy in 1Q, until PBoC lets its 1-year bill yield rise (sometime in 2Q). The long
Pay 5-year repo IRS 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%).

India:
Pay 5-year (partially hedged by
receiving 1-year to neutralize
negative carry)
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.

Taiwan:
Open 3s/10s steepeners
Source: J.P. Morgan
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.

January 5, 2010 5
Emerging
J.P. Morgan
Markets
Securities
Outlook
Inc., and
NewStrategy
York
J.P.
JoyceMorgan Securities
ChangAC Inc.
(1-212) 834-4203 J.P. Morgan Securities Ltd.
Michael MarreseAC (1-212) 834-4876
joyce.chang@jpmorgan.com William OswaldAC (44-20) 7777-3020
michael.marrese@jpmorgan.com william.a.oswald@jpmorgan.com
J.P. Morgan Securities Ltd. J.P. Morgan Securities Ltd.
Robert BeangeAC (44-20) 7777-3246 Michael TrounceAC (44-20) 7777-4356
robert.m.beange@jpmorgan.com michael.j.trounce@jpmorgan.com

2010 Top Trade Recommendations (continued)

Top CEEMEA trade recommendations
CEEMEA external debt

Russia: We have been running this trade for a month and a half, and it has remained stable but produced positive carry as
We increase overweight 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 Russia’s 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 SEC-registered 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: Target 1.40; stop 1.55; last 1.52. Retail buying of USD, which kept USD/TRY rangebound in 2H09, should slow as
Sell 6-month USD/TRY the economy recovers from recession.

Russia: Target 25.5; stop 31.2; last 30.63. USD weakness and rising commodity prices are expected to support RUB. While
Sell 6-month USD/RUB 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.

Hungary: Target 172; stop: 195; last: 193.90. Hungary is alone in CEEMEA in reporting improving current account and budget
Sell 2-month USD/HUF deficits. In our view, investor positions in HUF do not reflect the improving economic fundamentals or the high yield.

Poland: Target 3.80; stop 4.40; last 4.30. PLN is the CEEMEA region’s most undervalued currency, in our view, and fear over
Sell 12-month EUR/PLN rising public debt levels should diminish as growth rebounds more strongly than expected.

Nigeria: Buy naira based on our confidence that buoyant oil prices and rising oil production will support the Nigerian currency.
Sell USD/NGN 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: Target: 8.3%; stop: 9.5%; current 9.11%. The market is very underweight both outright and relative to the high level
Long R186 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.

Russia: long 3-year OFZ 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.

Turkey: 2-year/5-year steepener, Stop: -25bp; target: +90bp. The 2-year/5-year slope is only 22bp positively sloped one year forward currently and yet
one year forward 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).

Ghana: Long Ghanaian cedi
through FX forwards
Source: J.P. Morgan
The combination of local yields above 20% and good prospects for cedi appreciation support our recommendation to
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
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.

6 January 5, 2010
Emerging
J.P. Morgan
Markets
Securities
Outlook
Inc., and
NewStrategy
York
J.P.
JoyceMorgan
ChangSecurities
AC (1-212) Inc.
834-4203 J.P. Morgan Securities Inc.
Felipe PianettiAC (1-212) 834-4043
joyce.chang@jpmorgan.com Vladimir WerningAC (1-212) 834-4144
felipe.q.pianetti@jpmorgan.com vladimir.werning@jpmorgan.com
Banco J.P. Morgan S.A. J.P. Morgan Securities Inc.
Carlos CarranzaAC (54-11) 4348-3425 Ben RamseyAC (1-212) 834-4308
carlos.j.carranza@jpmorgan.com benjamin.h.ramsey@jpmorgan.com

2010 Top Trade Recommendations (continued)

Top Latin America trade recommendations
Latin America external debt

Mexico/Colombia: Current spread -7bp; 3-year low: -103bp; 3-year high: +13bp. Almost flat carry; defensive trade. The skew of this pair
Sell Mexico 5-year CDS vs. buy is for a tighter (more negative) spread. Local specifics were a major drag for the Mexican economy in 2009, while
Colombia 5-year CDS 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.

Colombia: Current spread 50bp; 3-year low: 15bp; 3-year high: +134bp; 6-month carry = 6bp of spread (breakeven = 43bp) and
Sell 2-year CDS vs. buy 5-year positive slide. Caveat is liquidity. We believe the 2s5s steepeners in Colombia offer the best risk-rewards among
CDS (2x1) 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.

Argentina: We remain overweight Argentina ahead of the debt swap, which we believe will generate a high participation rate.
We remain overweight 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.

Mexico:
Increase overweight, extending
duration into '19Ns to take
advantage of front-end
steepness
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.

Dominican Republic: We believe the Dominican Republic’s proven resilience to external shocks (GDP grew an estimated 3.5% in 2009),
We remain overweight 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.

Jamaica: We remain overweight 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.

Belize: We remain overweight Even after a 60%ytd rally, the BZ’29s 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.

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
J.P. Morgan’s 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.

Latin America rates

Argentina: Badlar-linked paper offers the best carry trade among Argentina local instruments. We do not expect ARS to weaken
Buy Bonar ’14 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.

Brazil Linkers: Buy May’11
inflation Breakeven (Buy NTN-B
May’11 vs. Pay Apr’11 DI + buy
1-month USD/BRL NDF).
Target: 6%, Stop 4.5%, last
5.18%. 3-month carry: +0.78% a.r.
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 communiqué, 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.

Brazil DI futures: Receive DV01 neutral. Current spread: +43bp; carry and roll in 6-month = 43bp. Breakeven spread + 0bp in 6-month. Besides
Jan’13 (12.32%) vs. pay Jan’15 positive carry and slide, this spread offers potential for capital gain, as the Jan’13 continues to look cheap in the curve.
(12.74%)—steepener

Chile: The 2-year inflation breakeven is below 2% versus the 3% central target. Near-term inflation carry is a drag for UF
Receive 2-year UF swaps 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.
Source: J.P. Morgan

January 5, 2010 7
Emerging
Article Title
Markets Outlook and Strategy
J.P. Morgan Securities Inc.
Inc., New York J.P. Morgan Securities Inc.
Inc., New York
Joyce ChangAC
AC (1-212)
(1-212) 834-4203
834-4203 Luis
Gloria KimACAC(1-212)
Oganes (1-212)834-4153
834-4326
joyce.chang@jpmorgan.com gloria.m.kim@jpmorgan.com
luis.oganes@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 GBI-EM Global Div

YTD total returns, % YTD total returns, %
EMBI Global 28.18 CEMBI Broad 37.49 FX Return US$ Hedged
Pakistan 147.39 Ukraine 121.29 -20 0 20 40 60
Argentina 132.78 Indonesia 108.61
Egypt 101.58 GBI-EM Global Div
Ecuador 118.30
Turkey 82.73
Ukraine 117.90 Brazil Broad
Nigeria 78.59
Iraq 99.46 Russia 74.66
Ghana 96.80 Indonesia
Taiwan 73.56
Dominican Rep 90.79 Jamaica 56.40 Colombia
Georgia 81.11 Argentina 54.15
China 52.96 Peru
Sri Lanka 75.31
Kazakhstan 50.11
Serbia 74.49 Egypt
India 46.74
Gabon 72.40 Peru 44.73 Turkey
Kazakhstan 67.90 Thailand 38.37
Venezuela 62.09 Qatar 37.03 Chile
Belize 60.70 Korea 35.87 South Africa
Indonesia 46.91 Mexico 35.69
Colombia 30.33 Russia
El Salvador 42.09
Brazil 28.40
Russia 41.41 Hungary
Panama 27.70
Uruguay 36.67 Philippines 25.73 Mexico
Jamaica 35.12 UAE 23.25
Vietnam 32.75 Hong Kong 21.82 Poland
Bulgaria 28.19 Singapore 20.30 Malaysia
Lebanon 28.12 Israel 19.65
25.36 Malaysia 18.65 Thailand
Panama
Lebanon 16.33
South Africa 24.83
Bahrain 14.97
Hungary 24.21 Chile 13.40
Turkey 24.13 Saudi Arabia 6.41
The Philippines 23.75 Venezuela-16.08
Peru 22.21
Colombia 16.70
Tunisia 15.73
Chile 13.05
Malaysia 12.63
Mexico 12.25
Egypt 12.13
Poland 12.01
Brazil 11.38
China 7.73

Source: J.P. Morgan

8 January 5, 2010
Emerging
Article Title
Markets Outlook and Strategy
J.P. Morgan Securities Inc.
Inc., New York J.P. Morgan Securities Ltd.
Inc., New York
Joyce ChangAC
AC (1-212)
(1-212) 834-4203
834-4203 Luis
William
Oganes AC AC
Oswald (1-212)
(44-20)
834-4326
7777-3020
joyce.chang@jpmorgan.com luis.oganes@jpmorgan.com
william.a.oswald@jpmorgan.com

Total EM sovereign requirements for 2010 Table 2: EM gross sovereign external issuance requirements total only US$67.5 billion in 2010
are modest at only US$67.5 billion 2010 forecast
Country Gross issuance Cash flows Net issuance
CEEMEA region accounts for nearly 60% of China 0 127 -127
sovereign financing needs Indonesia 4,000 1,222 2,778
Malaysia 1,500 131 1,369
Pakistan 0 111 -111
Only five countries—Argentina, Poland, Philippines 2,000 3,456 -1,456
Russia, Turkey and Venezuela—account Sri Lanka 750 69 681
for nearly 50% of total EM sovereign Thailand 0 3 -3
Vietnam 1,000 52 948
issuance needs
Asia subtotal 9,250 5,170 4,080
Angola 1,000 0 1,000
Belarus 750 0 750
Bulgaria 1,000 197 803
Croatia 2,500 1,048 1,452
Egypt 0 88 -88
Gabon 0 76 -76
Georgia 500 38 463
Ghana 0 64 -64
Hungary 1,817 2,583 -766
Iraq 0 157 -157
Ivory Coast 0 276 -276
Kazakhstan 500 0 500
Latvia 0 25 -25
Lebanon 1,000 2,268 -1,268
Lithuania 1,500 346 1,154
Morocco 500 40 460
Nigeria 500 0 500
Poland 7,200 4,653 2,547
Romania 1,482 1,281 201
Russia 9,000 4,118 4,882
Serbia 741 144 597
South Africa 3,000 524 2,476
Turkey 5,500 5,818 -318
Ukraine 0 324 -324
CEEMEA subtotal 38,490 24,066 14,424
Argentina 4,000 8,388 -4,388
Bahamas 0 0 0
Barbados 150 0 150
Belize 0 28 -28
Brazil 2,000 5,339 -3,339
Chile 0 108 -108
Colombia 1,500 1,493 7
Costa Rica 0 0 0
Dominican Republic 600 223 377
Ecuador 0 372 -372
El Salvador 1,000 257 743
Guatemala 0 88 -88
Jamaica 0 288 -288
Mexico 3,000 4,686 -1,686
Panama 500 604 -104
Peru 1,500 789 711
Trinidad and Tobago 500 33 467
Uruguay 0 569 -569
Venezuela 5,000 3,874 1,126
Latin America subtotal 19,750 27,140 -7,390
Total 67,490 56,423 11,067
Source: J.P. Morgan

January 5, 2010 9
Emerging
Article Title
Markets Outlook and Strategy
J.P. Morgan Securities Inc.
Inc., New York J.P. Morgan Securities Inc.
Inc., New York
Joyce ChangAC (1-212) 834-4203 Warren
Luis MarAC
Oganes AC (1-212)
(1-212) 834-4274
834-4326
joyce.chang@jpmorgan.com luis.oganes@jpmorgan.com
warren.j.mar@jpmorgan.com
J.P. Morgan Securities Ltd.
Victoria MilesAC (44-20) 7777-3582
victoria.miles@jpmorgan.com

We forecast US$128 billion of new Table 3: EM corporate bond and syndicated loan maturities for 2010 exceed US$200 billion
issuance from EM corporates for 2010 US$ million
Country Loans Bonds 2010 Total
Quasi-sovereign issuance should China 7,698 1,056 8,754
decline this year to less than 50% of Hong Kong 4,324 4,059 8,383
total corporate issuance vs. 65% in 2009 India 5,173 3,005 8,178
Indonesia 3,692 870 4,562
Korea 5,352 11,427 16,779
Issuance will continue to be Malaysia 2,556 500 3,056
concentrated in investment-grade Philippines 1,825 150 1,975
Singapore 3,539 1,033 4,572
corporates, accounting for nearly 80% Taiwan 3,644 350 3,994
of our full year forecast Thailand 1,198 320 1,518
Emerging Asia 39,754 22,948 62,702
Heaviest refinancing needs Russia 22,441 12,183 34,624
concentrated in the CEEMEA region, Kazakhstan 2,383 1,548 3,931
with Russia and UAE standing out Ukraine 1,667 1,775 3,442
Hungary 5,393 2,161 7,554
Kuwait 2,958 500 3,458
South Africa 4,767 423 5,189
UAE 9,645 6,659 16,304
CEEMEA 83,604 30,884 114,488
Argentina 1,040 1,278 2,318
Brazil 3,749 2,436 6,185
Chile 3,485 300 3,785
Colombia 348 43 390
Mexico 7,261 3,483 10,744
Latin America 17,262 7,771 25,033
Total Emerging Markets 140,620 61,603 202,223
* Estimates external borrowings issued in foreign currencies.
Source: Bloomberg, Dealogic, Bond Radar, and J.P.Morgan.

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 Table 4: High level of current and potential official creditor support to EM sovereigns
support to EM sovereigns exceeds Country US$ billion % of GDP Details
US$500 billion 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.
Total of 32 new IMF agreements
approved for EM countries since 2008 Colombia 2.4 1.0 The bulk of the multilateral lending in government’s 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
IMF agreements mainly concluded in 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
EM Europe and Latin America 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. J.P. Morgan Securities Inc.
Joyce ChangAC (1-212) 834-4203 Felipe PianettiAC (1-212) 834-4043
joyce.chang@jpmorgan.com 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
28.8 28.1 26.5
30 24.3 22.5
20 14.8 12.9 12.3
11.1
8.1 7.0 6.7
10 4.4
1.6 0.9 0.7
0
-0.2 -2.4
-10 -5.8 -7.2 -8.6 -10.1 -10.4
-20 -13.0

-30
-28.3 -30.7
-40
-50
-60 -53.7
ARS BRL CLP COP MXN PEN AUD CAD CHF EUR GBP JPY NOK NZD SEK INR IDR KRW MYR PHP THB TWD TRY ZAR HUF PLN CZK

Source: J.P. Morgan

EM FX currency appreciation has been Chart 6: Current/30-year average (Y-axis); Peak/30-year average (X-axis)
concentrated in commodity currencies
40%
30% AUD
Valuations have not reached their previous BRLNZD NOK
peak 20% CZK

CHF PEN
HUF IDR
Current / Avg

10%
PHP PLN
Mexico is the main underperformer in Latin CLP COP EUR
0% TRY
America, while TWD and KRW stand out in MYR CAD
JPY
EM Asia -10% SEK THB MXN
GBP
-20%
-30% TWD KRW
-40%
-40% -30% -20% -10% 0% 10% 20% 30% 40%
Peak / Avg
Source: J.P.Morgan

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 Table 5: Many EM countries likely to hike rates in 2010
bubbles, as well as a rise in inflation, Policy stance Timing of End 2010
have prompted EM central bankers to Current rate to end-2010 initial rate hike rate forecast
turn their focus to exit strategies
Developed markets
United States 0.125 On hold - 0.125
We forecast that 17 of 32 EM countries United Kingdom 0.50 Tightening 3Q10 1.00
will move towards monetary policy Euro area 1.00 On hold - 1.00
normalization in 2010 Japan 0.10 On hold - 0.10
Latin America
But policymakers will be slow to move Brazil 8.75 Tightening 1Q10 11.75
Chile 0.50 Tightening 3Q10 2.00
and it will be difficult to bring interest Colombia 3.50 On hold - 3.50
rates up as long as central banks Mexico 4.50 Tightening 2Q10 5.25
resist exchange rate appreciation Peru 1.25 Tightening 3Q10 2.75
CEEMEA
Czech Republic 1.00 Tightening 3Q10 2.25
Hungary 6.25 Easing - 5.50
Israel 1.25 Tightening 3Q09 4.00
Poland 3.50 Tightening 3Q10 4.00
Romania 7.50 Easing - 7.00
Russia 4.00 Easing - 3.00
South Africa 7.00 Tightening 4Q10 7.50
Turkey 6.50 Tightening 3Q10 8.00
Emerging Asia
China 5.31 Tightening 3Q10 5.85
India 4.75 Tightening 1Q10 5.50
Indonesia 6.50 On hold - 6.50
Korea 2.00 Tightening 1Q10 3.00
Malaysia 2.00 Tightening 3Q10 2.50
Philippines 4.00 Tightening 2Q10 5.00
Taiwan 1.25 Tightening 4Q10 1.375
Thailand 1.25 Tightening 3Q10 1.75
Source: J.P. Morgan

January 5, 2010 13
Emerging
Article Title
Markets Outlook and Strategy
J.P. Morgan Securities Inc.
Inc., New York J.P. Morgan Securities Inc.
Inc., New York
Joyce ChangAC
AC (1-212)
(1-212) 834-4203
834-4203 Luis OganesAC
AC (1-212)
(1-212) 834-4326
834-4326
joyce.chang@jpmorgan.com luis.oganes@jpmorgan.com
J.P. Morgan Securities Inc. JPMorgan Chase Bank N.A., Singapore Branch
Michael MarreseAC (1-212) 834-4876 David FernandezAC (65) 6882-2461
michael.marrese@jpmorgan.com david.fernandez@jpmorgan.com

EM has contributed more to global Table 6: 2010 Real GDP growth expected to exceed potential
GDP growth than all of the developed Potential
markets for the past four years %oya 2009 2010 2011 GDP growth
Developed markets -3.4 2.7 2.8 1.6
United States -2.5 3.3 3.1 2.0
We forecast 6.0% growth for EM
Japan -5.3 1.9 1.9 1.7
countries in 2010, above the estimated
Euro area -3.9 2.5 2.6 0.8
5.5% average potential growth rate
United Kingdom -4.8 1.7 3.1 1.5

EM Asia will lead with 7.3% growth, Emerging Economies 1.0 6.0 5.7 5.5
Latin America will benefit from Brazil’s Latin America -3.2 4.3 3.4 3.4
6.2% outperformance and also grow Argentina -4.0 4.0 3.0 3.5
above potential Brazil 0.1 6.2 4.0 4.0
Chile -1.7 5.0 5.0 4.2
Colombia 0.3 3.0 4.1 4.5
Ecuador -1.0 2.0 3.0 3.0
Mexico -7.0 3.5 2.5 2.5
Peru 1.0 5.5 6.0 6.0
Venezuela -2.7 1.0 2.5 3.0

Emerging Asia 4.3 7.4 7.2 6.9

China 8.6 9.5 9.3 9.0
Hong Kong -3.3 4.5 4.1 4.1
India 6.8 7.8 8.3 8.0
Indonesia 4.4 5.5 6.0 5.0
Korea 0.2 4.9 4.1 4.0
Malaysia -2.4 5.0 5.0 5.5
Philippines 1.0 5.0 4.3 4.5
Singapore -2.1 6.5 5.0 4.5
Taiwan -3.0 5.8 4.8 4.5
Thailand -2.9 5.5 5.0 5.0

CEEMEA -3.2 4.3 4.8 4.6

Bulgaria -5.8 -1.5 4.5 5.0
Czech Republic -4.0 2.5 4.0 4.0
Egypt 4.7 5.0 5.5 6.0
GCC 1.7 4.9 4.5 4.4
Hungary -6.5 1.0 4.0 3.5
Israel 0.0 3.0 4.5 4.0
Kazakhstan 0.1 2.5 3.0 7.0
Nigeria 3.2 9.2 8.0 8.0
Poland 1.7 3.5 4.2 4.5
Romania -6.0 2.0 5.0 5.0
Russia -8.5 5.0 5.0 4.0
Serbia -4.0 1.0 2.0 6.0
South Africa -1.9 3.0 3.5 3.2
Turkey -5.3 5.0 5.5 5.5
Ukraine -15.2 3.0 5.0 4.5
Source: J.P. Morgan

14 January 5, 2010
Emerging
Article Title
Markets Outlook and Strategy
J.P. Morgan Securities Inc.
Inc., New York J.P. Morgan Securities Inc.
Inc., New York
Joyce ChangAC
AC (1-212)
(1-212) 834-4203
834-4203 Luis OganesAC
AC (1-212)
(1-212) 834-4326
834-4326
joyce.chang@jpmorgan.com luis.oganes@jpmorgan.com
J.P. Morgan Securities Inc. JPMorgan Chase Bank N.A., Singapore Branch
Michael MarreseAC (1-212) 834-4876 David FernandezAC (65) 6882-2461
michael.marrese@jpmorgan.com david.fernandez@jpmorgan.com

EM policymakers will not tighten fiscal Table 7: Developed country fiscal deficits now more than double the level of EM countries
policy too much and have the resources % of GDP 2008 2009 2010
to sustain counter-cyclical measures.
Developed markets -3.3 -8.6 -8.5
United States -3.1 -9.9 -9.5
EM countries will run an average Japan -6.6 -11.3 -10.4
deficit equivalent to 3% of GDP, down Euro area -2.0 -6.1 -7.1
from 4.0% of GDP in 2009, and sharply United Kingdom -6.2 -12.1 -11.2
below the 8.5% of GDP deficit that
J.P. Morgan is forecasting for Emerging Economies -0.9 -4.1 -3.2
developed market countries Latin America -0.8 -3.1 -2.8
Argentina 1.3 -1.5 -1.0
Brazil -2.0 -4.3 -3.4
There will be fiscal consolidation
Chile 8.7 -3.8 -1.6
across all CEEMEA countries in 2010
Colombia 0.1 -2.7 -3.7
due in part to the constraints of IMF
Ecuador -0.5 -3.5 -1.5
programs or a desire to enter the
Mexico -2.0 -2.1 -2.8
Euro area
Peru 2.1 -1.9 -1.8
Venezuela -2.2 -3.5 -4.0

CEEMEA -0.1 -6.2 -4.9

Czech Republic -2.1 -6.0 -4.0
Hungary -3.8 -3.9 -3.8
Israel -2.0 -5.0 -4.0
Kazakhstan -2.5 -3.8 0.0
Poland -3.6 -5.6 -5.5
Romania -5.5 -8.0 -6.0
Russia 4.1 -6.3 -5.5
South Africa -1.0 -7.4 -6.2
Turkey -1.8 -6.3 -3.7
Ukraine -1.4 -7.5 -6.2

Emerging Asia -1.3 -3.8 -2.8

China -0.4 -3.3 -2.1
Hong Kong 0.1 -3.3 -1.0
India -7.8 -7.3 -6.8
Indonesia 0.1 -2.4 -1.5
Korea 1.3 -2.7 -1.5
Malaysia -4.8 -7.1 -5.0
Philippines -0.9 -3.2 -2.5
Singapore 5.0 1.0 2.5
Taiwan -0.7 -3.6 -3.0
Thailand -2.5 -3.9 -6.0
Source: J.P. Morgan

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 Table 8: Many EM Countries will benefit from an oil windfall at current 2010 oil price
EMBIG by market capitalization are assumptions
classified as oil exporters and another Impact of Impact of
24% are characterized as soft Oil Oil $1 change in $1 change 2010 Implicit WTI
commodity or metals exporters exports1 imports fiscal accounts in exports oil price assumption in
Country % of total % of total (%GDP) %GDP US$ million budget 2010 budget
The majority of countries are Latin America
budgeting the price of oil Colombia 28.4 3.3 0.02 0.05 140 75.2 88.2
conservatively at US$45-65/bbl, well Ecuador 66.8 19.0 0.13 0.25 140 65.0 71.2
below J.P. Morgan’s 2010 forecast for Mexico2 13.5 8.2 0.10 0.23 500 59.0 61.2
WTI to average US$78.25/bbl Venezuela 93.7 10.4 0.15 0.33 1,000 40.0 46.2
CEEMEA
Algeria 98.1 0.0 0.70 0.84 1,130 37.0 37.0
Angola 97.7 0.0 0.45 0.67 517 58.0 58.0
Egypt 47.1 16.4 0.00 0.04 41 44.7 50.0
Gabon 85.9 0.5 0.19 0.73 85 n/a n/a
Iraq 97.7 0.0 1.05 1.15 228 60.0 60.0
Kazakhstan 65.5 0.0 0.14 0.36 420 50.0 52.0
Nigeria 96.5 2.0 0.29 0.40 674 57.0 57.0
Qatar 89.5 0.0 0.49 1.00 562 40.0 40.0
Russia 61.0 0.0 0.15 0.18 3,250 58.0 60.0
EM Asia
China 1.1 10.2 0.00 0.00 236 n/a n/a
India 17.0 30.0 0.15 0.03 300 70.0 –
Indonesia 21.3 23.7 -0.01 0.06 307 70.0 –
Korea 0.0 19.7 0.02 – – 63.0 –
Malaysia 18.1 10.7 0.00 0.17 379 75.0 –
Philippines 2.5 15.7 0.00 0.01 13 n/a n/a
Singapore 24.2 28.6 0.00 0.50 859 n/a n/a
Taiwan 5.6 15.5 0.00 0.06 196 n/a n/a
Thailand 5.4 21.7 0.00 0.04 101 80.0 –
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. J.P. Morgan Securities Inc.
Joyce ChangAC (1-212) 834-4203 Juliet LimAC (1-212) 834-2516
joyce.chang@jpmorgan.com juliet.lim@jpmorgan.com

Number sovereign upgrades to Chart 7: EM sovereign rating upgrades are expected to exceed downgrades once again
exceed downgrades in 2010, while in 2010
ratings in DM countries will remain
under pressure Rating Upgrades Rating Downgrades Up/Down ratio
45 8.0
40 7.0
EMBIG average rating is expected to
35
move to investment grade in 2010 with 6.0
60% of the index in the investment 30
5.0
grade bucket
25
4.0
20
3.0
15
2.0
10
5 1.0

0 0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD 2010 F F
2009
* The total number of upgrades and downgrades include both S&P and Moody’s actions.
Source: J.P. Morgan

January 5, 2010 17
Emerging Markets Outlook and Strategy
J.P. Morgan Securities Inc. J.P. Morgan Securities Inc.
Joyce ChangAC (1-212) 834-4203 Gloria KimAC (1-212) 834-4153
joyce.chang@jpmorgan.com gloria.m.kim@jpmorgan.com

Assets under management for the Table 9: AUM benchmarked against EM indices increased to US$280 billion during 2009
external debt EMBI series increased to AUM ($mm)
US$217 billion at end-2009 compared to EM Indices December 2008 December 2009
US$200 billion at end-2008
Local Market Debt
GBI-EM Global Diversified 14,120 29,626
GBI-EM assets managed against the GBI-EM 9,045 11,913
index series increased to US$55 billion GBI-EM Diversified 4,775 8,193
from US$35.8 billion during the same GBI-EM Broad Diversified 6,455 5,070
time period GBI-EM Broad 50 105
GBI-EM Global 1,420 150

Assets under management for the EM Total 35,865 55,056

corporate market have attracted a small
following at US$6.4 billion External Debt
EMBI Global Diversified 120,152 144,274
EMBI Global 54,094 52,646
EMBI+ 24,750 20,639
Total 198,996 217,559

Corporate External Debt

CEMBI Broad Diversified - 4,942
CEMBI Diversified - 950
CEMBI Broad - 500
CEMBI - -
Total 0 6,392

TOTAL AUM managed against EM indices 234,861 279,007

Source: J.P. Morgan

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 Table 10: Heavy election calendar over the next two years in EM
countries between now and end-2011 Country Presidential Legislative/Parliamentary/Municipal
Latin America
Key elections to monitor in Latin Argentina October 2011
America: Colombia and Brazil Brazil First round: October 3, 2010 October 3, 2010
Second round: October 31, 2010
Colombia First round: May 30, 2010 March 14, 2010
Key elections to monitor in CEEMEA Second round: June 20, 2011
region: Ukraine and Latvia Costa Rica February 07, 2010 February 07, 2010
Dominican Republic May 16, 2010
Guatemala August 2011 August 2011
Mexico July 04, 2010
Peru April 2011 October 03, 2010
April 2011
Venezuela September 26, 2010
CEEMEA
Bahrain November 2010
Bulgaria October 2011
Central African Republic First round: March 2010 First round: March 2010
Croatia November 2011
Czech Republic June 2010
Egypt September 2011 May 2010
November 2010
Gabon December 2011
Hungary June 2010 April or May 2010
Iraq January 16, 2010
Latvia May 2011 October 02, 2010
Nigeria April 2011 April 2011
Poland First round: October 2010 Spring 2011 or October 2011
Russia December 2011
Turkey July 2011
Ukraine First round: January 17, 2010
Second round: February 2010
Emerging Asia
Philippines May 10, 2010 May 10, 2010
Singapore May 2011
Sri Lanka March 2010 March 2010
November 2011
Thailand 2H10
Vietnam June 2011
Source: www.electionguide.org

January 5, 2010 19
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