4Q | 2012

As of September 30, 2012

Guide to the Markets

Table of Contents

EQUITIES ECONOMY FIXED INCOME INTERNATIONAL ASSET CLASS U.S. Market Strategy Team
Dr. David P. Kelly, CFA Andrew D. Goldberg Joseph S Tanious CFA S. Tanious, Andrs Garcia-Amaya Brandon D. Odenath David M. Lebovitz Anthony M. Wile david.p.kelly@jpmorgan.com andrew.d.goldberg@jpmorgan.com joseph.s.tanious@jpmorgan.com joseph s tanious@jpmorgan com andres.d.garcia@jpmorgan.com brandon.d.odenath@jpmorgan.com david.m.lebovitz@jpmorgan.com anthony.m.wile@jpmorgan.com

4 17 32 41 55

www.jpmorganfunds.com/mi
Past performance is no guarantee of comparable future results.

Page Reference
Equities
4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 3 14. 15. 16. Returns by Style Returns by Sector S&P 500 Index at Inflection Points Bull and Bear Markets Stock Valuation Measures: S&P 500 Index Earnings Estimates and Valuations by Style Corporate Profits Sources of Earnings per Share Growth Confidence and the Capital Markets Deploying Corporate Cas ep oy g Co po ate Cash Broad Market Lagged Price to Earnings Ratio P/E Ratios and Equity Returns Equity Correlations and Volatility 34. 35. 36. 37. 38. 39. 40. Fixed Income Yields and Returns The Fed and the Money Supply The Fed Funds Rate: History and Expectations Credit Conditions High Yield Bonds Municipal Finance Emerging Market Debt

International
41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 50 51. 52. 53. 54. Global Equity Markets: Returns and Composition Global Economic Growth Global Monetary Policy y y The Importance of Exports The Impact of Global Consumers European Crisis: Fiscal Challenges European Crisis: Sovereign Bond Yields European Crisis: Financial System Risks Chinese Growth and Economic Policy Global Equity Valuations Developed Markets Global Equity Valuations Emerging Markets Emerging Market Equity Composition International Economic and Demographic Data Current Account Deficit and U.S. Dollar

Economy
17. 18. 18 19. 20. 21. 22. 23. 24. 25. 25 26. 27. 28. 29. 30. 31. Economic Growth and the Composition of GDP Cyclical Sectors Consumer Finances Federal Finances: Outlays and Revenues Federal Finances: Deficits and Debt Tax Rates and the Distribution of Income & Taxes U.S. Political Perspectives The Aftermath of the Housing Bubble Employment Employment and Income by Educational Attainment Consumer Price Index Returns in Different Inflation Environments 40 years Oil and the Economy Global Oil Supply Consumer Confidence and the Stock Market

Asset Class
55. 55 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. Asset Class Returns Correlations: 10-Years Mutual Fund Flows Dividend Income: Domestic and Global Global Commodities Gold Historical Returns by Holding Period Diversification and the Average Investor f Annual Returns and Intra-year Declines Cash Accounts Corporate DB Plans and Endowments The Dow Jones Industrial Average Since 1900

Fixed Income
32. Fixed Income Sector Returns 33. Interest Rates and Inflation

Returns by Style
Charts reflect index levels (price change only). All returns and annotations reflect total return, including dividends.
S&P 500 Index
1,500 ,

3Q 2012
Value Large Blend Growth

2012 YTD
Value Large Blend Growth

Equities

1,450 1,400 1,350 1,300 1 300

2012: +16.4% 3Q12: +6.4%

6.5%

6.4%

6.1%

15.7%

16.4%

16.8%

Mid

5.8%

5.6%

5.3%

Mid

14.0%

14.0%

13.9%

Small

1,250 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Sep-12

5.7%

5.3%

4.8%

Small

14.4%

14.2%

14.1%

S&P 500 Index

1,600 1 600 1,400 1,200

Since Market Peak (October 2007)

Large

Since Market Low (March 2009)

Value Large Blend Growth

Since 10/9/07 Peak: 2.7%

Value

Blend

Growth

-6.9%

2.7%

14.2%

132.2% 129.6% 132.9%

Mid

1,000 800 600 Dec-06 Feb-08

Since 3/9/09 Low: +129.6%

5.8%

8.3%

9.8%

Mid Small

170.3% 161.4% 153.8%

Small

2.3%

6.2%

9.6%

153.1% 156.2% 158.7%

Apr-09

Jun-10 Aug-11 Sep-12

Source: Russell Investment Group, Standard & Poors, FactSet, J.P. Morgan Asset Management. All calculations are cumulative total return including dividends reinvested for the stated period Since Market Peak represents period 10/9/07 return, period. 9/28/12, illustrating market returns since the most recent S&P 500 Index high on 10/9/07. Since Market Low represents period 3/9/09 9/28/12, illustrating market returns since the S&P 500 Index low on 3/9/09. Returns are cumulative returns, not annualized. For all time periods, total return is based on Russell-style indexes with the exception of the large blend category, which is reflected by the S&P 500 Index. Past performance is not indicative of future returns. Data are as of 9/30/12.

Returns by Sector
Di sc r. es ar e du st ria ls na nc ia ls St ap l og In d S& P
100.0% 100.0% 100.0% 6.4 Retur rn Div P/E 16.4 2.7 129.6 1.00 12.9x 12 9x 16.8x 15.2x 19.6x 2.1% 1.7%

Te le co m

at er ia ls

Te ch n

He al th

En er g

s.

s.

Co n

Co n

In

Ut il

Fi

iti

Equities

Russell Growth Weight Russell Value Weight

3Q 2012 2012 YTD Since Market Peak

(October 2007)

6.9 21.6 -51.4 165.1 1.39 10.7x 10 7x 12.9x 12.4x 15.9x 1.8% 2.1%

7.4 21.8 22.8 157.3 1.24 12.7x 12 7x 24.0x 15.9x 26.7x 1.5% 0.6%

6.2 17.8 23.3 98.7 0.64 12.8x 12 8x 18.6x 18.2x 24.1x 2.2% 1.5%

3.6 11.2 -4.9 161.4 1.17 12.5x 12 5x 17.0x 14.5x 20.4x 2.5% 1.8%

10.1 7.6 4.2 90.9 0.92 11.5x 11 5x 14.8x 10.9x 18.2x 2.3% 1.8%

7.5 21.4 34.7 211.7 1.11 15.1x 15 1x 18.7x 15.7x 19.6x 1.6% 1.0%

3.8 12.7 47.7 107.1 0.52 15.8x 15 8x 18.3x 18.6x 21.1x 2.9% 2.0%

8.1 25.9 13.5 116.8 0.84 18.3x 18 3x 17.5x 47.1x 19.4x 4.6% 3.8%

-0.5 4.3 8.5 90.0 0.51 14.9x 14 9x 13.6x 16.5x 14.3x 4.2% 4.4%

5.1 12.0 -3.2 130.6 1.28 12.7x 12 7x 16.2x 16.8x 19.6x 2.5% 2.1%

Since Market Low

(March 2009)

Beta to S&P 500

Forward P/E Ratio 15-yr avg. Trailing P/E Ratio 20-yr avg. Dividend Yield 20-yr avg.

Source: Standard & P R S St d d Poors, Russell I ll Investment G t t Group, F tS t J.P. Morgan Asset Management. FactSet, J P M A tM t All calculations are cumulative total return, not annualized, including dividends for the stated period. Since Market Peak represents period 10/9/07 9/28/12. Since Market Low represents period 3/9/09 9/28/12. Forward P/E Ratio is a bottom-up calculation based on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates. Trailing P/E ratios are bottom-up values defined as month-end price divided by the last 12 months of available reported earnings. Historical data can change as new information becomes available. Note that P/E ratios for the S&P 500 may differ from estimates elsewhere in this book due to the use of a bottom-up calculation of constituent earnings (as described) rather than a top-down calculation. This methodology is used to allow proper comparison of sector level data to broad index level data. Dividend yields are bottom-up values defined as the bottom up annualized value of the most recent cash dividend as a percent of month-end price. Beta calculations are based on 10 years of monthly price returns for the S&P 500 and its sub-indices. Past performance is not indicative of future returns. Data are as of 9/30/12.

Weight

S&P Weight

14.6% 4.3% 26.4%

20.1% 32.6% 6.3%

12.0% 11.9% 11.7%

9.8% 11.8% 9.1%

11.3% 4.1% 16.9%

11.0% 16.4% 7.9%

10.9% 12.7% 7.3%

3.3% 2.3% 3.8%

3.5% 0.2% 6.8%

3.5% 3.8% 3.9%

50 0

ol

es

ex

S&P 500 Index at Inflection Points

S&P 500 Index
1,600
Mar. 24, 2000 P/E (fwd.) = 25.6x

Characteristic Index level P/E ratio (fwd.) Dividend yield 10-yr. Treasury

Mar-2000 1,527 25.6x 1.1% 1 1% 6.2%

Oct-2007 1,565 15.2x 1.8% 1 8% 4.7%

Sep-2012 1,441 12.9x 2.1% 2 1% 1.6%

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

Equities

1,527 1 527

1,565

Sep. 28, 2012 p , P/E (fwd.) = 12.9x

1,441

1,400

+101%
1,200

+106% -57% -49%

1,000 1 000

+113% 113%

800
Dec. 31, 1996 P/E (fwd.) = 16.0x Oct Oct. 9, 2002 00 P/E (fwd.) = 14.1x Mar. 9, 2009 M 9 P/E (fwd.) = 10.3x

741
600 '97 '98 '99 '00 '01

777
'02 '03 '04 '05 '06

677
'07 '08 '09 '10 '11 '12

Source: Standard & Poors, First Call, Compustat, FactSet, J.P. Morgan Asset Management. Dividend yield is calculated as the annualized dividend rate divided by price, as p y yp provided by Compustat. Forward Price to Earnings Ratio is a bottom-up calculation based y p g p on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates. Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future results. Data are as of 9/30/12.

Bull and Bear Markets

Historical Bull Markets: Duration and Magnitude*
400% 600% '87 - '00

Bear Market Cycles vs. Subsequent Bull Runs

Market Peak 5/29/46 Market Low 5/19/47 Bear Market Return -28.6% Yrs. to Length of Length Bull Run Reach Old Decline of Run Peak 12 257.6% 122 3.1 yrs.

Equities

350% 550%

7/15/57

10/22/57

-20.7%

86.4%

50

0.9 yrs.

300%
12/12/61 6/26/62 -28 0% 28.0% 6 79.8% 79 8% 44 1.2 yrs. 1 2 yrs

Bull Ma arket Return (%)

250% '82 - '87 200% Average

'47 - '57
2/9/66 10/7/66 -22.2% 8 48.0% 26 0.6 yrs.

11/29/68

5/26/70

-36.1%

18

74.2%

31

1.8 yrs.

150%

1/5/73

10/3/74

-48.4%

21

125.6%

74

5.8 yrs.

Current Run

'74 - 80

11/28/80

8/12/82

-27.1%

20

228.8%

60

0.2 yrs.

100%

'02 - '07 '57 - '61 '70 - '73 '62 - '66 70 73 62 66 '66 - '68

8/25/87

12/4/87

-33.5%

582.1%

148

1.6 yrs.

50%

3/24/00

10/9/02

-49.1%

31

101.5%

60

4.6 yrs.

0% 0 50 100 150

10/9/07

3/9/09

-56.8% -35.0%

17 14 mo's

112.9%

43* 2.2 yrs.

Bull Market Length ( o t s) u a et e gt (months)

Average:

176.0% 68 mo's

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

Data are as of 9/30/12.

Stock Valuation Measures: S&P 500 Index

S&P 500 Index: Valuation Measures Valuation Measure Description P/E Price to Earnings P/B Price to Book P/CF Price to Cash Flow P/S Price to Sales PEG Price/Earnings to Growth Div. Yield Dividend Yield Historical Averages 3-year 5-year avg. avg.
12.8x 2.1 8.5 1.2 0.9 2.2% 13.0x 2.2 8.5 1.1 1.1 2.3%

Latest
12.9x 2.3 9.0 1.3 1.7 2.3%

1-year ago
10.8x 2.0 7.5 1.0 0.8 2.4%

10-year avg.
14.3x 2.5 9.8 1.3 1.2 2.1%

15-year avg.
16.8x 3.0 11.1 1.5 1.2 1.9%

Equities

S&P 500 Shiller Cyclically Adjusted P/E

50x

Adjusted using trailing 10-yr. avg. inflation adjusted earnings

S&P 500 Earnings Yield vs. Baa Bond Yield

10% 9%

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

40x 30x 20x 10x 0x

8%

3Q12: 22.2x Average: 19.0x

7% 6% 5% 4%

Moodys Baa Yield: 4.7%

'55

'60

'65

'70

'75

'80

'85

'90

'95

'00

'05

'10

3% '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

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

Earnings Estimates and Valuations by Style

S&P 500 Index: Forward P/E Ratio
28x

Current P/E vs. 20-year avg. P/E

Value Larg ge 11.6 14.0 12.3 14.0 13.0 14.2 14.4 17.1 14.1 16.3 16.2 21.3 Blend 12.9 16.2 16.6 21.8 Growth 15.2 21.0

24x

Equities

20x

16x

Sep. 2012: 12.9x

8x '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

S&P 500 Operating Earnings Estimates

Consensus estimates of the next twelve months rolling earnings
$120 $100 $80 $60 $40 $20 $0

Current P/E as % of 20-year avg. P/E

3Q12: $111.86 E.g.: Large Cap Blend stocks are 20.3% g g p cheaper than their historical average. Value Blend Growth

Large

Small

12x

Mid

Average: 16.2x

82.7%

79.7%

72.3%

Mid

87.8%

86.3%

75.9%

Small

91.2%

84.6%

75.8%

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

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

Corporate Profits
S&P 500 Earnings Per Share
$26

Operating basis, quarterly

Most recent: $25.43

Adjusted After-Tax Corporate Profits (% of GDP)

Includes inventory and capital consumption adjustments
11%

2Q07: $24.06

Equities

2Q12: 9.4% 9 4%

$23 $20 $17

10%

9%

8% $14 7% $11 6% $8 $5 $2 -$1 '02 '04 '06 '08 '10 '12 5%

50-yr. avg.: 6.2%

4%

3% '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

Source: Standard & Poors, Compustat, BEA, J.P. Morgan Asset Management. EPS levels are based on operating earnings per share. Most recently available data is 2Q12. Past performance is not indicative of future returns. Data are as of 9/30/12.

10

Sources of Earnings per Share Growth

S&P 500 Year-Over-Year EPS Growth
50%

Growth broken into revenue growth and margin expansion, quarterly

Margin Share of EPS Growth Revenue Share of EPS Growth

Equities

40% 30% 20% 10% 0% -10% -20% -30% -40% 2Q94 2Q96 2Q98 2Q00 2Q02

2Q04

2Q06

2Q08

2Q10

2Q12

Source: Standard & Poors, Compustat, J.P. Morgan Asset Management. EPS levels are based on operating earnings per share. Most recently available data is 1Q12. *2Q12 data are Standard & Poors estimates. Past performance is not indicative of future returns. 4Q2008, 1Q2010 and 2Q2010 reflect -101%, 92% and 51% growth in operating earnings, and are adjusted on the chart. Data are as of 9/30/12.

11

Confidence and the Capital Markets

Multiple Expansion and Contraction
S&P 500 forward P/E based on consensus EPS estimates
26x 24x

Est. impact of a 10pt. rise in sentiment: +2.0 multiple points* Consumer Sentiment
120 110 100 90 80 70

Forward P/E

Equities

22x 20x 18x 16x 14x 12x 10x '93 '94 '95 '96

Correlation Coefficient: 0.75

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

60 50

Sentiment & Real Yields

6% 5% 4% 3% 2% 1% 0% -1% '93 '94 '95 '96

Real yield based on nominal 10-yr. yield minus year-over-year core CPI
Real 10-year Yield

Est. Est impact of a 10pt. rise in sentiment: +54 basis points* 10pt Consumer Sentiment
120 110 100 90 80 70

Correlation Coefficient: 0.68

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

60 50

12

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

Deploying Corporate Cash

Corporate Cash as a % of Current Assets
30%

S&P 500 companies cash and cash equivalents, quarterly

28% 26% 24% 22% 20% 18% 16% 14% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Corporate Growth
$1,300 $1,200 $1 200 $1,100 $1,000 $900 $800 $ $700 $600 '00 '01 '02 '03

Nonfarm nonfinancial capex in billions USD, quarterly deal volume

Capital Expenditures M&A Activity
1,600 1,400 1 400 1,200 1,000 800 600 400 200 0 '04 '05 '06 '07 '08 '09 '10 '11 '12

Equities

Dividend Payout Ratio y

S&P 500 companies, LTM
60%

Cash Returned to Shareholders

$30

S&P 500 companies, rolling 4-quarter averages, billions USD

$160

Dividends per Share

$27

$140 $120

50%
$24

$100 $80 $60

40%
$21

30%

$18 $15

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

$40 $20

20%

'00 '01

'02

'03

'04

'05 '06

'07

'08 '09

'10

'11 '12

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

13

Broad Market Lagged Price to Earnings Ratio

Lagged P/E Ratio All U.S. Corporations
35x

Ratio of market value of all U.S. corporations to adjusted after-tax corporate profits for prior four quarters

Equities

30x

P/E Ratios Avg. During Recessions 12.6x 13.9x 13.2x

25x

Avg. During Expansions September 30, 2012

20x

15x

Average: 13.7x

10x

Sep. 30, 2012*: 13.2x

5x

0x '52 '55 '58 '61 '64 '67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 '12
Source: BEA, Federal Reserve Board, Wilshire Associates, J.P. Morgan Asset Management. *The September 28, 2012 price is a J.P. Morgan Asset Management estimated based on the daily value of the Wilshire Total Market Index. Data are as of 9/30/12.

14

P/E Ratios and Equity Returns

P/E and Total Return Over 1-yr. Periods
Quarterly, 1Q 1952 to 2Q 2011
60%

P/E and Total Return Over 5-yr. Annualized Periods

Quarterly, 1Q 1952 to 2Q 2007
60%

Current P/E: 13.2

Current P/E: 13.2

Equities

40%

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

40%

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

20%

20%

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

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

-20%

-20%

-40%

-40%

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

15

Equity Correlations and Volatility

Large Cap Stocks
Correlations Among Stocks
70% 60% 50% 40% 30% 20% 10% 0% '26 '32 '38 '44 '50 '56 '62 '68 '74 '80 '86 '92 '98 '04 '10

Sovereign Debt Crisis Lehman Bankruptcy

Equities

Great Depression / World War II Cuban Missile Crisis OPEC Oil Crisis

1987 Crash

Tech Bust & 9/11

Average: 26.7%

Sep. 2012: 40.9%

Daily Volatility of DJIA

3.5% 3.0% 2.5% 2.0% 2 0%

DJIA vol. shown in 3-month moving average

Volatility Measure 08 Peak DJIA (Left) 3.30% VIX (Right) 80.9

Average 0.72% 20.5

Latest 0.51% 15.7

90 75 60 45

1.5% 1.0% 0.5% 0.0% '30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 Source: (Top) Empirical Research Partners LLC, Standard & Poors, J.P. Morgan Asset Management. Capitalization weighted correlation of top 750 stocks by market capitalization, daily returns, 1926 Sep. 28, 2012. (Bottom) CBOE, Dow Jones, J.P. Morgan Asset Management. DJIA volatility are represented as three-month moving averages of the daily absolute percentage change in the Dow Jones Industrial Average. Charts shown for illustrative purposes only. Data are as of 9/30/12. '10 30 15 0

16

Economic Growth and the Composition of GDP

Real GDP
% chg at annual rate
10%

Components of GDP
20-yr avg. 2Q12 Real GDP: 2.5% 1.3%
$16,000 $14,000
$625 bn of output lost p

2Q12 nominal GDP, billions, USD

$18,000

8% 6%

2.4% Housing 10.7% Investment ex-housing 19.6% Govt Spending G t S di

Econom my

4% 2% 0% 2% -2% -4% -6% -8% -10% '04 '06

$12,000 $12 000 $10,000 $8,000

$848 b of bn f output recovered

$6,000 $4,000 $2,000 $0

71.0% Consumption

- 3.7% Net Exports

'08 '10 '12
-$2,000

Source: BEA, FactSet, J.P. Morgan Asset Management. GDP values shown i l l h in legend are % change vs. prior quarter annualized and reflect 2Q12 GDP d h i t li d d fl t GDP. Data are as of 9/30/12.

17

Cyclical Sectors
Light Vehicle Sales
24 22 20 18 16

Change in Private Inventories

150 100 50

Millions, seasonally adjusted annual rate

Billions of 2005 dollars, seasonally adjusted annual rate

2Q12: 41.4 Q

Aug. 2012: 14.5 Average: 15.1

0 -50 100 -100 -150 -200

Econom my

14 12 10 8 '94 '96 '98 '00

Average: 28.3

'02

'04

'06

'08

'10

'12

'95

'00

'05

'10

Thousands, seasonally adjusted annuall rate Th d ll dj t d t

2,400

Housing Starts

Real Capital Goods Orders

75 70

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

2,000
65

1,600
60

1,200 800 400 0 '95 '00

Average: 1 388 1,388

Average: 57.4

55 50

Aug. 2012: 750

'05 '10

45 40 '98 '00 '02 '04 '06 '08 '10

Aug. 2012: 53.4

'12

Source: (Top left) BEA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, FactSet, J.P. Morgan Asset Management. (Bottom left) Census Bureau, FactSet, J.P. Morgan Asset Management. (Bottom right) Census Bureau, FactSet, J.P. Morgan Asset Management. Capital goods orders deflated using the producer price index for capital goods. Data are as of 9/30/12.

18

Consumer Finances
Consumer Balance Sheet
Trillions of dollars outstanding, not seasonally adjusted
$80

Personal Savings Rate Annual, % of disposable income

12% 10% 8%

Total Assets: $76 1 tn Assets $76.1

2Q-07 Peak: $81.5tn 1Q-09 Low: $65.2tn

YTD 2012: 4.2%

$70

Homes: 25%

6% 4%

Econom my

$60

Other tangible: 7%
$50

2% 0% '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

Deposits: 10%

$40

Pension funds: 18% Revolving (e.g.: credit cards): 6% Non-revolving: 14% Other Liabilities: 7% Other financial assets: 40% Total Liabilities: $13.5 tn

Household Debt Service Ratio Debt payments as % of disposable personal income, seasonally adjusted
15% 14% 13% 12% 11%

$30

3Q07: 14.1%

$20

$10

1Q80: 11.1%

Mortgages: 73%
$0

3Q12*: 10.5%

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

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

19

Federal Finances: Outlays and Revenues

The 2012 Federal Budget
CBO Baseline forecast, trillions USD
$4.0

1960 2012, % of GDP

26%

Federal Outlays and Receipts

Total Spending: $ $3.6tn

$3.5

Other $482bn (14%) Net Int.: $220bn (6%) Non-defense Non defense Discretionary: $620bn (17%) Defense: $669bn (19%)

24%

$3.0

Econom my

Borrowing: $1,128bn (32%)

22%

2012*: 24.3%

$2.5

$2.0

20%

Average: 20.5%

$1.5

$1.0

Social Security: $768bn (22%)

Revenues: $2,435bn (68%)

18%

Average: 17.9%
16%

$0.5

Medicare & Medicaid: $804bn (23%)

Total Government Spending Sources of Financing

Revenues Outlays

2012*: 15.8%

$0.0
Source: U.S. T S U S Treasury, BEA CBO J P Morgan Asset M BEA, CBO, J.P. M A Management.

14% 1960

1970

1980

1990

2000

2010

2012 Federal Budget is based on the CBOs August 2012 Baseline Scenario. *2012 revenues and outlays are forecasts from the Congressional Budget Office (CBO). Note: Years shown are fiscal years (Oct. 1 through Sep. 30). Data are as of 9/30/12.

20

Federal Finances: Deficits and Debt

Federal Budget Surplus/Deficit % of GDP, 2007 2022
-12%

Federal Debt (Accumulated Deficits) % of GDP, 2007 2022

Fiscal Ledge Fiscal Ladder -8.7% 8 7% -7.3% -5.7% -8.7% 8 7% -7.3% -6.5% 80%

Fiscal Cliff 2011 Actual 2012 Est. 2013 Proj. -8.7% 8 7% -7.3% -4.0%

100%

Forecast 2022*: 83.2% 2011 actual: 67.7%

-10%

Econom my

Forecast
-8%

2022 : 2022*: 75.1% Fiscal Ladder Scenario Fiscal Ledge Scenario Fiscal Cliff
60%

2022: 58.5% Fiscal Ladder Scenario Fiscal Ledge Scenario Fiscal Cliff

-6%

40%
-4%

20%
-2%

Fiscal Cliff 2011 Actual 2012 Est. 2022 Proj. 67.7% 67 7% 72.8% 58.5%

Fiscal Ledge Fiscal Ladder 67.7% 67 7% 72.8% 75.1% 67.7% 67 7% 72.8% 83.2%

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

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

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

21

Tax Rates and the Distribution of Income & Taxes

Historical Average Maximum Tax Rates by Decade
100% 80% 60%

Share of Income and Taxes by Income Level

Based on adjusted gross income and federal taxes, 2009
Income

Dividends

Wage Income
40%

5% to 25% 34.1% Top 5% 31.7% Bottom 75% 34.2%

Econom my

Capital Gains
20% 0%

1930's

1940's

1950's

1960's

1970's

1980's

1990's

2000's

Current

Current and scheduled 2013 maximum federal tax rates under current law
60% 50% 40% 30% 20% 10% 0% Wage Income Capital Gains* Dividends* Payroll Tax** Estate Tax*** 15.0% 37.9% 23.8% 15.0% 10.4% 12.4%

Potential Tax Rate Changes

2012
43.4%

Taxes
55.0%

Scheduled 2013
43.4% 35.0%

Top 5% 58.7%

5% to 25% 28.6%

Bottom 75% 12.7%

22

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

U.S. Political Perspectives

Political Polarization
% of Representatives voting with the majority of their party*
100% 95%

Congressional & Presidential Approval Ratings

90% 80%

Senate House

70% 60% 50% 40%

90% 85%

Econom my

80% 30% 75% 70% 1901 20% 10% 1941 1951

Presidential Congressional
1961 1971 1981 1991 2001 2011

1919

1937

1955

1973

1991

2009

Political Party Dominance

Democratic % of major party seats
80%
Democratic President

Parties identified as President/Senate/House number of years 1937 2011 President/Senate/House, years, 1937-2011
20% 18% 17.4% 15.4%

Annual Market Returns by Political Party Control

70%

Senate House

16% 14% 12% 10% 8% 6% 4% 2%

60%

10.6% 6.5%

50%

0% RRR (6) 1939 1951 1963 1975 1987 1999 2011 Source: U.S. House of Representatives, U.S. Senate, Gallup Inc., FactSet, J.P. Morgan Asset Management. 40%

RSPLIT (30)

DDD (30)

DSPLIT (9)

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

23

Data are as of 9/30/12.

The Aftermath of the Housing Bubble

Home Prices
Indexed to 100, seasonally adjusted 160
Case Shiller 20-city FHFA Purchase Only

Monthly Rent vs. Monthly Mortgage Payment

Vacant properties
$1,100 $950 $ $800 $650

150

Average Existing Home

Monthly Mortgage Payment

3Q12*: $725

Econom my

140

$500 $350

Monthly Rent

3Q12*: $477

130

$200 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

Home Inventories
120
Millions, annuall rate, seasonally adjusted Milli t ll dj t d
4.5 4.0

110

3.5 3.0 30

100

2.5 2.0

Aug. 2012: 2.4

90 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

1.5

'94

'96

'98

'00

'02

'04

'06

'08

'10

'12

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

24

Data are as of 9/30/12.

Employment
Civilian Unemployment Rate
Seasonally adjusted
12%

Employment Total Private Payroll

Total job gain/loss (thousands)
600

11%

400

10%

Econom my

200

8.9mm jobs lost

9% 0 8%

Aug. 2012: 8.1%

-200

7% -400 6% -600 5%

4.6mm jobs gained

50-yr. avg.: 6.1%

-800

4%

3% '70 '80 '90 '00 '10

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

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

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

25

Employment and Income by Educational Attainment

Unemployment Rate by Education Level
18%

Average Annual Earnings by Highest Degree Earned

Full-time workers aged 25 and older, 2009, USD
$90,000

$87,194

16%

14%

Less than High School Degree High School No College Some College College or Greater Aug. Aug 2012: 12.0%

$80,000

+31K
$70,000

Econom my

12%

Aug. 2012: 8.8%

$60,000

$56,665

10%

$50,000

8%

+26K
$40,000 $40 000

6%

Aug. 2012: 6.6% Aug. 2012: g 4.1%

$30,627
$30,000

4%

$20,000

2%

$10,000

0% '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Source: BLS FactSet J P Morgan Asset Management BLS, FactSet, J.P. Management. Unemployment rates shown are for civilians aged 25 and older. Data are as of 9/30/12.

$0 High School Graduate Bachelor's Degree Advanced Degree

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

26

Consumer Price Index

% change vs. prior year, seasonally adjusted
15%

CPI and Core CPI

50-yr. Avg. Aug. 2012

CPI Components Food & Bev. Housing Apparel Transportation

Weight in CPI 15.3% 41.0% 3.6% 16.9% 7.1% 6.0% 6.8% 3.4% 100.0%

12-month Change 2.0% 1.4% 1.6% 1.4% 4.1% 1.2% 1.5% 2.4% 1.7%

Headline CPI: Core CPI:

4.2% 4.1%

1.7% 1.9%

12%

Econom my

9%

Medical Care Recreation

6%

Educ. & Comm. Other

3%

Headline CPI Less:

0%

Energy Food

9.7% 13.7% 76.6%

-0.6% 2.0% 1.9%

-3% '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
Source: BLS, FactSet, J.P. Morgan Asset Management. CPI values shown are % change vs. 1 year ago and reflect August 2012 CPI data. CPI component weights are as of December 2011 and 12-month change reflects non-seasonally adjusted data through August 2012. Core CPI is defined as CPI excluding food and energy prices. Data are as of 9/30/12.

Core CPI

27

Returns in Different Inflation Environments 40 years

Rising inflation scenarios Falling inflation scenarios

High and Rising Inflation

Occurred 14 times since 1972
25% 20% 15% 10% 5% 2% 7% 13%

High and Falling Inflation

Occurred 6 ti O d times since 1972 i
25% 20% 15% 10% 5% 0% -5% -10% -15% -15% Bonds Equities Cash Commodities 18% 8% 23%

Econom my

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

Equities

Cash

Commodities

Low and Rising Inflation

Occurred 7 times since 1972
25% 20% 15% 10% 5% 0% -5% -10% -15% Bonds Equities Cash Commodities 6% 3% 20% 17%

Low and Falling Inflation

Occurred 13 times since 1972
25% 20% 15% 10% 5% 0% -5% -10% -15% Bonds Equities Cash Commodities 8% 12% 4% 6%

Median Inflation: 3.3%

28

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

Above median e Below medi ian

Oil and the Economy

WTI Crude Oil & Retail Gasoline Prices
$4.50

Economic Drag From Oil Prices

Oil
$160

Gas
Oil Gas

12/31/00 $26.72 $1.41 $1 41

9/30/12 $92.19 $3.83 $3 83

U.S. petroleum imports as a % of GDP

4%

3Q12*: 2.9% 3Q08: 3.8%

$4.00

$140
3%

$3.50

$120

2%

Econom my

$3.00

$100

1%

$2.50

$80

0% '70

'75

'80

'85

'90

'95

'00

'05

'10

Oil Prices and Consumption per Country p p y

$2.00 $60

Gasoline price per gallon, USD, annual barrels of oil consumed per capita

Energy Spending by Income Level $12

% of after-tax income per Gallon (Left) Gasoline Price
$8.67 $8.06 $8 $6 $3.97 $10 $8.48

Annual Barrels of Oil Consumed per Capita (Right)

30bbls 25bbls 20bbls

$1.50

$40

$5.38

$5.22

15bbls 10bbls 5bbls 0bbls

$1.00

$20

$4 $2

$0.50 '94

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

$ $US UK France Germany China India

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

Source: U.S. Department of Energy, FactSet, J.P. Morgan Asset Management. Price of gas based on U.S. retail national average of all formulations and WTI for crude. Data are as of 9/30/12.

29

Global Oil Supply

Middle East Energy Production & Chokepoints
Percent of global liquid fuel production, 2011
Syria 0.5% Kuwait 3.1%

Days of net imports

250 200 150 100 50

U.S. Commercial & Strategic Oil Stocks

Aug. 2012: 235 days

Suez Canal 2.2%

Oct. 2005: 129 days

Econom my

Iraq 3.0% Libya 0.6%

Iran 4.9%

U.S. Commercial Oil Stocks

Egypt 0.8%

Saudi Arabia 12.8% Strait of Hormuz 17.0% 17 0% UAE 3.6%

U.S. Strategic Petroleum Reserve

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

Sudan S d 0.5%

OPEC Surplus Production Capacity

Millions of barrels per day
6 5 4 3

EIA forecast

Bab el-Mandeb el Mandeb 3.4%

Major Producers Percent of global total, 2011 Saudi Arabia 13% China Russia 12% Iran United States 12% Canada 5% 5% 4% Major Consum ers Percent of global total, 2011 United States 22% India 4% China 10% Saudi Arabia 3% Japan 5% Brazil 3%

Average: 2.7mm bbl/day

2 1 0 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Source: EIA, J.P. Morgan Asset Management. Forecast from the September EIA Short Term Energy Outlook.

30

Data are as of 9/30/12.

Consumer Confidence and the Stock Market

Consumer Sentiment Index University of Michigan
130
Average 12-month S&P 500 index return After a peak: +1 1% +1.1% After a trough: +22.2% +22 2% Total period: +6.6% +6 6%

120

Jan. 2000 -2.0%

110

Econom my

Aug. 100 Aug 1972 -6.2%

90

May 1977 +1.2%

Mar. Mar 1984 +13.5%

Jan. 2004 +4.4% Jan. 2007 -4.2%

Average: 85.3
80

70

Mar. 2003 +32.8% Oct. 2005 +14.2% Oct. 1990 +29.1% May 1980 +19.2%
'78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04

60

50

Feb. 1975 +22.2%

Nov. 2008 +22.3%

Aug. 2011 +15.4%

40 '72 '74 '76 '06 '08 '10 '12

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

31

Data are as of 9/30/12.

Fixed Income Sector Returns

2002
TIPS 16.6% EMD 12.2% Treas. 11.8% 11 8% Barclays Agg 10.3% Corp. 10.1% Asset Alloc. 10.0% Muni 9.6% MBS 8.7% High Yield

2003
High Yield 29.0% EMD 26.9% Asset Alloc. 9.7% 9 7% TIPS 8.4% Corp. 8.2% Muni 5.3% Barclays Agg 4.1% MBS 3.1% Treas.

2004
EMD 11.9% High Yield 11.1% TIPS 8.5% 8 5% Asset Alloc. 6.3% Corp. 5.4% MBS 4.7% Muni 4.5% Barclays Agg 4.3% Treas.

2005
EMD 12.3% Asset Alloc. 3.6% Muni 3.5% 3 5% TIPS 2.8% Treas. 2.8% High Yield 2.7% MBS 2.6% Barclays Agg 2.4% Corp.

2006
High Yield 11.8% EMD 10.0% MBS 5.2% 5 2% Asset Alloc. 5.1% Muni 4.8% Barclays Agg 4.3% Corp. 4.3% Treas. 3.1% TIPS

2007
TIPS 11.6% Treas. 9.0% Barclays Agg 7.0% 7 0% MBS 6.9% Asset Alloc. 6.2% EMD 5.2% Corp. 4.6% Muni 3.4%

2008
Treas. 13.7% MBS 8.3% Barclays Agg 5.2% 5 2% Asset Alloc. -1.4% TIPS -2.4% Muni -2.5% Corp. -4.9% EMD -14.7%

2009
High Yield 58.2% EMD 34.2% Corp. 18.7% 18 7% Asset Alloc. 15.8% Muni 12.9% TIPS 11.4% Barclays Agg 5.9% MBS 5.9% Treas.

2010
High Yield 15.1% EMD 12.8% Corp. 9.0% 9 0% Asset Alloc. 7.6% Barclays Agg 6.5% TIPS 6.3% Treas. 5.9% MBS 5.4% Muni

2011
TIPS 13.6% Muni 10.7% Treas. 9.8% 9 8% Asset Alloc. 8.9% Corp. 8.1% Barclays Agg 7.8% EMD 7.0% MBS 6.2% High Yield

2012 YTD
EMD 14.2% High Yield 12.1% Corp. 8.7% 8 7% Asset Alloc. 6.7% TIPS 6.2% Muni 6.1% Barclays Agg 4.0% MBS 2.8% Treas.

3Q12
EMD 6.8% High Yield 4.5% Corp. 3.8% 3 8% Asset Alloc. 2.7% Muni 2.3% TIPS 2.1% Barclays Agg 1.6% MBS 1.1% Treas.

10-yrs '02 - '11 Cum. Ann.

EMD 185.6% High Yield 133.6% TIPS 107.5% 107 5% Asset Alloc. 96.0% Corp. 85.2% Barclays Agg 75.4% Treas. 74.3% MBS 73.9% Muni EMD 11.1% High Yield 8.9% TIPS 7.6% 7 6% Asset Alloc. 7.0% Corp. 6.4% Barclays Agg 5.8% Treas. 5.7% MBS 5.7% Muni

Fixed In ncome

High Yield High Yield

-1.4% 2.2% 3.5% 1.7% 0.4% 1.9% -26.2% -3.6% 2.4% 5.0% 2.1% 0.6% 68.8% 5.4% Source: Barclays Capital, FactSet, J.P. Morgan Asset Management. Past performance is not indicative of future returns. Fixed income sectors shown above are provided by Barclays Capital and are represented by: Barclays Capital U.S. Aggregate Index; MBS: Fixed Rate MBS Index; Corporate: U.S. Corporates; Municipals: Muni Bond Index; Emerging Debt: Emerging Markets Index; High Yield: Corporate High Yield Index; Treasuries: Barclays Capital U.S. Treasury; TIPS: Barclays Capital TIPS. The Asset Allocation portfolio assumes the following weights: 10% in MBS, 20% in Corporate, 15% in Municipals, 10% in Emerging Debt, 10% in High Yield, 25% in Treasuries, 10% in TIPS. Asset allocation portfolio assumes annual rebalancing.

32

Data are as of 9/30/12.

Interest Rates and Inflation

Nominal and Real 10-year Treasury Yields
20%

Sep. 30, 1981: 15.84%

15%

Nominal Yields Real Yields

Average 9/30/12 6.46% 1.65% 2.58% -0.27%

10%

Nominal 10-year Treasury Yield Sep. 30, 2012: 1.65%

Fixed In ncome

5%

0%

Sep. 30, 2012: -0.27%

-5%

Real 10-year Treasury Yield

-10% 10% '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
Source: Federal Reserve, BLS, J.P. Morgan Asset Management. Real 10-year Treasury yields are calculated as the daily Treasury yield less year-over-year core inflation for that month except for September 2012, where real yields are calculated by subtracting out August 2012 year-over-year core inflation.

33

Data are as of 9/30/12.

Fixed Income Yields and Returns

Yield U.S. Treasuries 2-Year 5-Year 10-Year 30-Year Sector Broad Market MBS 7,967 861 4,231 46,180 525 1,931 33 $16,815 bn 5,052 3,551 1,339 798 1,082 823 6.7 years 3.8 10.7 13.7 11.1 11 1 6.7 9.2 1.61% 1.77 2.79 2.17 4.61 4 61 6.51 1.46 2.35% 2.82 3.83 3.02 6.59 6 59 9.51 1.86 3.99% 2.80 8.66 6.06 14.19 14 19 12.13 6.25 1.58% 1.13 3.83 2.32 6.77 6 77 4.53 2.12
Change in bond price is calculated using b th d ti and convexity i both duration d it according to the following formula: New Price = (Price + (Price * -Duration * Change in Interest Rates))+(0.5 * Price * Convexity * (Change in Interest Rates)^2) *Calculation assumes 2-year Treasury interest rate f ll 0 23% t 0.00% and i t t t falls 0.23% to 0 00% d the 5-year Treasury falls 0.62% to 0.00%, as interest rates can only fall to 0.00%. Chart is for illustrative purposes only. Past performance is not indicative of comparable future results. Data are as of 9/30/12.

Return 2012 YTD 0.25% 2.30 4.37 3.66 3Q12 0.21% 0.83 0.93 -0.28

Source: U.S. Treasury, Barclays Capital, FactSet, J.P. Morgan Asset Management. Fixed income sectors shown above are provided by Barclays Capital and are represented b B d M k t U S t d by Broad Market: U.S. Barclays Capital Index; MBS: Fixed Rate MBS Index; Corporate: U.S. Corporates; Municipals: Muni Bond Index; Emerging Debt: Emerging Markets Index; High Yield: Corporate High Yield Index. TIPS: Treasury Inflation Protection Securities (TIPS). Treasury securities d t f # of issues T iti data for fi and market value based on U.S. Treasury benchmarks from Barclays Capital. Yield and return information based on Bellwethers for Treasury securities.

# of issues

Mkt. Value Avg. Maturity 2 years

9/30/2012 0.23% 0.62 1.65 2.82

9/30/2011 0.25% 0.96 1.92 2.90

# of issues: 164 Total value: $5.067 tn

5 10 30

Fixed In ncome

Corporates Municipals Emerging Debt High Yield TIPS

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

25% 20.1% 20% 15% 9.1% 10% 3.0% 5% 0.5% 0% -5% -2.0% -4.9% -10% -9.1% 9 1% -15% -20% -20.1% -25% 2-Year 5-Year 10-Year 30-Year

+1% -1%

2.3% -2.4%

4.0%

4.8%

5.3%

6.8%

6.9%

7.2%

-4.0%

-4.9%

-5.3%

6.8% -6.8%

-6.9% 6.9%

-7 2% 7.2%

MBS

High Yield Broad Mkt.

TIPS

EMD

Munis

Corp.

34

The Fed and the Money Supply

Feds Balance Sheet: Assets
$ trillions
$3.5tn $3.0tn $ $2.5tn $2.0tn $1.5tn $1.0tn $1 0t $0.5tn

Money Multiplier
M2 / Monetary Base
10x 9x 8x 7x 6x 5x 4x 3x 2x '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Other Oth U.S. Treasuries Agency MBS

Aug. 2012: 3.8x

Fixed In ncome

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

Feds Balance Sheet: Liabilities

$ trillions t illi
$3.0tn $2.5tn $2.0tn

Money Supply Growth

Year-over-year growth in M2
14% 12% 10%

Aug. 2012: 6.3%

Monetary Base
$1.5tn $1 5tn $1.0tn $0.5tn $0.0tn '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

8% 6% 4% 2% 0% '85 85 '90 90 '95 95 '00 00 '05 05 '10 10

Excess Reserves

Source: Federal Reserve, FactSet, J.P. Morgan Asset Management. Monetary base is defined as the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. Money multiplier defined as M2 divided by the monetary base. Data are as of 9/30/12.

35

The Fed Funds Rate: History and Expectations

Federal Funds Rate & FOMC Interest Rate Projections
12%

10%

8%

Fixed In ncome

6%

Long-term Fed projection

4%

2%

Sep. 30, 2012: 0.0%-0.25%

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

Source: Federal Reserve, J.P. Morgan Asset Management. Fed Funds Rate projections are based on an average of the FOMC interest rate projections for a given year. Data are as of 9/30/12.

36

Credit Conditions
Lending Standards for Approved Mortgage Loans
Average FICO score based on origination date
760 740 720 700 680 660 640

Consumer & Industrial Loan Demand

Net percent of banks reporting stronger demand
60% 40% 20% 0% -20% -40% -60% -80%

Aug. 2012: 750

31%

22% Small Firms Large & Medium Firms

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

Fixed In ncome

620 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Delinquency Rates
All b k seasonally adjusted banks, ll dj t d
12% 10% 8% 6% 4% 2% '92 '94 '96 '98 '00 '02 '04 '06 '08

Common Equity as a % of Total Assets

All FDIC insured institutions 1934 2011 institutions,
10.6%
14% 12% 10% 8%

Residential Mortgages Consumer Loans Commercial and Industrial Loans

2011: 11.1%

Average: 7.6%

2.8% 1.4%
'10 '12

6% 4% '97 97 '04 04 '11 11

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

37

High Yield Bonds

High Yield Spreads and Defaults
20%

HY Spreads HY Defaults Spreads S d Default Rates

Average 5.9% 4.2%

Latest 5.9% 1.8%

15%

10%

5%

0%

Fixed In ncome

'88

'90

'92

'94

'96

'98

'00

'02

'04

'06

'08

'10

'12

Historical High Yield Recovery Rates g yield bonds, cents on the dollar High y e d bo ds, ce ts o t e do a
70 60 50 40 30 20 10 0 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

Annual Flows into High Yield Mutual Funds & ETFs Billions US o s USD YTD 2012: $35 0 $35.0
$40bn $30bn

Average: 39.2

$20bn $10bn $bn -$10bn -$20bn '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

38

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

Municipal Finance
Muni/Treasury Ratio Ratio of Barclays 10-year Municipal Bond yield to 10-year Treasury
240%

State & Local Government Debt Service Percent of current expenditures

8%

220%

7%

6% 200% 5% 180%

2Q12: 5.1%

Fixed In ncome

160%

Sep. 30, 2012: 122%

4% '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

140%

Municipal Bond Issuance* o s USD, e e ue and ssues Billions US , revenue a d GO issues

$500

120%

$400 $300

100%
$200 80% $100 60% '98 '00 '02 '04 '06 '08 '10 '12 $0 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Source (Left chart): Barclays Capital, U.S. Treasury, FactSet, J.P. Morgan Asset Management. (Top right) BEA, J.P. Morgan Asset Management. (Bottom right) SIFMA, J.P. Morgan Asset Management. *Excludes maturities of 13 months or less and private placements. 2012 issuance data is as of August 2012. Data are as of 9/30/12.

39

Emerging Market Debt

Index Breakdown USD Denominated EMD
100% 80% 60% 40% 20%
Asia 18% Middle East & Africa 7% Middle East & Africa 10%

Emerging Markets Debt Spreads

12% 10%

Spread to Treasuries of USD-denominated debt, percent

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

Latin America 43%

Latin America 39% Europe 16%

8% 6%

Europe 32% Asia 35%

4% 2% 0% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

0%

Fixed In ncome

EMBIG

CEMBI

Emerging Market Debt Credit Rating

EMBIG average monthly credit rating, inverse scale g y g
Aug. Aug 2012: BBB BBBBBBBB+ BB BBB+ B B-

Annual Flows into EMD Mutual Funds & ETFs

Billions USD
$20bn $16bn $12bn $8bn $4bn $bn -$4bn

YTD 2012 $16 7 2012: $16.7

'93

'95

'97

'99

'01

'03

'05

'07

'09

'11

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

40

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

Global Equity Markets: Returns and Composition

3Q12 Country / Region Local USD YTD 2012 Local USD

Weights in MSCI All Country World Index

% global market capitalization

Regions / Broad Indexes USA (S&P 500) EAFE Europe ex U K ex-U.K. Pacific ex-Japan Emerging Markets MSCI: Selected Countries United Kingdom France 4.0 5.9 12.4 -3.2 -3 2 4.7 9.0 5.3 6.0 60 7.1 7.4 13.9 -0.8 -0 8 4.7 15.4 4.8 9.4 94 6.5 11.7 22.8 3.6 36 8.9 24.5 5.4 8.9 89 10.7 10.7 21.7 2.4 24 9.1 25.4 -3.1 11.6 11 6
Emerging Markets 50%

Europe exex U.K. 15% United States 47% U.K. 8% Emerging Markets 13% Japan 7%

4.7 8.0 80 9.5 6.0

6.4 7.0 9.7 97 11.0 7.9

9.6 13.1 13 1 15.5 11.4

16.4 10.6 12.8 12 8 17.6 12.3

Share of Global GDP

Based on purchasing power parity

United States 19% Japan 5% Europe exU.K. 17% U.K. 3%

International

Germany Japan China India Brazil Russia R i

Canada 2%

Other Developed 4%

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

41

Global Economic Growth

Emerging Market Country Real GDP Growth
Year-over-year % chg. forecasts from JPMSI
10% 8% 6% 4% 2% 0% -2% -4% Emerging Markets China India Russia Mexico South Africa Korea Brazil

Historical 3Q11 4Q11 1Q12 2Q12 3Q12

JPMSI Forecast 4Q12 1Q13 2Q13

Developed Market Country Real GDP Growth

Year-over-year % chg. forecasts from JPMSI
10% 8%

Historical 3Q11 4Q11 1Q12 2Q12 3Q12

JPMSI Forecast 4Q12 1Q13 2Q13

International

6% 4% 2% 0% -2% -4% Developed Countries Japan Canada U.S. Germany France U.K. Italy

Source: J.P. Morgan Global Economic Research, J.P. Morgan Asset Management. Forecast and aggregate data come from J.P. Morgan Global Economic Research. Data are as of 9/30/12.

42

Global Monetary Policy

Central Bank Assets Percent of Nominal GDP
35% 30% 25% 20% 15% 10% 5% 0% '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Real Policy Rates Monthly

4% 3%

Bank of Japan European Central Bank

2% 1% 0% -1%

U.S. Federal Reserve

-2% -3% '02 '03

Emerging Markets Developed Markets

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

Country Level Monetary Policy and Inflation

14.0% 10.5% 7.0%

Target Policy Rate

Inflation Rate

Real Policy Rate

International

3.5% 0.0% -3.5%

South Africa

Indonesia

Thailand

Hong Kong

Euro area

Colombia

Canada

Australia

Taiwan

Mexico

Poland

Russia

Turkey

Japan

Korea

Developed M k t D l d Markets

Emerging M k t E i Markets

43

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

China

India

-7.0%

U.K.

U.S.

Brazil

The Importance of Exports

Exports as a % of GDP 2011
Goods exports only
Brazil India China Russia
0.8% 1.0% 2.1% 1 0% 2 1% 2.2% 2 2% 4.9% 4 9%

10.3% 10 3%
10.2%

US
17.6%
15.5%

Eurozone

BRIC

Other

Total

2.0%

3.1%

2.3%

4.5%

4.4%

1.7%

26.1% 26.8% 6 8%

9.5%

2.1%

14.4%

U.S. Japan U.K. France

1.5% 1.4%

6.9%

9.8%
6.2%

2.2%

1.7%

4.0%

14.0%
1.3% 4.8%

1.9%

10.0%

18.0%
5.8%

1.1%

12.7%

1.5%

21.1%
7.6%

International

Italy Canada Germany

1.4%

12.4%

2.0%

23.4%
1.6% 2.8%

19.2%

2.5%

26.0%
4.2% 10.7%

2.2%

21.8%

38.9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Source: IMF J P Morgan Asset Management IMF, J.P. Management. Numbers represent exports of goods only and would be higher if services were included. Data are as of 9/30/12.

44

The Impact of Global Consumers

Share of Global Nominal Consumption
40%

Foreign Sales, % of Total Sales

35%

35%

30%

Mega Cap (Russell 200)

30%

25%

Large Cap (Russell 1000)

25% 20%

International

20%

U.S. Consumption % of Global EM Consumption % of Global

15%

Small Cap (Russell 2000)

15% 1990 1994 1998 2002 2006 2010 10% '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

Source: FactSet, Compustat, Russell, J.P. Morgan Global Economics Research, J.P. Morgan Asset Management. Estimates of global consumption for 2010 and 2011 provided by J.P. Morgan Global Economics Research. Foreign sales as a p g percentage of total sales is calculated as an unweighted average of individual index constituent companies reported sales figures g g g p p g and does not capture all index members due to differences in reporting practices. Data are as of 9/30/12.

45

European Crisis: Fiscal Challenges

GDP Growth, Debt to GDP and Borrowing Costs
8%

Bubble size = 10-year government bond yield = 10%

Example of Fiscal Redistribution in the U.S.

6%

EM

= 5%

Real GDP Growth (2011 20 013)

4%

U.S. 2% Germany France E.U. 0% Ireland Italy Portugal -2% Greece

The E.U. Lacks a Similar Fiscal Mechanism

Spain

International

-4%

-6% 20%

40%

60%

80%

100%

120%

140%

160%

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

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

46

Data are as of 9/30/12.

European Crisis: Sovereign Bond Yields

10-year benchmark bond yields, daily
16%

European Sovereign Funding Costs

Introduction of the Euro

14%

Portugal Ireland Spain Italy France Germany

9/30/12 8.39% 7.19% 5.97% 5.03% 2.18% 1.46%

12%

10%

8%

6%

International

4%

2%

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

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

47

European Crisis: Financial System Risks

European Bank Exposure
Billions USD
Spain
Spain

Euribor and Libor Spreads

3M Euribor - EONIA, 3M Libor - OIS
4.0%

Greece Ireland Italy Portugal

3.5%

3.0%

Libor Spread
2.5%

U.K.

2.0%

Germany

1.5%

International

Euribor Spread
1.0%

France

0.5%

0.0%

$0

$100

$200

$300

$400

$500

$600

07 '07

'08 08

'09 09

'10 10

'11 11

'12 12

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

48

Chinese Growth and Economic Policy

China and U.S. Contribution to Global GDP Growth
Share of year-over-year change in nominal global GDP
40% 35% 30% 25% 20% 15% 10% 5% 0% '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 0% -2% '00 '02 '04 '06 '08 '10 '12 10% 6% 4% 2% 15% 20%

Chinese Inflation and the Money Supply

Year-over-year % change
10% % 8%

China United St t U it d States

CPI (LHS) M2 (RHS)

Most Recent 2.0% 2 0% 13.5%

30%

25%

China Export Growth

45% 35%

3-month 3 month moving average year over year % year-over-year

Percentage of GDP
18% 16%

Mortgage Debt
United States (Right) 1Q12: 14.0%
77% 75% 73% 14% 12% 10% 8% 71%

International

25% 15%
5% -5% -15% -25% eb 08 Feb-08 Sep 08 Sep-08 Apr-09 Nov-09 Jun-10 p 09 o 09 Ju 0

Aug. 2012: 5.0%

China (Left)

69% 67% 65%

61% 05 '06 06 '07 07 '08 08 '09 09 '10 10 '11 11 '12 12 '05 Source: (Top left) IMF, J.P. Morgan Asset Management. (Top right) National Bureau of Statistics, J.P. Morgan Economics, J.P. Morgan Asset Management. (Bottom left) IMF, J.P. Morgan Asset Management. (Bottom right) Barclays Capital, Federal Reserve, J.P. Morgan Asset Management. *In 2009, global growth was negligible, while Chinese growth was robust, which resulted in China contributing more than 1200% to global growth. Calculations based on PPP exchange rates and 2012 2016 growth forecasts are from the IMF. Ja Jan-11 Aug-11 Mar-12 ug a

1Q12: 62.9%

63%

49

Data are as of 9/30/12.

Global Equity Valuations Developed Markets

Developed Market Countries
Std Dev from Global Average d A
+6 Std Dev +5 Std Dev +4 Std Dev +3 Std D 3 Dev +2 Std Dev +1 Std Dev Average -1 Std Dev -2 Std Dev -3 Std Dev -4 Std Dev -5 Std Dev

Example Expensive relative to world Expensive relative to own history Cheap relative to own history

Current Average Cheap relative to world

World (ACWI)

EAFE Index

France

Japan

U.K.

Germany Australia Canada Switzerland United States

Current Com posite Index World (ACWI) EAFE Index France Japan U.K. Germ any G Australia Canada Sw itzerland United States -0.88 -1.88 -2.39 -2.00 -1.78 -1.69 1 69 -1.48 -0.92 0.34 0.55

Current Fw d P/E d. 12.0 10.9 10.2 11.5 10.2 9.8 98 12.1 12.7 12.2 12.6 P/B 1.7 1.3 1.1 0.9 1.6 1.4 14 1.7 1.8 2.0 2.2 P/CF 6.9 5.5 5.2 3.9 6.1 6.6 66 6.5 5.1 11.9 8.2 Div. Yld. Div Yld 2.8% 3.7% 4.2% 2.7% 4.1% 3.6% 3 6% 4.9% 2.8% 3.5% 2.0% Fw d P/E d. 13.4 12.9 11.5 17.9 11.4 11.8 11 8 13.4 13.8 13.7 14.4

10-year avg. P/B 2.1 1.7 1.6 1.4 2.0 1.5 15 2.2 2.1 2.4 2.4 P/CF 7.0 6.2 5.8 6.2 7.1 4.6 46 8.2 7.2 9.8 8.4 Div. Yld. Div Yld 2.5% 3.3% 3.7% 1.9% 3.9% 3.3% 3 3% 4.5% 2.4% 2.9% 2.0%

Internatio onal 50

Source: MSCI, FactSet, J.P. Morgan Asset Management. Note: Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (Fwd. P/E), price to current book (P/B), price to last 12 months cash flow (P/CF) and price to last 12 months dividends. Results are then normalized using means and average variability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). See disclosures page at the end for metric definitions. Data are as of 9/30/12.

Global Equity Valuations Emerging Markets

Emerging Market Countries
+6 Std Dev

Example Expensive relative to world Expensive relative to own history Cheap relative to own history

Std Dev from Global Av verage

+5 Std Dev +4 Std Dev +3 Std Dev +2 Std Dev +1 Std Dev Average -1 Std Dev -2 Std Dev -3 Std Dev 3 -4 Std Dev -5 Std Dev

Current Average Cheap relative to world

World (ACWI)

EM Index
Current p Com posite Index -0.88 -1.43 -3.71 -2.28 -1.92 -0.74 -0.21 0.19 1.76 2.69

Russia

China

Brazil

Taiwan

South Africa

Korea

Mexico

India

Current Fw d. P/E 12.0 10.3 5.2 9.0 10.8 15.0 11.6 8.7 16.7 14.0 P/B 1.7 1.6 0.8 1.5 1.4 1.8 2.3 1.3 2.9 2.5 P/CF 6.9 6.1 3.6 4.5 6.2 5.9 9.7 5.7 6.3 12.7 Div. Yld. 2.8% 2.9% 3.6% 3.3% 4.1% 3.3% 3.5% 1.1% 1.6% 1.5% Fw d. P/E 13.4 10.9 7.9 12.2 9.6 15.2 10.9 9.4 13.4 15.1

10-year avg. P/B 2.1 1.9 1.3 2.1 1.9 1.8 2.3 1.5 2.6 3.2 P/CF 7.0 5.7 4.9 4.1 5.5 6.5 7.5 5.0 5.6 12.0 Div. Yld. 2.5% 2.7% 2.2% 2.8% 3.5% 3.5% 3.4% 1.8% 2.0% 1.5%

Internatio onal 51

World(ACWI) EM Index Russia China Brazil Taiw an South Africa Korea Mexico India

Source: MSCI, FactSet, J.P. Morgan Asset Management. Note: Each valuation index shows an equally weighted composite of four metrics: price to forward earnings (Fwd. P/E), price to current book (P/B), price to last 12 months cash flow (P/CF) and price to last 12 months dividends. Results are then normalized using means and average variability over the last 10 years. The grey bars represent valuation index variability relative to that of the All Country World Index (ACWI). See disclosures page at the end for metric definitions. Data are as of 9/30/12.

Emerging Market Equity Composition

MSCI EM Index by Region MSCI EM Index by Sector

22%

8%
16% 20%

Other Commodities

Africa/Mideast Asia/Pacific ex Japan 10% 60% Europe Latin America

25% 14%

Financials
25%

Tech Consumer

MSCI EM Country Index by Sector y y

100% 16% 80% 12% 17% 21% 60% 40% 26% 16% 20% 0%
Brazil

24%

16% 34% 14% 13% Other Commodities Financials Tech 38% 23%
Mexico* Korea

International

37% 69% 28%

22% 19% 37% 9%

33%

4% 17% 15% 4%
Russia India

18%

7% 11%
China

Consumer

Source: MSCI, FactSet, J.P. Morgan Asset Management. Other is comprised of Healthcare, Industrials, Telecom, and Utilities sectors. *Mexican Telecom sector accounts for 28% of the countrys market capitalization. Values may not sum to 100% due to rounding.

52

Data are as of 9/30/12.

International Economic and Demographic Data

Economics
GDP USD GDP Per (B$s) p Capita Developed U.S. Canada U.K. Germany France Japan Italy Emerging Russia Mexico Brazil China India 1,850 1,155 2,493 7,298 1,676 1 676 12,993 10,153 12,789 5,414 1,389 1 389 2.0 3.5 4.8 7.4 5.2 52 5.2 5.4 5.3 4.1 9.8 98 6.9 4.6 5.3 2.0 7.7 77 5.4 -0.4 -2.1 2.8 -2.5 25 143 115 199 1,343 1,205 1 205 -0.5 1.1 1.1 0.5 1.3 13 38.8 27.4 29.6 35.9 26.5 26 5 +0.3 -3.1 -0.1 -0.3 -0.1 01 $15,094 1,737 2,418 3,577 3 577 2,776 5,869 2,199 $48,387 50,436 38,592 43,742 43 742 44,008 45,920 36,267 GDP Growth 1.3% 1.9 2.0 0.3 03 -0.3 -2.0 -2.5 Unempl. Rate 8.1% 7.3 8.1 6.8 68 10.2 4.3 10.6 Inflation
(CPI)

Demographics
C.A.
(%GDP)

Population

Population Growth 0.9% 0.8 0.6 -0.2 02 0.5 -0.1 0.4

Median Age g 37.1 yrs 41.2 40.2 45.3 45 3 40.4 45.4 43.8

Migration p per 1000 +3.6 +5.7 +2.6 +.7 7 +1.1 +4.7

1.7% 1.4 2.5 2.0 20 2.2 -0.4 3.2

-3.6% -2.5 -2.3 5.3 53 -1.9 1.5 -2.3

314 mm 34 63 81 66 127 61

International 53

Source: FactSet, Eurostat, CIA, J.P. Morgan Securities, J.P. Morgan Asset Management. GDP levels represent 2011 data and are from the April 2012 World Economic Outlook published by the IMF, except for the U.S. levels, which come directly from the BEA. All GDP Growth data are from J.P. Morgan Economics and expressed as % change versus prior quarter annualized. All GDP growth data are for 3Q12. India unemployment is from CIA estimates and is as of 2011. CPI Inflation is shown as % change versus a year ago and all data are for August 2012, except for Japan, which is as of July 2012. Unemployment rate for developed countries comes from FactSet Economics, Eurostat and Statistics Canada and represent the most recently available data. Demographic data provided by CIA World Factbook at CIA.gov. Current Account (C.A.) represents each countrys current account balance as of 6/30/12. Russia, China and Brazils current accounts are as of 12/31/11. Data are as of 9/30/12.

Current Account Deficit and U.S. Dollar

Current Account Balance, % of GDP
-8%

U.S. Dollar Index

Nominal trade-weighted exchange index: major currencies
115

4Q05: -6.5%
-6%

110 105 100 95 90 85

-4%

2Q12: -3.0%

Mar. Mar 2009: 84.0

-2%

International

80 75 0% 70 65 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Source: Federal Reserve, FactSet, J.P. Morgan Asset Management. Data are as of 9/30/12.

Mar. 2008: 70.3 Sep. 2012: 72.5

'94

'96

'98

'00

'02

'04

'06

'08

'10

'12

Source: BEA, FactSet, J.P. Morgan Asset Management. Data are as of 9/30/12 and are reported quarterly.

54

Asset Class Returns

2002
DJ UBS Cmdty 23.9% Ba rc la ys Agg 10 . 3 % Ma rke t Ne utra l 7.4% REITs 3.8% Ca sh 1. 7 % Asse t Alloc . - 5.8% MS CI EME - 6.0% MS CI EAFE - 15 . 7 % Russe ll 2000 - 20.5% S &P 500 - 2 2 . 1%

2003
MS CI EME 56.3% Russe ll 2000 47.3% MS CI EAFE 39.2% REITs 3 7 . 1% S &P 500 28.7% Asse t Alloc . 25.0% DJ UBS Cmdty 22.7% Ma rke t Ne utra l 7 . 1%

2004
REITs 3 1. 6 % MS CI EME 26.0% MS CI EAFE 20.7% Russe ll 2000 18 . 3 % Asse t Alloc . 12 . 4 % S &P 500 10 . 9 % DJ UBS Cmdty 7.6% Ma rke t Ne utra l 6.5%

2005
MS CI EME 34.5% DJ UBS Cmdty 17 . 5 % MS CI EAFE 14 . 0 % REITs 12 . 2 % Asse t Alloc . 8 . 1% Ma rke t Ne utra l 6 . 1% S &P 500 4.9% Russe ll 2000 4.6% Ca sh 3.0% Ba rc la ys Agg 2.4%

2006
REITs 3 5 . 1% MS CI EME 32.6% MS CI EAFE 26.9% Russe ll 2000 18 . 4 % S &P 500 15 . 8 % Asse t Alloc . 14 . 9 % Ma rke t Ne utra l 11. 2 % Ca sh 4.8% Ba rc la ys Agg 4.3% DJ UBS Cmdty - 2.7%

2007
MS CI EME 39.8% MS CI EAFE 11. 6 % DJ UBS Cmdty 11. 1% Ma rke t Ne t N utra l 9.3% Asse t Alloc . 7.2% Ba rc la ys Agg 7.0% S &P 500 5.5% Ca sh 4.8% Russe ll 2000 - 1. 6 % REITs - 15 . 7 %

2008
Ba rc la ys Agg 5.2% Ca sh 1. 8 % Ma rke t Ne utra l 1. 1% Asse t Alloc All . - 24.0% Russe ll 2000 - 33.8% DJ UBS Cmdty - 36.6% S &P 500 - 37.0% REITs - 37.7% MS CI EAFE - 4 3 . 1% MS CI EME - 53.2%

2009
MS CI EME 79.0% MS CI EAFE 32.5% REITs 28.0% Russe ll 2000 27.2% S &P 500 26.5% Asse t Alloc . 22.2% DJ UBS Cmdty 18 . 7 %

2010
REITs 27.9% Russe ll 2000 26.9% MS CI EME 19 . 2 % DJ UBS Cmdty C dt 16 . 7 % S &P 500 15 . 1% Asse t Alloc . 12 . 5 % MS CI EAFE 8.2%

2011
REITs 8.3% Ba rc la ys Agg 7.8% Ma rke t Ne utra l 4.5% S &P 500 2 . 1% Ca sh 0 . 1% Asse t Alloc . - 0.6% Russe ll 2000 - 4.2% MS CI EAFE - 11. 7 % DJ UBS Cmdty - 13 . 4 % MS CI EME - 18 . 2 %

2012 YTD
S &P 500 16 . 4 % REITs 16 . 1% Russe ll 2000 14 . 2 % MS CI EME 12 . 3 % MS CI EAFE 10 . 6 % Asse t Alloc . 9.8% DJ UBS Cmdty 5.6% Ba rc la ys Agg 4.0% Ca sh 0 . 1% Ma rke t Ne utra l - 0.5%

3Q12
DJ UBS Cmdty 9.7% MS CI EME 7.9% MS CI EAFE 7.0% S &P 500 6.4% Russe ll 2000 5.3% Asse t Alloc . 4.5% Ba rc la ys Agg 1. 6 % REITs 1. 0 % Ma rke t Ne utra l 0.8% Ca sh 0.0%

10-yrs '02 - '11 Cum. Ann.

MS CI EME 2 7 7 . 1% REITs 16 4 . 2 % Asse t Alloc . 82.8% Ba rc la ys Agg A 75.4% Russe ll 2000 72.8% Ma rke t Ne utra l 7 2 . 1% MS CI EAFE 64.8% DJ UBS Cmdty 58.0% S &P 500 33.4% Ca sh 20.2% MS CI EME 14 . 2 % REITs 10 . 2 % Asse t Alloc . 6.2% Ba rc la ys Agg A 5.8% Russe ll 2000 5.6% Ma rke t Ne utra l 5.6% MS CI EAFE 5 . 1% DJ UBS Cmdty 4.7% S &P 500 2.9% Ca sh 1. 9 %

Ba rc la ys Ba rc la ys Agg Agg 5.9% 6.5% Ma rke t Ne utra l 4 . 1% Ca sh 0 . 1% Ca sh 0 . 1% Ma rke t Ne utra l - 0.8%

Asset Class

Ba rc la ys Ba rc la ys Agg Agg 4 . 1% 4.3% Ca sh 1. 0 % Ca sh 1. 2 %

55

Source: Russell, MSCI, Dow Jones, Standard & Poors, Credit Suisse, Barclays Capital, NAREIT, FactSet, J.P. Morgan Asset Management. The Asset Allocation portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EMI, Asset Allocation 25% in the Barclays Capital Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the CS/Tremont Equity Market Neutral Index, 5% in the DJ UBS Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. All data except commodities represent total return for stated period. Past performance is not indicative of future returns. Data are as of 9/30/12, except for the CS/Tremont Equity Market Neutral Index, which reflects data through 8/31/12. 10-yrs returns represent annualized total return. These returns reflect the period from 1/1/02 12/31/11. Please see disclosure page at end for index definitions. *Market Neutral returns include estimates found in disclosures. Data are as of 9/30/12.

Correlations: 10-Years
Large Cap Large Cap Small Cap EAFE EME Core Bonds Corp. HY EMD Commodities REITs Hedge Funds 1.00 1 00 Small Cap 0.95 0 95 1.00 Core Bonds -0.21 -0 21 -0.27 -0.15 -0.09 0 09 1.00 Corp. HY 0.78 0 78 0.73 0.75 0.79 0 79 -0.03 1.00 Hedge Funds 0.81 0 81 0.76 0.87 0.90 0 90 -0.22 0.78 0.65 0.72 0.59 1.00 Eq Market Neutral* 0.59 0 59 0.55 0.72 0.62 0 62 -0.09 0.44 0.40 0.50 0.50 0.60 1.00
Source: Standard & Poors, Russell, Barclays Capital Inc., MSCI Inc., Credit Suisse/Tremont, NCREIF, DJ UBS, J.P. Morgan Asset Management. Indexes used Large Cap: S&P 500 Index; Small Cap: Russell 2000; EAFE: MSCI EAFE; EME: MSCI Emerging Markets; Bonds: Barclays Capital Aggregate; C C it l A t Corp HY B l HY: Barclays C it l C Capital Corporate Hi h Yi ld EMD B l t High Yield; EMD: Barclays C it l E Capital Emerging M k t C dt DJ UBS Commodity I d i Market; Cmdty.: C dit Index; Real Estate: NAREIT Equity REIT Index; Hedge Funds: CS/Tremont Multi-Strategy Index; Equity Market Neutral: CS/Tremont Equity Market Neutral Index. *Market Neutral returns include estimates found in disclosures. All correlation coefficients calculated based on quarterly total return data for period 9/30/02 to 9/30/12. This chart is for illustrative purposes only.

EAFE 0.92 0 92 0.88 1.00

EME 0.84 0 84 0.79 0.93 1.00 1 00

EMD 0.67 0 67 0.59 0.66 0.73 0 73 0.27 0.85 1.00

Cmdty. 0.53 0 53 0.46 0.59 0.64 0 64 -0.27 0.56 0.44 1.00

REITs 0.79 0 79 0.84 0.72 0.64 0 64 0.00 0.70 0.61 0.40 1.00

Asset Class 56

Eq Market Neutral*

Mutual Fund Flows

Fund Flows Billions, USD Domestic Equity World Equity Taxable Bond Tax-exempt Bond Hybrid Money Market AUM 4,270 4 270 1,492 2,724 562 946 2,554 2 554 YTD 2012 (77) 18 169 39 39 (138) 2011 (132) 4 135 (12) 31 (124) 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 (81) 58 230 11 24 (28) (148) (65) 28 (80) 139 311 69 10 22 8 (26) 97 11 42 654 (0) 149 45 15 18 245 18 106 26 5 37 62 101 71 5 (15) 49 120 24 40 (7) 38 (26) (3) 125 17 9 55 (22) 76 11 9 375 261 53 (36) (14) (36) 159 176 11 8 (12) (14) 194 149 8 59 15 10 235

(525) (539) 637

(157) (263) (46)

Cumulative Flows into Stock & Bond Funds

Includes both mutual funds and ETFs, $ billions
$1,400

Difference Between Flows Into Stock and Bond Funds Billions, USD, U.S. and international funds, monthly
$40

$1,200 $1,000 $800 $600

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

Bond flows exceeded equity flows by b $51 billi in A billion i August 2012 t

$20

$0

Asset Class

$400 $200

Bonds Stocks

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

-$20

-$40

$0 '07 '08 '09 '10 '11 '12

-$60 May M '08

Mar M '09

Jan J '10

Nov N '10

Sep S '11

Jul J l '12

57

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

Dividend Income: Domestic and Global

S&P 500 Total Return: Dividends vs. Capital Appreciation
Average annualized returns
20% 15% 10% 5% 4.7% 0% -5.3% 5 3% -5% -10% 1926 - 1929 1930's 1940's 1950's 1960's 1970's 1980's 1990's 2000's 1926 to 2011 5.4% 13.9% 3.0% 6.0% 5.1% 13.6% 4.4% 3.3% 1.6% 4.2% 4.4% 2.5% 1.8% -2.7% 12.6% 15.3% 5.5% 4.1%

Capital Appreciation Dividends

REIT Dividend Yields

6% 5.5% 5.5%

Equity Dividend Yields

5.4% 5.0%

Major world markets by capitalization

10-year 10 year government bond yield

4.7% 4.2% 4.0%

Major world markets by capitalization

6% 4.8% 4.1% 4% 3.8% 3.4% 2.9% 2 9% 2.2% 2.8% 2 8% 2.6%

10-year government bond yield

5%

5%

4%

3.5%

3%

3%

Asset Class

2%

2%

1%

1%

0%

U.S.

France

Australia

Singapore

Canada

Japan

Global

U.K.

0%

U.S.

Australia

France

U.K.

Switzerland Canada

ACWI

Japan

Source: (Top chart) Standard & Poors, Ibbotson, J.P. Morgan Asset Management. (Bottom left) FactSet, NAREIT, J.P. Morgan Asset Management. Yields shown are that of the appropriate FTSE NAREIT REIT index, which excludes property development companies. (Bottom right) FactSet, MSCI, J.P. Morgan Asset Management. Yields shown are that of the appropriate MSCI index. Data are as of 9/30/12.

58

Global Commodities
Commodity Prices
Weekly index prices rebased to 100
600

Oil Demand: Emerging Markets Share

Emerging markets as % of total global oil consumption
40% 38% 36%

Precious Metals
500

Industrial Metals
34% 32% 30% '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

400

300

Commodity Prices and Inflation y

Energy

Year-over-year % chg.
8% 6%

DJ-UBS Commodity Index (Y/Y % chg.) 80%

60% 40% 20% 0% -20% -40% -60% '94 '96 '98 '00 '02 '04 '06 '08 '10 '12

200
4%

Grains

2% 0% -2%

Asset Class

100

Livestock
0 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Source: Dow Jones/UBS, FactSet, J.P. Morgan Asset Management. Commodity prices represented by the appropriate DJ/UBS Commodity sub-index.

-4% Headline CPI (Y/Y % chg.) -6%

Source: (Top) BP Statistical Review of World Energy, J.P. Morgan Asset Management. (Bottom) BLS, DJ/UBS, FactSet, J.P. Morgan Asset Management. Data are as of 9/30/12.

59

Data are as of 9/30/12.

Gold
Gold Prices
$ / oz
Year
2000

World Gold Production Troy Ounces Total Value

83.3 mm 83.6 mm 82.0 mm 81.7 81 7 mm 77.8 mm 79.4 mm 76.2 mm 75.6 mm 73.3 mm 79.1 mm 82.3 mm 86.8 86 8 mm $23 bn $23 bn $25 bn $30 b bn $32 bn $35 bn $46 bn $53 bn $64 bn $77 bn $101 bn $136 bn

$3,000

$2,500

Jan. 1980: $2,480.36

Gold, Inflation Adjusted Gold

2001 2002

$2,000

Sep. 2012: $1,763.00

2003 2004 2005

$1,500
2006

$1,000

Jan. 1980: $850.00

2007 2008

Asset Class

$500

2009 2010

$0 '75 '80 '85 '90 '95 '00 '05 '10

2011

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

60

Historical Returns by Holding Period

Range of Stock, Bond and Blended Total Returns
Annual total returns, 1950 2011
60% 50% 40% 30% 20% 10% 6% 0% -8% -10% -20% -15% -2% -2% 1% -1% 1% 2% 1%

Annual Avg. Growth of $100,000 Total R t T t l Return over 20 years

51% 43% 32% 28% 23% 21% 19% 18% 12%

Stocks Bonds 50/50 Portfolio

10.8% 6.3% 8.9%

$771,337 $337,713 $552,853

16% 17%

14% 5%

Stocks Bonds 50/50 Portfolio

Asset Class

-30% -40%

-37% 1-yr. 5-yr. rolling 10-yr. rolling 20-yr. rolling

Sources: Barclays Capital, FactSet, Robert Shiller, Strategas/Ibbotson, Federal Reserve, J.P. Morgan Asset Management. Returns shown are based on calendar year returns from 1950 to 2011.

61

Data are as of 9/30/12.

Diversification and the Average Investor

Maximizing the Power of Diversification (1994 2011)
Traditional Portfolio More Diversified Portfolio
Equity Mkt. Neutral Commodities 8%
30% 55% 15% S&P 500 MSCI EAFE Barclays Agg. y gg
(Top) Indexes and weights of the traditional portfolio are as follows: U.S. stocks: 55% S&P 500, U.S. bonds: 30% Barclays Capital Aggregate. International stocks: 15% MSCI EAFE. Portfolio with 25% in alternatives is as follows: U.S. stocks: 22.2% S&P 500, 8.8% Russell 2000; International Stocks: 4.4% MSCI EM, 13.2% MSCI EAFE; U.S. Bonds: 26.5% Barclays Capital Aggregate; Alternatives: 8.3% CS/Tremont Equity Market Neutral, 8.3% DJ/UBS Commodities, 8.3% NAREIT Equity REIT Index Return Index. and standard deviation calculated using Morningstar Direct. Charts are shown for illustrative purposes only. Past returns are no guarantee of future results. Diversification does not guarantee investment returns and does not eliminate risk of loss. Data are as of 9/30/12. 9/30/12 (Bottom) Indexes used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Barclays Capital U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Gold: USD/troy oz, Inflation: CPI. CPI Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/11 to match Dalbars most recent analysis.

26%

8% 8%

REIT S&P 500 Russell 2000

4% 13%
9%

22%

MSCI EAFE
MSCI EM Barclays Agg.

Return: 6.75% Standard Deviation: 10.94%

12% 10% 8.6% 8% 7.8% 7 8% 7.6% 7 6%

Return: 7.09% Standard Deviation: 9.97%

20-year Annualized Returns by Asset Class (1992 2011)

10.9%

Asset Class

6.5% 6% 4.0% 4% 2.5% 2% 0% REITs Oil S&P 500 Gold Bonds EAFE Inflation Homes Average Investor 2.5% 2.1%

62

Annual Returns and Intra-year Declines

S&P 500 Intra-year Declines vs. Calendar Year Returns
Despite average intra-year drops of 14.5%, annual returns positive in 25 of 32 years
50%

35%
26 26 17 27 26

34

31 27 20 20 14 13 4 -38 0 26 23

20%
-10

15

15

12 -7 4 7 9 -2 -10 -13 -23 3

5%

10% -10%
-17 -17 -14

-7 -12

-8

-9

-8

-8

-6 6

-6 6

-5 -9

-3 -8 -11 -19 -12 -17 -26 -14 -8 -7 -8 -10 -16 -19 -28 -32 32

-25%

-20

Asset Class

-40%

-34

-55%
Source: Standard & Poors, FactSet, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops over periods of 6 months or less. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2011. Data are as of 9/30/12.

-47

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

63

Cash Accounts
Annual Income Generated by $100,000 Investment in a 6-month CD
$10,000 $8,000 $6,000 $4,000 $2,000 $0 1986 1990 1994 1998 2002 2006 2010

Money Supply Component

$ Billions

Weight in Money Supply

2006: $5 240 $5,240

M2-M1 7,688 76.7%

2011: $419

Retail MMMFs

641

6.4%

Savings deposits

6,348

63.3%

Cash as a % of Cash Accounts Total Household Financial Assets

6-month CD rate vs. Core CPI
24% 28%

Small time deposits

700

7.0%

Mar. 09 Mar 09 S&P 500 low

Institutional MMMFs Cash in IRA & Keogh accounts 1,723 17.2%

Oct. 02 S&P 500 low

20%

616

6.1%

16%

Asset Class

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

Total

10,026

100.0%

64

Source: Federal Reserve, St. Louis Fed, Bankrate.com, J.P. Morgan Asset Management. All cash measures obtained from the Federal Reserve are seasonally adjusted monthly numbers. All numbers are in billions of U.S. dollars. Small-denomination Small denomination time deposits are those iss ed in amo nts of less than $100 000 All IRA and Keogh acco nt balances at commercial banks issued amounts $100,000. account and thrift institutions are subtracted from small time deposits. Annual income is for illustrative purposes and is calculated based on the 6-month CD yield on average during each year and $100,000 invested. IRA and Keogh account balances at money market mutual funds are subtracted from retail money funds. Past performance is not indicative of comparable future results. Data are as of 9/30/12.

Corporate DB Plans and Endowments

Asset Allocation: Corporate DB Plans vs. Endowments Defined Benefit Plans Funded Status: S&P 500 Companies

Endowments Corporate Defined Benefit Plans

Equities 32.0% 45.3% 13.0% 35.5% 21.9% 2.7% 10.7% 10 7% 4.7% 6.1% 3.1% 12.2% 4.1% 4.0% 4.7%
0% 10% 20% 30% 30%

Overfunded

Underfunded

8% 22%

Fixed Income

78%

92%

Hedge Funds

1999
40% 33% 27% 27% 29%

2010
1999: Average 9.2% 2010: Average 7.4%

Pension Return Assumptions: S&P 500 companies

Private Equity

% of Comp panies

Real Estate

20% 20% 16% 16% 9% 5% 2% 0% < 7% 7 to 7.5% 7.5 to 8% 8 to 8.5% 8.5 to 9% 9 to 9.5% 9.5 to 10% > 10% 1% 0% 0% 8%

Asset Class

Other

10%

7% 0%

Cash

% of total
40% 50%

Return Assumption

65

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

The Dow Jones Industrial Average Since 1900

Dow Jones Industrial Index, Price Return (Since 1900)
Log Scale

2000 present 10,000

3,000 1966 1982 1,000

400 1937 1949

100

Asset Class

1906 1924

'10

'20

'30

'40

'50

'60

'70

'80

'90

'00

'10

Source: IDC, FactSet, J.P. Morgan Asset Management. Data shown in log scale to best illustrate long-term index patterns. Past performance is not indicative of future returns. Chart is for illustrative purposes only. Data are as of 9/30/12.

66

J.P. Morgan Asset Management Index Definitions

All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index. The S&P 400 Mid Cap Index is representative of 400 stocks in the mid-range sector of the domestic stock market, representing all major industries. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization. The Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000. The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower priceto-book ratios and lower forecasted growth values. The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index. The Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth index. The Russell Midcap Value Index measures the performance of those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000 Value index. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower priceto-book to book ratios and lower forecasted growth values values. The MSCI EAFE (Europe, Australia, Far East) Net Index is recognized as the pre-eminent benchmark in the United States to measure international equity performance. It comprises 21 MSCI country indexes, representing the developed markets outside of North America. The MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 2007, the MSCI Emerging Markets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Co o b a, C ec epub c, gyp , u ga y, d a, do es a, s ae , Jordan, o ea, a ays a, e co, o occo, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jo da , Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2009 the MSCI ACWI consisted of 45 country indices comprising 23 developed and 22 emerging market country indices. The MSCI Small Cap IndicesSM target 40% of the eligible Small Cap universe within each industry group, within each country. MSCI defines the Small Cap universe as all listed securities that have a market capitalization in the range of USD200 1 500 million USD200-1,500 million. The MSCI Value and Growth IndicesSM cover the full range of developed, emerging and All Country MSCI Equity indexes. As of the close of May 30, 2003, MSCI implemented an enhanced methodology for the MSCI Global Value and Growth Indices, adopting a two dimensional framework for style segmentation in which value and growth securities are categorized using different attributes - three for value and five for growth including forwardlooking variables. The objective of the index design is to divide constituents of an underlying MSCI Standard Country Index into a value index and a growth index, each targeting 50% of the free float adjusted market capitalization of the underlying country index. Country Value/Growth indices are then aggregated into regional Value/Growth indices. Prior to May 30, 2003, the indices used Price/Book Value ( y (P/BV) ratios to divide the ) standard MSCI country indices into value and growth indices. All securities were classified as either "value" securities (low P/BV securities) or "growth" securities (high P/BV securities), relative to each MSCI country index. The following MSCI Total Return IndicesSM are calculated with gross dividends: This series approximates the maximum possible dividend reinvestment. The amount reinvested is the dividend distributed to individuals resident in the country of the company, but does not include tax credits. The MSCI Europe IndexSM is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of June 2007, the MSCI Europe Index consisted of the following 16 developed market country indices: Austria Belgium Denmark, Finland, France, Germany, Greece, Austria, Belgium, Denmark Finland France Germany Greece Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The MSCI Pacific IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Pacific region. As of June 2007, the MSCI Pacific Index consisted of the following 5 Developed Market countries: Australia, Hong Kong, Japan, New Zealand, and Singapore. Credit Suisse/Tremont Hedge Fund Index is compiled by Credit Suisse Tremont Index, LLC. It is an assetweighted hedge fund index and includes only funds, as opposed to separate accounts. The Index uses the Credit Suisse/Tremont database, which tracks over 4500 funds, and consists only of funds with a minimum of US$50 million under management, a 12-month track record, and audited financial statements. It is calculated and rebalanced on a monthly basis, and shown net of all performance fees and expenses. It is the exclusive property of Credit Suisse Tremont Index, LLC. The NCREIF Property Index is a quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market for investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors - the great majority being pension funds. As such, all properties are held in a fiduciary environment. The NAREIT EQUITY REIT Index is designed to provide the most comprehensive assessment of overall industry performance, and includes all tax-qualified real estate investment trusts (REITs) that are listed on the NYSE, the American Stock Exchange or the NASDAQ National Market List.

67

J.P. Morgan Asset Management Index Definitions

All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. The Dow Jones-UBS Commodity Index is composed of futures contracts on physical commodities and represents nineteen separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc. The S&P GSCI Index is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. Individual components qualify for inclusion in the index on the basis of liquidity and are weighted by their respective world production quantities. The Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis. This U S Treasury Index is a component of the U S Government index. U.S. U.S. index West Texas Intermediate (WTI) is the underlying commodity for the New York Mercantile Exchange's oil futures contracts. The Barclays Capital High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, and 144-As are also included. The Barclays Capital 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non convertible. The Barclays Capital General Obligation Bond Index is a component of the Barclays Capital Municipal Bond Index. To be included in the index, bonds must be general obligation bonds rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the ti th rating must b iinvestment-grade. Th must h t be t t d They t have an outstanding par value of at lleast $7 million and be issued t t di l f t t illi db i d as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives, are excluded from the benchmark. The Barclays Capital Revenue Bond Index is a component of the Barclays Capital Municipal Bond Index. To be included in the index, bonds must be revenue bonds rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a investment grade. transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives, are excluded from the benchmark. The Barclays High Yield Municipal Index includes bonds rated Ba1 or lower or non-rated bonds using the middle rating of Moodys, S&P and Fitch. The Barclays Capital Taxable Municipal Bond Index is a rules-based, market-value weighted index engineered for the long-term taxable bond market. To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies if all three rate the bond: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate and must be at least one year from their maturity date. Remarketed issues (unless converted to fixed rate), bonds with floating rates, and derivatives, are excluded from the benchmark. Municipal Bond Index: To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives are excluded from the benchmark. The Barclays Capital Emerging Markets Index includes USD-denominated debt from emerging markets in the USD denominated following regions: Americas, Europe, Middle East, Africa, and Asia. As with other fixed income benchmarks provided by Barclays Capital, the index is rules-based, which allows for an unbiased view of the marketplace and easy replicability. The Barclays Capital MBS Index covers the mortgage-backed pass-through securities of Ginnie Mae, Fannie Mae, and Freddie Mac. Aggregate components must have a weighted average maturity of at least one year, must have $250 million par amount outstanding, and must be fixed rate mortgages. The Barclays Capital Corporate Bond Index is the Corporate component of the U.S. Credit index. The Barclays Capital TIPS Index consists of Inflation Protection securities issued by the U S Treasury Inflation-Protection U.S. Treasury. The J.P. Morgan EMBI Global Index includes U.S. dollar denominated Brady bonds, Eurobonds, traded loans and local market debt instruments issued by sovereign and quasi-sovereign entities. The J.P. Morgan Domestic High Yield Index is designed to mirror the investable universe of the U.S. dollar domestic high yield corporate debt market. The CS/Tremont Equity Market Neutral Index takes both long and short positions in stocks with the aim of minimizing exposure to the systematic risk of the market (i.e., a beta of zero). The CS/Tremont Multi-Strategy Index consists of funds that allocate capital based on perceived opportunities among several hedge fund strategies. Strategies adopted in a multi-strategy fund may include, but are not limited to, convertible bond arbitrage, equity long/short, statistical arbitrage and merger arbitrage. *Market Neutral returns for November 2008 are estimates by J.P. Morgan Funds Market Strategy, and are based on a December 8, 2008 published estimate for November returns by CS/Tremont in which the Market Neutral returns were estimated to be +0.85% (with 69% of all CS/Tremont constituents having reported return data). Presumed to be excluded from the November return are three funds, which were later marked to $0 by CS/Tremont in connection with the Bernard Madoff scandal. J.P. Morgan Funds believes this distortion is not an accurate representation of returns in the category. CS/Tremont later p p g y published a finalized November return of 40.56% for the month, reflecting this mark-down. CS/Tremont assumes no responsibility for these estimates.

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

Past performance is no guarantee of comparable future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise. The price of equity securities may rise, or fall because of changes in the broad market or changes in a companys financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting condition unpredictably individual companies, sectors or industries, or the securities market as a whole, such as changes in economic or political conditions. Equity securities are subject to stock market risk meaning that stock prices in general may decline over short or extended periods of time. Small-capitalization investing typically carries more risk than investing in well-established "blue-chip" companies since smaller companies generally have a higher risk of failure. Historically, smaller companies' stock has experienced a greater degree of market volatility than the average stock. Mid-capitalization investing typically carries more risk than investing in well-established "blue-chip" companies. Historically, id Hi t i ll mid-cap companies'' stock h experienced a greater d i t k has i d t degree of market volatility th th average f k t l tilit than the stock. Real estate investments may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation p g policies outside the U.S. can raise or lower returns. Also, some , overseas markets may not be as politically and economically stable as the United States and other nations. Investments in emerging markets can be more volatile. As mentioned above, the normal risks of investing in foreign countries are heightened when investing in emerging markets. In addition, the small size of securities markets and the low trading volume may lead to a lack of liquidity, which leads to increased volatility. Also, emerging markets may not provide adequate legal protection for private or foreign investment or private property. Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss. Derivatives may be riskier than other types of investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the original investment. The use of derivatives may not be successful, resulting in investment losses, and the cost of such strategies may reduce investment returns. Price to forward earnings is a measure of the price-to-earnings ratio (P/E) using forecasted earnings. Price to book value compares a stock's market value to its book value. Price to cash flow is a measure of the market's expectations of a firm's future financial health. Price to dividends is the ratio of the price of a share on a stock firm s health exchange to the dividends per share paid in the previous year, used as a measure of a company's potential as an investment. There is no guarantee that the use of long and short positions will succeed in limiting an investor's exposure to domestic stock market movements, capitalization, sector swings or other risk factors. Investing using long and short selling strategies may have higher portfolio turnover rates. Short selling involves certain risks, including additional costs associated with covering short positions and a possibility of unlimited loss on certain short sale positions. Opinions and estimates offered constitute our judgment and are subject to change without notice as are notice, statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. All cases studies shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. Results shown are not meant to be representative of actual investment results. The views expressed are those of J.P. Morgan Asset Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited which is regulated by the Financial Services Authority; in other EU jurisdictions by JPMorgan Asset Management (Europe) S. r.l.; in Switzerland by J.P. Morgan (Suisse) SA, which is regulated by the Swiss Financiall Market Supervisory A th it FINMA in Hong Kong by JF Asset hi h i l t d b th S i Fi i M k tS i Authority FINMA; i H K b A t Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, all of which are regulated by the Securities and Futures Commission; in India by JPMorgan Asset Management India Private Limited which is regulated by the Securities & Exchange Board of India; in Singapore by JPMorgan Asset Management (Singapore) Limited which is regulated by the Monetary Authority of Singapore; in Japan by JPMorgan Securities Japan Limited which is regulated by the Financial Services Agency; in Australia by JPMorgan Asset Management (Australia) Limited which is regulated by the Australian Securities and Investments Commission; in Brazil by Banco J.P. Morgan S.A. which is regulated by The Brazilian Securities and Exchange Commission (CVM) and Brazilian Central Bank (Bacen); and in Canada by JPMorgan Asset Management (Canada) Inc. which is a registered Portfolio Manager and Exempt Market Dealer i C d (i l di O t i ) d D l in Canada (including Ontario) and iin addition, iis registered as an I dditi i t d Investment F d M t t Fund Manager iin B iti h British Columbia. This communication is issued in the United States by J.P. Morgan Investment Management Inc. which is regulated by the Securities and Exchange Commission. Accordingly this document should not be circulated or presented to persons other than to professional, institutional or wholesale investors as defined in the relevant local regulations. The value of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. JPMorgan Distribution Services, Inc., member FINRA/SIPC. JPMorgan Chase & Co., October 2012. g , Unless otherwise stated, all data are as of September 30, 2012 or most recently available. Prepared by: Andrew D. Goldberg, Joseph S. Tanious, Andrs Garcia-Amaya, David M. Lebovitz, Brandon D. Odenath, Anthony M. Wile and David P. Kelly. JP-LITTLEBOOK

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