Key Trades and Risks Emerging Markets Equity Strategy ::JPMorgan

 The relative year to date performance of EM versus the US is the poorest
since 1995. Against World and Japan, 2013 is the worst year on record.
EM equities’ problems are fundamental. 2013 EPS revisions for most
major country sectors are negative (see page 3). BRIC economic growth
is disappointing. Despite low GDP growth, the forecast for 2013 EM
EPS growth is a robust 16%oya. In 2012 EM EPS declined 4%oya! We
remain concerned that EPS forecasts will continue to fall.

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 Japan's Abenomics rally continues. We think it is too early to decide if
Japan will be successful and exit deflation, rather investors should
focus on how policy will drive asset prices; BoJ policy combined with
nominal GDP growth driving EPS revisions supports the equity rally.
Large cap EM is vulnerable as global investors switch into Japan.
 There are two extreme outcomes for China’s economy: (1) 2H12
monetary stimulus is successful, just with an extended lag, in
stabilizing economic activity - positive for Chinese equities and deep
cyclicals (2) the PBoC, conscious of the core inflation drivers of a tight
labor market and rising property prices, tightens policy while growth
momentum is weak - bearish for Chinese equities and deep cyclicals.
Our view is closer to the latter, near consensus.
 Our OW Mexico and UW Taiwan hurt us in the last month. We have
debated both. In Taiwan we UW materials, neutral tech and OW
financials . In Mexico, despite weaker EPS, macro
fundamentals justify the Ow.
 There are two styles that are working. Yield substitution in which
savers who are more comfortable in bonds are forced to consider
equities with income. The other style is growth at unlimited price or
GULP. With growth and positive revisions scarce, the few
countries/sectors/stocks enjoying positive revisions continue to re-rate.
 Our key trades are:
1. EM Nifty Fifty; search for return
2. OW Financials
3. China: Slowing growth, rising inflation
4. OW India and Turkey
5. Demographic beneficiaries
 Asset allocation:
OW: Turkey, India, Mexico, Indonesia, Malaysia, Thailand, the
Philippines and Peru
UW: Russia, China, South Africa, Korea, Taiwan and Colombia
 The key risk to our strategy is improving Chinese economic data