JP Morgan Equity Strategy August 2010

European Equity Research 2nd August 2010
Equity Strategy
Mislav Matejka, CFA AC (44-20) 7325-5242 mislav.matejka@jpmorgan.com
Emmanuel Cau, CFA (44-20) 7325-1684 emmanuel.b.cau@jpmorgan.com J.P. Morgan Securities Ltd.
See the end pages of this presentation for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Key calls
We are positive on equities as: 1. Macro momentum has peaked, but our work indicates that historically equities have continued to advance over the next 12 months post these peaks. There are similarities to 04 in terms of market volatility during the transition from lead indicators peaking towards greater clarity regarding the sustainability of recovery. Slowdown in manufacturing is clear, but beyond profit taking at sector level, our ISM framework does not work as a sell signal for the overall market at this stage. 2. Our Yield curve framework is still giving a positive signal. Despite last quarters flattening, the curve is still in the top 10% of record steep observations. To get around the problem of zero short rates, we found that the 10y-30y year spread was also a strong indicator of recessions. Right now it is near record steep, a positive. Historically, it took 29 months between the peak in curve steepness and the next recession. 3. Interbank stress has reduced markedly, peripheral bond yields and CDS spreads have moderated. 4. Profits are on the upturn, although 2H surprises are likely to slow significantly. 5. Rotation away from inventory rebuild and fiscal support towards increasing evidence of sustainability of recovery in private demand (capex, labour market, smaller businesses). 6. DM inflation risks minimal, allowing central banks to remain accommodative for longer, countering the headwind from fiscal consolidation. 7. Equity valuations undemanding in absolute terms and vs other asset classes. In terms of market catalysts, we think that: 1. The fact that a number of key events are now behind us could act to reduce the tail risk that markets are pricing in going forward. US financial regulatory bill was passed, stress tests are behind us, there is more clarity on Basel3, July was the peak month of Spanish refinancing. The underlying problem is not going away, but at least the hurdles for next few quarters are getting easier. 2. Chinese policymakers are turning more market friendly as CPI peaks and economic momentum slows. Key risks: Double dip near term. We see the five-year outlook to be far worse than the 12-month one.
2
Key trades and themes

Regional: 1. Re-enter EM vs DM exposure: we started the year OW DM vs EM on the back of adverse EM growth inflation tradeoff, but two months ago reversed it. 2. OW Europe vs US: European activity is resilient vs the US; the region is underweight in global portfolios and attractively priced. 3. Reducing OW Dax vs Eurostoxx50: OW Germany was our key regional trade this year, but we see it as a crowded call now. Sectorwise: Stay OW Cyclicals vs Defensives - despite their strong outperformance ytd. Rotate out of crowded, outperforming, expensive cyclicals (Cap. Goods downgraded on 27th July), as manufacturing momentum is slowing. Better risk/reward among non-consensus cheaper cyclical laggards (Banks/Mining). Key longs: Banks, Mining, IT, Discretionary. Key shorts: Utilities, Pharma. Themes: M&A to pick up: our key theme for 2010 due to strong balance sheets and record low credit yields (see our 21st June report for details). Dividend comeback: we think the recent GE, AAL etc. dividend news is significant; we expect continued positive news flow on this front (see our 29th June report for more details).
1 - Macro momentum is peaking, driven by manufacturing slowdown

The macro momentum is peaking, albeit from elevated levels, driven by the slowing in manufacturing activity
Global manufacturing PMI
60 55 50 45 40 35 30 98 99 00 01 02 03 04 05 06 07 08 09 10
Global Manufacturing PMI

Source: J.P. Morgan
Eurozone composite PMI

65 60 55 50 45 40 35 30 98 99 00 01 02 03 04 05 06 07 08 09 10
80 75 70 65 60 55 50 45 40 35 30 48
ISM and recessions
52
56
60
64
68
72
76
80
84
88
92
96
00
04
08
E u ro area P M I c om p os ite
US recessions
ISM manufacturing
Source: J.P. Morgan
Source: Datastream, NBER
Peak in macro momentum does not mean equities need to fall

The pushback we frequently hear from clients is: If you were using bottoming out in ISM and the improvement in its 2nd derivative as a reason to buy stocks last year, why are you not using the peaking in ISM and a rollover in macro momentum as a signal to sell? Historically, the peak in lead indicators didnt work as a sell signal at the market level
Equity performance after ISM peak
S&P500 perf ISM peak Jul 50 Aug 52 May 55 May 59 Dec 61 Mar 65 Apr 68 Jan 73 Feb 76 Jul 78 Nov 80 Dec 83 Dec 87 ISM 77.5 60.4 69.5 68.2 64.2 64.9 58.0 72.1 61.5 62.2 58.2 69.9 61.0 54.9 59.4 57.7 58.1 53.6 61.4 +3M 8.5% 2.1% 14.3% 0.4% -2.2% -2.1% -0.7% -6.7% -0.2% -3.8% -3.8% -4.2% 4.8% 7.2% 0.4% -0.9% -1.3% -12.5% -1.4% -0.1% -0.9% 37% +6M 20.8% 3.1% 19.5% 0.1% -21.3% 4.1% 5.2% -6.9% 4.0% -0.7% -3.5% -7.1% 10.0% 3.9% 9.8% 5.7% 3.7% -9.2% 6.3% 2.5% 3.9% 68% +12M 24.9% -6.9% 20.1% -4.7% -11.7% 4.2% 5.7% -16.9% 0.6% 3.5% -8.1% 1.4% 12.4% 7.0% 24.7% 17.5% -5.9% 1.4% 7.2% 4.0% 3.5% 68%
Forward S&P500 perf when ISM goes above 60

ISM 60.5 63.8 62.3 60.7 60.6 61.5 63.6 60.1 +1m 0.4% 1.8% 2.2% -2.0% 0.6% 3.1% 1.1% 1.7% 1.1% 1.4% 88% S&P500 performance +3m +6m +9m 9.1% 7.0% 13.3% 1.7% 14.0% 21.4% 8.0% 12.2% 17.9% 4.8% 2.8% -12.4% 2.8% 4.2% 9.5% 0.5% 3.2% 2.4% 0.6% 0.5% -1.5% 1.3% 2.6% 0.2% 3.6% 5.8% 6.3% 2.2% 3.7% 5.9% 100% 100% 75% +12m 26.6% 26.4% 12.1% -13.1% 4.8% 0.1% -7.3% 9.0% 7.3% 6.9% 75%
Sep 91 Oct 94 Jul 97 Nov 99 Jun 02 May 04 Average Median Hit ratio
Feb 50 Dec 54 Oct 58 Aug 61 Feb 72 Feb 76 Jul 83 Dec 03 Average Median Hit ratio
Source: Datastream
Source: Datastream, J.P. Morgan, *% of time performance is positive
Looking at the past cycle, ISM peaked in 2004 but equities continued to rally for another three years MSCI Europe vs. ISM during the last cycle
Lead indicators almost always tended to peak within 1.5 years of an upcycle starting, but equities continued to advance most of the time In the last cycle ISM peaked in May 2004 at 61.4, just a bit more than a year after the market trough. The peaking in the ISM was coincident with shortterm market volatility. MSCI Europe fell by 8% between March and August 04 However, ultimately this was a good buying opportunity as equities moved much higher over the next few years
Typical ISM move during recovery vs. latest
65
1800
May-04 ISM peak
Jun-07 MSCI Europe peak (+65%)
65
1600
60
55 1400 50 1200 45 1000 40 800
35
600 03 04 05 06 MSCI Europe 07 ISM (rhs) 08
30
Source: Datastream, MSCI
Typical ISM and S&P500 moves during recovery

65 145 140
60
60
135 130 125
55
55
50
50
45
120 115
45
40
110 105 100
35
40
30
gh 4m 2m 6m 8m m m m m m m m m m m m m m m 30 32 34 18 ou 14 10 12 16 26 20 22 24 28 36
35
gh 4m 6m 2m 8m m m m m m m m m m m m m 10 12 14 16 18 20 22 24 26 28 30 m ou 36 32 34 m
95
Tr
Av erage ISM
ISM s inc e Dec -08
Tr
Av erage ISM
Av erage S&P500 (rhs )
Source: Datastream
Source: Datastream
ISM framework Great BUY indicator, but not a good SELL indicator
Last year the key call was not to ignore the 2nd derivative. It doesn't pay to sell stocks in 30-40 range of ISM, given the next 3, 6 and 12 months equity performance is likely to be strong. This was one of the key catalysts to enter beta in Q1 09 Looking at the other side of the coin, equities tended to fall on the majority of occasions when the ISM started in the 65-75 range, but strength of signal is relatively weak The current ISM level does not mean outright sell
% of time equities go up in different ISM ranges
Hit ratio S&P500 Fwd return ISM range 25-30 30-35 35-40 40-45 45-50 50-55 55-60 60-65 65-70 70-75 75-80 % of time 0.1% 1.6% 5.1% 7.5% 18.6% 28.3% 23.3% 10.5% 4.0% 0.4% 0.4% +3m 100% 67% 74% 64% 57% 67% 65% 58% 50% 0% 100% +6m 100% 92% 84% 63% 64% 69% 71% 62% 57% 33% 100% +12m 100% 100% 100% 68% 70% 73% 67% 67% 47% 33% 100% ISM range 25-30 30-35 35-40 40-45 45-50 50-55 55-60 60-65 65-70 70-75 75-80 % of time 0.1% 1.6% 5.1% 7.5% 18.6% 28.3% 23.3% 10.5% 4.0% 0.4% 0.4%
Forward S&P500 perf in different ISM ranges

average S&P500 Fwd return +3m 10.5% 5.8% 6.2% 1.9% 1.1% 2.9% 1.7% -0.2% 1.3% -4.8% 8.7% +6m 23.9% 10.7% 14.0% 4.2% 3.1% 4.9% 3.4% 0.5% 0.3% -5.0% 18.8% +12m 19.5% 22.9% 27.8% 8.8% 8.7% 8.7% 6.7% 1.4% 1.5% -6.6% 23.3%
Source: Datastream, J.P. Morgan
2 - What is the Yield curve really saying? Still constructive

DM yield curves have flattened, but are still near record steep in the historical context Yield curve steepness peaks on average 2.5 years before the start of a recession Pushback of zero short-term rates. 10y-30y spread behaved similar to 10y-3m spread, inverting ahead of every recession, but it is at a record steep now.
US recessions vs shape of the yield curve
4 75 70 65 60 1 55 0 50 -1 45 -2 40 35 30 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 3
-3
-4
NBER dated recessions
Yield curv e (10y r - Fed funds)
Timing of recessions and peak of the yield curve

Peak of the yield curve Jul-58 Nov-67 Jun-71 Sep-75 Sep-80 Oct-87 Jun-99 May-04 Average Median
10Y-30Y spread and US recessions

1.5
Start of Recessions Apr-60 Dec-69 Nov-73 Jan-80 Jul-81 Jul-90 Mar-01 Dec-07
Difference (# months) 21 25 29 52 10 33 21 43 29 27
1.0
0.5
0.0
-0.5
-1.0
-1.5 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
US recessions
US 30-10y
Source: Datastream, *latest
Yield curve and equity market direction

The start of yield curve flattening is not an indicator of a poor equity performance ahead In the past 50 years, equities continued to rise 73% of the time after the yield curve peaked The current level of the yield curve is consistent with 10-15% annualized equity return Flattening/falling yields supports defensives and steepening/rising yields supports cyclicals
Yield curve investment clock
10 Year Rising 1. Recovery Strong OW: Cyclicals (esp. Resources) 10-2 Steepening OW Financials (esp Banks) Strong UW Defensives (esp. Utilities) 2. Expansion Modest OW Cyclicals 10-2 Flattening (esp Industrials & Media) UW Financials (esp Banks) Modest UW Defensives (esp Telecom, Utilities) 10 Year Falling 4. Slowdown Strong OW Defensives (esp Staples and Pharma) UW Financials Strong UW Cyclicals (esp Industrials & Discretionary) 3. Overheating Modest OW Defensives (esp Telecoms) OW Financials Modest UW Cyclicals (esp Resources)
-1 0 % -6 / -5 -5 / -4 -4 / -3 in v e rte d -5 % -5 % 5% 3% 2% 0% -0 . 1 % 15% 14% 10% 10% 8% 5% 6%
12m fwd S&P500 perf following the peak of the yield curve
5 4 3 2 1 1% 0 -1 -2 -3 -4 -5 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 -2 9 % -3 0 % -1 3 % -2 0 % -5 % -8 % 0% 15% 8% 7% 30% 26% 19% 14% 5% 30% 34% 34% 40%
20%
10%
-1 0 %
-4 0 %
S & P 5 0 0 + 1 2 m p e rf (rh s )
Y ie ld c u r v e ( 1 0 y r - F e d fu n d s )
Source: Datastream
12m S&P500 perf* from different levels of the yield curve
-1 0 % -3 / -2
-2 / -1
-1 / 0 Y ie ld c u rv e
+0/1
+1/2 s te e p
+2/3
+3 / 4
Source: Datastream, using US/European sectors and US 10-2year yield curve Source: Datastream,*average since 1955
S & P 5 0 0 + 1 2 m p e rf
3 - Monitoring the stress in funding markets the pace of deterioration is slowing

Signs of bank funding stress elevated, but still way off the 08 levels Interbank market - Libor OIS spread: Spread between 3-month Libor and overnight swap rate Bloomberg ticker: .LIBOROIS F index Peaked at 364 bps in October 08
LIBOR-OIS spread 2007-to-date

400 350
35 40
LIBOR-OIS spread year-to-date
300
30
250 200 150 100 50 0 07 08 Libor-OIS spread 09 10

25
20
15
10
5 Jan-10 Feb-10 Mar-10 Apr-10 Libor-OIS spread May -10 Jun-10 Jul-10
Source: Bloomberg
Source: Bloomberg
10
Euro Swap spread

Spread between two-year German bond yield and two-year swap rate Bloomberg ticker: EUSS2 crncy Peaked at 126 bps in October 08
Euro swap spread 2007-to-date

140
Euro swap spread year-to-date

90 85
120
80 75 70 65
100
80
60
60 55 50 45
40
20
0 07 08 09 Euro sw ap spread 2YR 10
40 Jan-10 Feb-10 Mar-10 Apr-10 May -10 Jun-10 Jul-10
Euro sw ap spread 2YR
Source: Bloomberg
Source: Bloomberg
11
TED spread
Spread between 3m T-Bills and 3m LIBOR Bloomberg ticker: TEDSP index Peaked at 463 bps in October 08
TED spread 2007-to-date

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 07 08 09 Ted spread 10
TED spread year-to-date

0.55 0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 Jan-10 Feb-10 Mar-10 Apr-10 May -10 Jun-10 Jul-10
Ted spread
Source: Bloomberg
Source: Bloomberg
12
Corporate credit spreads

Volatile, but significantly below 08 wides
US and Euro corporate high grade spreads 2008-to-date
600 500 400 300 200 100 Jan-08 May -08 Sep-08 Jan-09 May -09 Sep-09 Jan-10 May -10 370 320 270 220 170 120 70
US and Euro corporate high grade spreads year-to-date

170 160 150 140 130 120 110 100 Jan-10 Feb-10 Mar-10 Apr-10 May -10 Jun-10 Jul-10 130 110 90 70 190 170 150
US corporates high grade spreads

Source: J.P. Morgan
Euro corporate high grade spreads (rhs)
US corporates high grade spreads

Source: J.P. Morgan
Euro corporate high grade spreads (rhs)
US and Euro corporate high yield spreads 2008-to-date

2100 1900 1700 1500 1300 1100 900 700 500 Jan-08 May -08 Sep-08 Jan-09 May -09 Sep-09 Jan-10 May -10 1900 1700 1500 1300 1100 900 700 500 300
800 750 700 650 600 550 500
US and Euro corporate high yield spreads year-to-date

570 520 470 420 370 320 Feb-10 Mar-10 Apr-10 May -10 Jun-10 Jul-10
Jan-10
US corporates high y ield spreads

Source: J.P. Morgan
Euro corporate high y ield spreads (rhs)
US corporates high y ield spreads

Source: J.P. Morgan
Euro corporate high y ield spreads (rhs)
13
Credit yields near record low

US corporate High Grade yield (%)
9.0
While the spreads are widening, the total yield on HG corporate bonds in Europe is near record lows, thanks to the rally in government bonds Not 07-08 backdrop, but 05
8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 00 01 02 03 04 05 06 07 08 09 10
U S indus trials c orporate high grade y ield
Source: J.P. Morgan
Eurozone corporate High Grade yield (%)

7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 99 00 01 02 03 04 05 06 07 08 09 10
4.5 5.5 5.0 7.0 6.5 6.0 8.0 7.5
UK corporate High Grade yield (%)
99
00
01
02
03
04
05
06
07
08
09
10
Euro industrials co rpo rate high grade yield
U K c orporate high grade y ield
Source: J.P. Morgan
Source: J.P. Morgan
14
The movement in bond yields and sovereign CDS spreads

Self fulfilling prophecy: the more bonds fall, the more they should fall as it gets incrementally harder to meet the fiscal obligations Circuit breaker is needed, credible and committed buyer of last resort Most of the Southern European yields have moved off their 7th May peak due to ECB action
Move in 5yr CDS spreads
5 Yr CDS GREECE PORTUGAL IRELAND SPAIN ITALY BELGIUM AUSTRIA FRANCE UK NETHERLAND GERMANY US FINLAND Current 697 225 208 177 133 92 75 62 56 39 36 34 24 Year Start 283 92 158 114 109 54 84 32 83 32 26 38 28 7th May 939 440 263 251 230 106 85 78 100 53 57 43 30 Move since 7/05 (bps) -242 -215 -55 -74 -96 -13 -11 -16 -44 -14 -22 -9 -6 Ytd Move (bps) 413 133 50 64 24 38 -9 30 -27 7 9 -4 -4
Source: Datastream up to 27th July
Move in 2yr government bond yields (%)

2 Yr BY GREECE IRELAND PORTUGAL SPAIN ITALY FINLAND UK AUSTRIA BELGIUM NETHERLAND FRANCE GERMANY US Current 10.0 3.7 2.9 1.8 1.7 1.2 1.0 1.0 1.0 1.0 0.9 0.9 0.6 Year Start 3.7 3.7 1.3 1.5 1.5 1.7 1.3 0.9 1.6 1.1 1.4 1.3 1.1 7th May 17.4 3.7 6.0 2.9 2.3 0.7 1.1 0.8 1.1 0.5 0.5 0.5 0.8 Move since 7/05 (bps) -742 0 -304 -104 -54 45 -2 14 -16 46 41 36 -18 Ytd Move (bps) 625 0 160 31 23 -51 -24 8 -59 -14 -42 -45 -51
Move in 10yr government bond yields (%)

10 Y BY GREECE IRELAND PORTUGAL SPAIN ITALY UK BELGIUM AUSTRIA US FRANCE FINLAND NETHERLAND GERMANY Current 10.3 5.2 5.2 4.1 3.9 3.6 3.3 3.1 3.0 3.0 3.0 3.0 2.8 Year Start 5.8 4.8 4.1 3.9 4.0 4.1 3.7 3.7 3.8 3.6 3.6 3.5 3.4 7th May 12.2 5.8 6.3 4.4 4.3 3.8 3.5 3.3 3.4 3.1 3.1 3.1 2.7 Move since 7/05 (bps) -194 -61 -110 -31 -35 -18 -19 -17 -38 -11 -11 -10 5 Ytd Move (bps) 450 42 116 15 -7 -52 -38 -57 -79 -55 -60 -60 -62
15
4 - Earnings remain a support, but size of surprises to slow in 2H

Macro momentum vs earnings surprises
Most of the leading indicators that we follow for earnings suggest further growth ahead The trends in IFO, yield curve shape, margin proxy etc, are bullish for near term profits, but 2H is likely to witness a rollover
40 30 20 10 0 -10 -20 -30 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
80% 60% 40% 20% 0% -20% -40% -60%
S &P 500 P os itiv e / N egativ e EPS s urpris es % y oy
ISM % y oy (rhs )
Source: Bloomberg, assuming July ISM at 52
US profit margins proxy* vs corporate profits

60% 50% 40% 30% 20% 10% 0% -10% -20% -30% 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 US corporate profits %y oy USA prox y for profit margins (%y oy , rhs) -4% -6%
-60% -40%
IFO vs European profits

8% 6%
40% 60% 25% 20% 15% 10% 5% 0% 0% -5%
4%
20%
2% 0% -2%
-20%
-10% -15% -20% -25% 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Europe trailing earnings (%y oy , adv 13m)
IFO (%y oy , rhs)
Source: Datastream, BEA, J.P. Morgan, * GDP deflator Unit labor cost
Source: Datastream
16
EPS integer continues to move higher; Dominated by Cyclicals

European earnings integer moved up by 13% ytd. Cyclicals showed the bulk of upgrades
115
Typical EPS trajectory 88-02 vs 03-06
In the last cycle analysts were behind the curve
110 105 100 95
YTD change in 12m Fwd sector EPS forecasts

S e m ic o n A u t o m o b ile M e t& M in C h e m ic a ls B anks C o n s D u r a b le s T ra n s p o rt C ap G oods R e t a ilin g HPC H o t e ls , R e s t& L e is E u ro p e Food B ev& Tob F o o d D ru g R e t S o ftw a re D iv F in R e a l E s ta te E n e rg y M e d ia H e a lt h c a r e In s u ra n c e T e le c o m s C ons M at U tilitie s T e c h H a rd w a re
Source: IBES up to 27th July
90 85 80 Jan F eb M ar Apr M ay Jun Jul Aug Sep Oct N ov Dec
138% 87% 48% 25% 22% 21% 20% 19% 16% 14% 14% 13% 10% 10% 10% 9% 9% 8% 8% 7% 1% 1% -2 % -3 % -1 5 %
1 9 8 8 - 2 0 0 2 a v e r a g e c u r r e n t y e a r E P S e s tim a te s 2 0 0 3 - 0 6 a v e r a g e c u r r e n t y e a r E P S e s tim a te s
Source: IBES
Europe EPS +ve to ve revisions

40% 20% 0% -20% -40% -60% -80% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Europe +v e to -v e EPS rev isions

Source: IBES, J.P. Morgan
17
Profit margins troughing at relatively high level, FX tailwind

Europe vs US 12m Fwd earnings vs EUR/USD
Margins are troughing at relatively high levels in 2009, despite steep volume falls Corporate restructuring, aggressive cost control, top-line diversification, lower interest costs and taxes have contributed to margins holding up The weakening Euro is acting as a tailwind to European vs US profitability trends
40% 30% 20% 10% 0% -10% -20% -30% -40% 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
-30% -20% -10% 0% 10% 20% 30%
Europe F w d earnings rel to U S (ex -F inancials, %y oy )

Source: Datastream, MSCI, IBES
EU R /U SD (%y oy , rhs,rs)
European EBIT/Sales
14% 13% 12% 11% 10% 9% 8% 7% 99 00 01 02 03 04 05 06 07 08 09 10 11
European P&L decomposition

As % of Sales Staff costs COGS excl staff costs SGA costs Other expenses EBITDA Depreciation EBIT Interest Other income Pretax Income Taxes Minority, disctd, etc Net Income Taxes as % of pretax income EBIT / Sales Net income / Sales 2003 16.4% 51.1% 14.8% 1.9% 15.8% 7.4% 8.4% 2.0% 0.0% 6.5% 2.4% 0.1% 3.9% 37.5% 8.4% 3.9% 2004 15.5% 52.2% 14.0% 1.0% 17.2% 6.9% 10.4% 1.7% -0.1% 8.7% 3.1% 0.0% 5.6% 35.3% 10.4% 5.6% 2005 15.3% 51.6% 13.8% 1.1% 18.2% 6.0% 12.2% 1.6% 0.0% 10.6% 3.6% 0.2% 6.9% 33.6% 12.2% 6.9% 2006 15.0% 52.0% 13.5% 1.9% 17.6% 5.6% 12.1% 1.7% -0.1% 10.5% 3.6% 0.2% 6.7% 34.1% 12.1% 6.7% 2007 14.6% 52.1% 13.0% 1.1% 19.2% 5.6% 13.6% 1.8% -0.1% 11.9% 3.8% 0.0% 8.1% 31.9% 13.6% 8.1% 2008 14.5% 53.9% 12.6% 2.0% 17.1% 5.3% 11.7% 2.0% -0.1% 9.8% 3.4% 0.3% 6.2% 34.5% 11.7% 6.2% 2009 16.2% 51.0% 13.9% 3.0% 15.8% 6.4% 9.5% 2.1% -0.1% 7.5% 2.6% 0.1% 4.9% 34.7% 10.5% 4.9%
EBIT/Sales Europe
IBES forecasts
Source: Datastream, Worldscope, J.P. Morgan Source: Datastream, IBES
18
Moving away from low quality beats

European revenue growth
The Q2 reporting season has delivered strong results, above street estimates on both the top line and bottom line Unlike Q2, Q3 and Q4 09, where positive news flow was mostly margin related, the majority of corporates in both the US and Europe have surprised consensus revenue projections for Q1 and Q2
15% 8%
13% 10% 7% 9%
10% 5%
0% -1% -5%
-10% -15% -12%
-9% -13% -15% -12%
-10%
-20% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10e
DJStox x 600 Sales grow th (%y oy )
DJStox x 600 ex -Financials Sales grow th (%y oy )
Source: Bloomberg, IBES, J.P. Morgan
Summary of the US Q2 reporting season

% cos beating EPS % reported estimates 61% 77% 62% 71% 81% 68% 82% 85% 43% 88% 48% 89% 69% 77% 73% 83% 61% 61% 33% 67% 31% 55% % cos beating Sales estimates 62% 48% 60% 70% 74% 26% 60% 70% 70% 0% 55%
Summary of the European Q2 reporting season

% cos beating EPS % reported estimates 56% 59% 52% 64% 50% 50% 67% 58% 62% 69% 45% 56% 41% 67% 40% 60% 83% 73% 64% 67% 80% 33% % cos beating Sales estimates 70% 64% 56% 69% 73% 70% 100% 68% 71% 100% 58%
S&P500 Energy Materials Industrials Discretionary Staples Healthcare Financials IT Telecoms Utilities
Source: Bloomberg
No. of cos reported 301/497 24/39 25/31 46/56 34/80 19/40 35/51 58/80 46/76 3/9 11/35
EPS surprise 10% 9% 7% 9% 21% 2% 4% 26% 4% 3% 3%
Sales surprise 0% -6% 1% 0% 3% 0% 0% 7% 2% 0% -3%
DJStoxx600 Energy Materials Industrials Discretionary Staples Healthcare Financials IT Telecoms Utilities
Source: Bloomberg
No. of cos reported 160/288 11/21 18/36 36/54 16/26 9/20 9/22 25/62 15/18 9/14 12/15
EPS surprise 6% -5% 6% 28% 24% 1% -2% 16% -3% 5% -2%
Sales surprise 6% 15% 1% 1% 3% 0% 3% 9% 1% 4% 6%
19
10-11 hurdle rate appears challenging, but achievable

Y +24m MSCI Europe EPS growth from the trough
Y +24m S&P500 operating EPS growth from the trough
10 and 11 expectations appear aggressive at face value, but we believe operational leverage could be substantial Earnings rebound has historically been proportional to the size of the fall
US and European consensus EPS growth forecasts
Europe '11e vs peak -4% -13% 1% 2% 2% 29% 34% -31% -6% 1% -11% US '11e vs peak 18% -21% 8% 1% 49% 22% 21% -12% 54% -18% 3%
MSCI Europe EPS fall and rebound around past recessions

100% 2003 90% 80% 70% 1993 1976 60% 50% 40% 30% 1982 20% 10% 0% -48% -46% -44% -42% -40% -38% -36% -34% -32% -30% X MSCI Europe EPS fall Peak to Trough
Source: Datastream, IBES
2009
'08 Market Energy Materials Industrials Discretionary Staples Healthcare Financials IT Telecoms Utilities -24% 19% 4% -9% -26% 8% 11% -70% -3% 12% 3%
'09e -20% -47% -58% -32% -54% -9% 10% 49% -48% -2% -7%
'10e 33% 34% 80% 37% 115% 10% 11% 56% 59% 1% -4%
'11e 18% 20% 30% 20% 25% 11% 6% 28% 27% 4% 3%
'08 -31% 24% -11% -1% -23% 1% 10% -151% 11% -3% -1%
'09e 1% -54% -47% -29% 18% 4% 2% -5% -28% -3%
'10e 34% 41% 68% 19% 40% 8% 7% 45% 1% 2%
'11e 16% 21% 25% 18% 18% 8% 9% 30% 11% 14% 4%
S&P500 EPS fall and rebound around past recessions

2001 100% 80% 60% 2009 1991 1983 1958 1949 1981 -60% -50% -40% -30% -20% -10% 0% 1975 1953 40% 20% 0% -20%
1961 1970
Source: IBES, % yoy as of 27th July

X S&P500 operating EPS fall Peak to Trough
20
Real GDP vs 08 peak => new high achieved at global level in Q2 10

When will GDP regain past peak
US real GDP is expected to surpass its past peak in Q3 10. For Europe, this should happen by the end of 2011 / start of 2012 Historically, the size of GDP loss was proportional to the size of rebound => suggesting US real GDP should be growing 67%, rather than 3-4%
Region Global US UK Euro Area Germany France Japan EM Source: J.P. Morgan estimates
08 Peak 08Q2 08Q2 08Q1 08Q1 08Q1 08Q1 08Q1 08Q3
Expected/Reached new High 10Q2 10Q3 12Q1 12Q1 12Q1 11Q1 12Q1 09Q3
US real GDP rebound in the past cycles

9 Y - % Gain in US real GDP during the first year of past recoveries 8 7 6 5 1970 4 current 3 2 1 0 0 -1 -2 -3 -4 -5
95 120
Global real GDP projections
1948-49 1960-61
1981-82 1957-58 1953-54 1973-75
115
110
1980
105
1990-91 2001
100
05
06
07
08
09
10 J PM forecasts
11
X - % Fall in US Real GDP during past recessions
Global R eal GDP index (2005=100, sa)
Source: BEA, Blue Chip forecasts
Source: J.P. Morgan estimates
21
Profit margins in the long-term context

Investors are sceptical about the magnitude of potential margin recovery We think margins will cyclically rebound, supporting valuation multiples Longer-term margins will depend on inflation, potential growth, etc 1950-60s displayed structurally high margins (although still cyclical) against a backdrop of low inflation, low risk-free rates and low wage growth. Some of these conditions might hold again
European RoE vs GDP growth

18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 6% 4% 2% 0% -2% -4% -6% -8%
14% 13% 12% 11% 10% 9% 8% 7% 6%
US NIPA profit margins
47
50
53
56
59
62
65
68
71
74
77
80
83
86
89
92
95
98
01
04
07
10
Europe RoE
Source: Datastream
Europe GDP (%y oy , rhs)

Recessions
US Corporate profits as a % of GDP
22
NIPA profit margin breakdown

Financials margins likely to be structurally under pressure, but short term they are supported by steep yield curves EM margins, to which both US and Europe are significantly leveraged, need not structurally weaken Domestic non-financial margins are not stretched
US domestic financial margins

4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 47 50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10
Recessions
US Domestic financial corporate profits as a % of GDP
Source: NBER, BEA
Foreign profit as a share of GDP

3.5% 3.0%
12% 14%
Domestic non-financial margins
2.5%
10%
2.0% 1.5% 1.0% 0.5% 0.0% 47 50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10

8% 6%
4% 2% 47 50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10
Recessions
US Foreign profits as a % of GDP
Recessions
US Domestic non financial corporate profits as a % of GDP
Source: NBER, BEA
Source: NBER, BEA
23
5 - Fiscal drag and an end to inventory rebuild vs. the improving private demand capex, consumer, smaller businesses
The fiscal drag is likely to subtract an average of 1-1/4%-pt from GDP growth over the next six quarters and to become more significant from Q1 11 onwards Inventory rebuild and the acceleration in production, which typically lasted four quarters, is coming to an end
J.P. Morgan US GDP forecast
2009, %q/q, saar 4Q real GDP final sales* Inventories* Inventories ** IP 5.6 1.5 3.8 -19.7 5.6 1Q 2.7 1.7 1.9 41.2 6.1 2Q 2.5 3.7 -0.1 37.5 7.9 2010, %q/q, saar 3Q 2.5 2.6 -0.1 35.1 3.5 4Q 3.0 2.8 0.1 37.5 4.0 1Q 2.5 2.3 0.1 39.9 4.0 2011, %q/q, saar 2Q 2.5 2.5 0.1 42.9 4.0 3Q 3.0 2.9 0.0 41.70 4.5
Source: J.P. Morgan estimates *as a contribution to GDP growth **change in absolute level of inventories (ch $bn, chained $2000)
Estimated contribution of fiscal policy to US GDP growth

4 3 2 1 0.0 0 -1 -2 -3 -0.6 -1.3 -1.1 -1.5 -2.6 -1.2 -0.8 1. 4 3.6
Fiscal thrust and private final sales

%oya GDP 2009 2010e 2011e Fiscal thrust (+ is stimulative) 2009 2010e 2011e Inventory contribution 2009 2010e 2011e Underlying private final sales 2009 2010e 2011e
Source: J.P. Morgan economic research
DM -3.5 2.5 2.3 2.4 0.0 -1.1 -0.6 0.8 -0.1 -5.2 1.6 3.5
US -2.4 2.9 2.8 2.8 0.1 -1.3 -0.6 1.2 0.0 -4.7 1.6 4.1
EMU -4.1 1.3 1.4 2.0 0.2 -1.3 -0.8 1.2 -0.4 -5.3 -0.1 3.1
Japan -5.3 3.6 2.2 2.2 0.3 0.2 0.2 -0.2 0.0 -7.7 3.4 2.0
UK -4.9 1.6 2.6 2.1 -2.0 -2.4 -1.2 0.8 0.5 -5.8 2.6 4.4
2009E
2010E
-2.9
2011E
Source: J.P. Morgan economic research, % chg, saar
24
The size of the needed fiscal consolidation, manageable at EMU level

Putting Eurozone sovereign concerns into perspective, the primary deficit for Eurozone as a whole is no worse than those for the US, UK or Japan
Primary budget position and debt (%GDP, 2009)
UK US Japan Stability and Growth Program deficit Euro area Germany France Italy Spain Netherlands Belgium Austria Greece Ireland Finland Portugal Slovakia Slovenia Luxembourg Cyprus Malta -3.2 -7.9 -5.3 -11.4 -4.9 -5.9 -3.5 -12.7 -11.7 -2.2 -9.3 -6.3 -5.7 -1.1 -0.9 -6.6 Deficit (Eurostat) -6.3 -3.3 -7.5 -5.3 -11.2 -5.3 -6.0 -3.4 -13.6 -14.3 -2.2 -9.4 -6.8 -5.5 -0.7 -6.1 -3.8 Primary deficit -3.5 -0.7 -5.2 -0.6 -9.4 -3.0 -2.3 -0.7 -8.5 -12.2 -1.0 -6.6 -5.3 -4.1 -0.2 -3.6 -0.6 Cycl-adj primary position -1.4 1.5 -3.3 1.8 -8.1 -0.7 -0.9 0.1 -7.6 -6.8 1.7 -5.2 -3.4 -0.5 1.0 1.0 -3.8 Gross debt 78.7 73.2 77.6 115.8 53.2 60.9 96.7 66.5 115.1 64.0 44.0 76.8 35.7 35.9 14.5 56.2 69.1 Euro area Germany France Italy Spain Netherlands Belgium Austria Greece Ireland Finland Portugal Source: J.P. Morgan economic research 2010e -0.2 -3.1 0.2 0.1 2.7 -1.5 1.3 -1.2 9.5 0.9 -1.4 2.4 2011e 1.3 0.5 1.9 0.8 3.4 0.8 0.6 0.9 1.9 0.8 0.6 3.8 2012e 1.2 1.5 1.2 0.7 1.8 0.3 0.8 0.7 1.3 2.1 0.1 2.1
Fiscal positions (%GDP, 2009)

Fiscal Balance Euro area -6.3 -12.6 -9.9 -10.7 Primary balance -3.5 -10.7 -8.6 -8.6 Cyc adj Primary Balance -1.4 -6.5 -5.3 -6.0
Gross debt 78.7 72.9 83.4 189.3
Net debt 51.7 55.6 53.0 96.5
Fiscal thrust across the Euro area
25
Periphery facing a Herculean task, though

Previous fiscal adjustments* in EMU
The size of proposed Greek fiscal adjustment is ranking the top of historical achievements, at 12-13% of GDP Refinancing schedule to ease in H2
ECB funding as % of total bank assets
EMU Dec-08 Dec-09 Jun-10 Change 2.6% 2.1% 2.7% 0.1% Greece 8.3% 9.2% 17.3% 9.0% Ireland 5.1% 5.6% 5.6% 0.5% Italy 1.4% 0.7% 0.9% -0.5% Portugal 2.1% 3.2% 7.6% 5.5% Spain 2.7% 2.0% 3.9% 1.2%
Share of Eurozone GDP Belgium Germany Portugal Netherlands Greece Ireland Italy Finland Spain Austria France Average Median 4% 29% 2% 6% 2% 2% 16% 2% 10% 3% 21%
Largest move % pts of GDP 8.7 7.6 7.5 6.7 6.4 6.3 6.0 6.0 3.1 3.0 2.9
Date 1982-84 1996-98 1982-84 1996-98 1992-94 1982-84 1991-93 1998-00 1994-96 1995-97 1994-96
Real GDP Avg Annual Growth 1.1% 1.6% 0.0% 3.9% 0.4% 2.1% 0.5% 4.7% 2.5% 2.1% 1.8% 1.9% 1.8%
Abs Perf (LC) 82.9% 107.2% 116.3% 20.0% 31.5% 38.5% 444.9% 44.4% 12.4% 10.2% 90.8% 41.5%
Perf Rel to MSCI Europe (LC) 4.8% 10.3% 19.4% -10.2% 18.4% -22.6% 396.3% 20.7% -68.6% -13.6% 35.5% 7.5%
Perf Rel to MSCI Europe ($) 7.9% -6.1% 0.6% -29.2% -38.3% 338.1% 17.8% -73.5% -15.7% 22.4% -6.1%
Source: National central banks, ECB aggregate MFI balance sheet, J.P. Morgan Fixed income research
Source: J.P. Morgan economic research, * largest three-year moves in cyclically adjusted primary balances
Government debt cost, maturity and redemption schedule

10-year Bond yield (%) Average in 90-ies Spain Italy Portugal Greece Ireland Total
Source: J.P. Morgan Fixed income research, Bloomberg
Avg debt maturity (years) 6.6 6.8 6.5 7.4 6.9 Jun-10 8.1 47.2 1.6 0.0 1.3 58.2 Jul-10 29.9 21.7 4.5 7.5 2.0 65.6 Redemption schedule bn, bonds (principal plus interest) and bills Aug-10 6.8 45.4 0.0 2.0 0.8 55.0 Sep-10 5.8 51.8 3.1 1.0 0.0 61.7 Oct-10 7.4 7.3 1.2 3.3 1.0 20.2 Nov-10 5.5 30.9 2.6 0.1 0.2 39.3 Dec-10 4.6 19.4 0.0 0.1 0.0 24.1 1Q11 18.7 83.5 6.4 12.3 1.1 122.0 2Q11 22.0 39.8 12.4 10.4 1.5 86.1 3Q11 25.0 81.7 0.4 12.0 0.0 119.1 4Q11 23.9 21.2 1.2 7.0 5.6 58.9
Latest 4.1 3.9 5.2 10.3 5.2
8.9 9.5 7.8 7.9 7.6
26
Tracking the fiscal adjustment in the Euro area: So far so good

The monthly budget data through June are now available for Greece and Spain It appears that public finances are on track to reach the respective government objectives of fiscal consolidation for this year
Greek govt. cash deficit and annual fiscal balance
Portuguese govt. cash deficit and annual fiscal balance
Spanish govt. cash deficit and annual fiscal balance
27
Recovery so far: Eurozone is not the odd one out

Majority of macro indicators for June and July remained robust in Europe Within Eurozone, Germany, Austria, Netherlands and France appear in relatively stronger positions, while Greece, Spain and Ireland are weaker Only Greece is double dipping so far
Manufacturing and employment indicators in EMU
Share in Euro Area GDP 29% 6% 100% 21% 3% 16% 2% 10% 2% PMI Manufacturing Overall, sa 61.2 55.9 56.5 53.7 59.0 54.3 51.8 51.2 42.2 PMI Manufacturing Unemploymen Employment t Rate 54.0 7.1 52.2 4.3 51.7 10.0 45.8 9.9 54.8 4.1 49.8 8.7 47.9 12.9 46.2 19.7 41.1 10.2
Germany Netherlands EMU France Austria Italy Ireland Spain Greece

Source: Datastream
EMU manufacturing PMI breakdown

65 60 55 50 45 40 35 30 25 Jan-08 Apr-08 EMU Jul-08 Oct-08 Jan-09 France Apr-09 Jul-09 Greece Oct-09 Italy Jan-10 Ireland Apr-10 Jul-10 Spain
10 0 -1 0 -2 0 -3 0 -4 0 -5 0 -6 0 -7 0 -8 0
EMU consumer confidence breakdown
J a n -0 8
A p r-0 8
J u l-0 8
O c t-0 8
J a n -0 9
A p r-0 9
J u l-0 9
O c t-0 9
J a n -1 0
A p r-1 0
J u l-1 0
Germany
EM U
G e rm a n y
F ra n c e
G re e c e
Ita ly
S p a in
Source: Datastream
Source: Datastream
28
FX boost and resilient macro momentum to counter austerity packages

The economic underperformance of Europe in the early stages of an upturn has been a regular feature of past recoveries. However, the European data in this upcycle has been robust so far Eurozone composite output PMI index printed 56.7 in July, consistent with 3% real GDP growth, in contrast to Blue Chip forecast for 2010 which stands at 1% FX tailwind to offset fiscal tightening in periphery
US ISM vs Eurozone PMI
65 60 55 50 45 40 35 30 97 98 99 00 01 02 03 EMU PMI
Source: Markit, ISM
160 140 120 100 80 60 40 20 0 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
J.P. Morgan real GDP projections (%yoy)

2010e Euro area Germany France Italy Spain Greece Portugal Ireland Source: J.P. Morgan estimates 1.3 2.2 1.6 1.2 -0.2 -4.4 0.8 -0.8 2011e 1.4 2.2 1.4 1.3 -0.1 -4.2 -1.0 0.6 2012e 1.8 2.0 1.8 1.7 1.5 1.0 1.0 2.0
US vs Eurozone consumer confidence

5 0 -5 -10 -15 -20 -25 -30 -35 -40
04
05
06
07
08
09
10
US ISM
US Conference Board index - consumer confidence EU surv ey - consumer confidence indicator (rhs)
Source: Conference Board, European Commission
29
Drivers of final demand a) Remain bullish on capex

We continue to see the key leading indicators of corporate spend: 1) change in bank lending standards, 2) turn in the profit cycle and 3) the momentum in utilisation rates, as supportive of stronger capex However, from equity market perspective, we have recently closed our long standing OW Capital Goods call (since Feb 09) as we believe it is a crowded trade
Lending standards vs non-residential capex
-40 -20 0 20 40 60 80 100 91 93 95 97 99 01 03 05 07 09 11 15% 10% 5% 0% -5% -10% -15% -20% -25%
US bank lending standards - net% tightening (adv 3q, rs)

Source: Datastream, Federal Reserve
US non residential capex (%y oy , rhs)
US corporate profits vs non-residential capex

60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 -25% -5% -15% 5%
0% -5% -10% -15%
US capacity utilization vs non-residential capex

35% 25% 15%
15% 10% 5% 35% 25% 15% 5% -5% -15% -25% 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
US corporate profits (%y oy , brought forw ard 3 quarters)

Source: Datastream
US capacity utilization (%y oy ,brought forw ard 2 quarters)
Source: Datastream
30
Starting point favourable, capex share of GDP record low; corporate balance sheets cash rich Cash* on MSCI Europe* balance sheets
The pushback is the low utilisation rate, but actual capex levels are also at record lows. Unlike the trough of the last cycle, when corporate balance sheets were under pressure, the cash on balance sheets is at record highs at present. This bodes well for M&A, dividends/buybacks and capex.
700 18% 600 16%
500 14% 400 12% 300 10% 200 8%
100
0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
6%
M SC I Europe ex -F inanc ials C as h on Balanc e s heet (bn)
M SC I Europe ex -F inanc ials C as h / M ark et c ap (rhs )
Source: Worldscope, *bottom-up aggregated, ex-financials and companies with short record
US capex as a share of GDP

20% 19% 18% 17% 16% 15% 14% 13% 12% 11% 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 Priv ate fix ed inv estment % of GDP av erage
Eurozone capex as a share of GDP

23.0% 22.5% 22.0% 21.5% 21.0% 20.5% 20.0% 19.5% 19.0% 18.5% 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Eurozone Nominal gross fix ed inv estment % of GDP
av erage
Source: J.P. Morgan
Source: Eurostat
31
Drivers of final demand b) Consumer needs to see further improvement in labour markets
Ultimately, the key condition for sustainable consumption growth is improvement in the labour market. Latest indicators are mixed, but on balance point up: 1. Jobless claims are stuck in a range at 460k;we believe 500k is breakeven for +ve payrolls; 2. Private payrolls in positive territory for six months in a row; 3. Productivity surge calls for stronger hiring; 4. ISM Employment index at 57.8 (near 40-year highs); 5. Challenger/Manpower surveys constructive
US non-farm private payrolls (000s)
600 400 200 0 -200 -400 -600 -800 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
70 65 60 55 50 45 40 35 30 25 20 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
US Retail sales vs unemployment rate

20% -40%
15%
-20%
10% 0% 5% 20% 0% 40% -5% 60%
-10%
-15% 68 69 70 71 72 73 74 75 76 77 78 79 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 R etail s ales - total, s a % y oy C iv ilian unem ploy m ent rate, s a (% y oy , rhs , rs ) unem ploy m ent rate forec as ts
80%
Source: JP Morgan, Datastream
ISM employment component
US non-farm private payrolls (1m ch, 000s)

Source: Datastream Source: Datastream
ISM m anufac turing s urv ey - em ploy m ent
32
Jobless recovery?
US total hours worked, start of expansions
We contrast the movement in hours worked and jobless claims to past recoveries, split into strong (1975 & 1983) and weak (1992 & 2002) labour recoveries The trajectory of hours worked and jobless claims momentum remains consistent with the path of historical strong labour recoveries
% 3m , s aar 10 S tro n g re c o v e rie s
5 C u rre n t 0
-5
"J o b le s s " re c o v e rie s
-1 0 t= 0 +3 +6 +9 +1 2 M o n th s s in c e e n d o f re c e s s io n , t = 0 re p re s e n ts e n d o f re c e s s io n
Source: J.P Morgan
US jobless claims, start of expansions

3m prior to end of recession=100 110
100
M ild recov ery
90
80 C urrent 70 Strong recov ery
60 -3 0 3 6 M onths (0 = end of recession) 9 12
Source: J.P. Morgan
33
European labour markets are improving

The size of labour market adjustment in Eurozone was substantial, but there is a clear improvement in European labour market indicators evident The latest employment PMI reading at 50.9 is higher than in 03, 04 or 05, higher than at any point during the first three years of past cyclical upswings
Eurozone employment PMI
60
55 50
45 40
35 30 98 99 00 01 02 03 04 05 06 07 08 09 10
EM U PM I m anufac turing s urv ey - em ploy m ent
Source: JP Morgan, Datastream
UK ILO & Claimant Count

300
Euro area unemployment change

800 600 400 200
200
100
0 -200 -400
03 04 05 06 07 08 09 10
-100
-200
00
01
02
03
04
05
06
07
08
09
10
ILO 3m C h in 3m m a, thous ands

Source: Eurostat
U K C laim ant C ount 3m C h in 3m m a, thous ands

Source: Eurostat
Euro Area Unemploy ment sa, m/m ch
Euro Area Unemploy ment sa, m/m ch in 3mma
34
c) Recovery broadening to smaller businesses

Contrary to the consensus view that smaller companies will not see a recovery because they are cut off from access to credit, small cap surveys in all parts of the world have been on an uptrend
Shoko-Chukin small firms business sentiment index
50 45 40 35 30 25 20 May -08 Sep-08 Jan-09 May -09 Sep-09 Jan-10 May -10
Shoko-Chukin small firms' business sentiment index

Source: J.P. Morgan
US Small Business Confidence

94 92 90 88 86 84 82 80 J an-08 M ay -08 Sep-08 J an-09 M ay -09 Sep-09 J an-10 M ay -10
German VDMA machinery orders

80% 60% 40% 20% 0% -20% -40% -60% -80% 00 01 02 03 04 05 06 07 08 09 10
N F IB Sm all Bus ines s O ptim is m Index
Germany Plant & Machinery Orders YoY

Source: Bloomberg
Source: Bloomberg
35
Delinquencies peaking
Good correlation between macro momentum and delinquencies, suggesting delinquencies are falling in absolute terms now The turn in the credit cycle is the big positive for banks profitability
US residential mortgage delinquencies vs jobless claims

50% 40% 30% 20% 20% 10% 0% -10% -20% 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 0% -20% -40% 80% 60% 40%
US commercial loan delinquencies vs IP

10% 5% 0% -5% -10% -15% 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 US IP (y oy %) JPM IP forecast US Delinquency Rates - Commercial and Industrial Loans (y oy %, rs, rhs)
-60% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140% 160%
U S res idential m ortgage delinquenc ies (%y oy )
U S jobles s c laim s (%y oy , rhs )
Source: Datastream
36
China backdrop growth redistributes - policy tightening to slow

Chinese growth slowing and rebalancing, but not expecting a hard landing Chinese inflation to peak in Q3 and to allow policymakers to relax the tightening process
China inflation
10% 8% 6% 4% 2% 0% -2% -4% 00 01 02 03 04 05 06 07 08 Forecast 09 10 11
China CPI %y oy
Source: Datastream, J.P. Morgan estimates
China GDP growth and contribution breakdown

12% 10% 8% 6% 4% 2% 0% -2% -4% -3.9% -6% 2009 Real GDP 2010e Consumption % Inv estment Net trade 2011e 0.8% 4.4% 4.6% 5.3% 4.7% 4.5% 8.7% 8.1% 10.8% 9.4%
Chinese interest rates

4.0 3.5 3.0 2.5
0.3%
2.0 1.5 1.0 J a n -1 0 F e b -1 0 M a r-1 0 A p r-1 0 M a y -1 0 J u n -1 0 J u l-1 0
Source: J.P. Morgan economic research Source: Bloomberg
C H IN A IN T E R B A N K R E P O 7 D
37
6 - Inflation risk limited, DM central banks to remain accommodative for longer

Historically, core CPI would bottom out only with a long lag following the trough in activity, after more than two years, on average. This time around the output gaps are even more extreme Some pickup in inflation expectations would be welcome for Eurozone given the low recent inflation readings
Euro area vs German core inflation
2.5
2.0
1.5
1.0
0.5 07 08 Germany core CPI %y oy 09 Eurozone core CPI %y oy 10
Source: Eurostat
US output gap
600
US median CPI
5
400
4
200
-2 0 0
2
-4 0 0
-6 0 0
-8 0 0
0
-1 0 0 0 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
M e d ia n C P I (% y o y )
J P M a n d C B O fo re c a s ts U S O u tp u t G a p
38
UK Inflation bucks the trend

While US, Eurozone and Japanese inflation remains on a firm downtrend, UK inflation remained uncomfortably high We expect UK inflation to peak out right now, and move to 1.5% yoy run rate by the end of this year
UK core vs headline inflation
6% 5% 4% 3% 2% 1% 0% 2007 2008 U K headline C PI %y oy 2009 U K c ore C PI % y oy 2010
Source: ONS
Core services vs goods inflation

6 4
4.0 5.0 4.5
CPI services vs JPM composite slack

2
2 0 -2 -4 04 05 06 07 08 09 CPI Serv ices, %oy a 10
3.5 3.0 2.5 2.0 1.5 1.0 97 98 99 00 01 02 03 04 05 06 07 08 09 10
-1
-2
-3
-4
CPI, Goods Ex Food and Energy , %oy a

Source: J.P. Morgan
CPI Serv ices Inflation %y oy
Slack one y ear ahead, % dev of output from potential, rhs
Source: J.P. Morgan
39
Timing of Fed exit: way too early to position for it

Non-farm payrolls at times of Fed hikes (000)
JPM expecting start of policy normalisation in Q4 2011 Equities have fallen every single time in the aftermath However, the equity uptrend has resumed following the initial weakness
End of recession Apr-58 Feb-61 Nov-70 Mar-75 Jul-80 Nov-82 Mar-91 Nov-01 Average Median Source: Datastream
Payrolls -274 -127 -110 -270 -263 -124 -160 -292 -203 -212
1st Fed Hike Jul-58 Nov-61 Jul-71 Aug-77 Oct-80 Mar-84 Feb-94 Jun-04
Payrolls 125 222 63 238 280 275 201 81 186 212
# mths positive payrolls 1 7 5 26 3 7 24 10 10 7
S&P500 performance around the first hike

105 103 101 99 97 95 93 91 89 87 85 1st hike -12M -10M -8M -6M -4M -2M +10M +12M +2M +4M +6M +8M
85 90 95 100 105 110
S&P500 maximum fall following the first hike
1s t hik e
30 d 1971
60 d 1977
90 d 1980
120 d
150 d 1984
180 d 1994
210 d 2004
1s t hik e
Av erage S&P500*
M edian S&P500*
Source: Datastream, *re-based to 100 on the day before the 1st hike, since 1971
Source: Datastream, *re-based to 100 on the day before the 1st hike
40
Money illusion to show up again, credit growth not needed early in recovery
Distinction between Stock and Flow of credit. The starting leverage is excessive, but it might not prevent the cyclical response to liquidity injection Economic participants to artificially feel better off again Actual credit expansion not needed in the early stages of recovery
Household leverage
2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
UK HH Debt / Income ratio US HH Debt / Income ratio France and Germany av erage HH Debt / Income ratio (rhs)
Source: ECB, BOE
Corporate credit growth vs recessions

20%
UK House prices
30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20%
15%
10%
5%
0%
-5% 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 R ecessions U S flow of funds - N onfinancial s ector debt - corporate business (%y oy )
92 93
94 95
96
97 98
99 00
01 02
03 04
05 06
07 08
09 10
Nationw ide house price index , sa (%y oy )

Source: Nationwide
Source: Federal Reserve
41
Looking at 2004 pause

Using the last recovery as an example, the initial equity gains were largely made from March 03 to Jan 04, with MSCI Europe up almost 50%. Subsequently, equities were flat for the ensuing 7 months However, in 2005 the equity advance resumed
MSCI Europe in 2003-04
1100 1050 1000 950 900 850 800 750 700 650 Dec-02 M ar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 MSCI Europe up 51% MSCI Europe down 8%
MSCI Europe
Source: Datastream
Valuations in 2004 vs current

25
Fed funds rate and bond yields in 2004

2.5 5.0
23 21 19 17 15 13 11
2.3 2.1
4.8
Feb-04 13.8x fwd P/E
4.6
June-10 10.8x fwd P/E
1.9 4.4 1.7 4.2 1.5 1.3 4.0
9 7 5 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
1.1 0.9 Jan-04 Apr-04 Fed Funds rate Jul-04 US 10Y bond y ield (rhs) Oct-04
3.8
3.6
MSCI Europe 12m Fw d P/E
Source: Datastream
42
7 Near-term valuations: at or below fair value

MSCI Europe 12m Fwd P/E
The first stage of equity rebound is driven by multiple expansion. Despite strong re-rating in 2009, on a number of metrics stocks are still at or below historical fair value
25 23 21 19 17 15 13 11 9 7 5 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 median 04 05 06 07 08 09 10
MSCI Europe 12m Fw d P/E
MSCI Europe P/Book

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3
MSCI Europe P/Sales
MSCI Europe P/Book
median
96
97
98
99
00
01
02
03
04
05
06 m e d ia n
07
08
09
10
Source: Datastream, MSCI Source: Datastream, MSCI
M S C I E u ro p e P ric e to S a le s
43
Yield gaps attractive: could drive asset allocation shift to stocks

European dividend yield gap
European equities still trade at the largest DY vs bond yield spreads since March 2003 The drive for yield compression could push stocks to re-rate further
5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% 99 00 01 02 03 04 05 06 Div idend Yield Gap 24m m a DY Gap
Equities expensive
Equities cheap
07 08 09 -1.5 Stdev 10
+1.5 Stdev
Source: J.P. Morgan
Dividend yield vs corporate bond yield (%)

Dividend yield Utilities Telecom Energy Chemicals Staples Real Estate Technology Building Materials Capital Goods Transport Autos
Eurozone HG corporate yield minus dividend yield

6.0%
High grade yield 3.6 3.8 3.6 2.6 3.0 3.6 3.5 4.1 3.5 3.5 2.6
Difference 2.3 2.3 1.3 0.1 -0.3 -0.5 -1.1 -1.2 -1.2 -1.3 -1.8
LT average -0.9 -1.8 -1.5 -1.5 -2.2 -1.8 -3.4 -2.2 -2.1 -2.1 -1.7
5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% 99 00 01 02 03 04 05 06 07 08 09 -1.5 Stdev 10
5.9 6.0 4.9 2.7 2.7 3.1 2.3 2.9 2.3 2.2 0.8
Corp Div idend Yield Gap

Source: J.P. Morgan
24mma DY Gap
+1.5 Stdev
44
Longer-term equity outlook: much more muted

While our tactical (6-9 month rolling horizon) view remains bullish, our medium term (2-3 years) outlook is much more cautious Using S&P500 10-year rolling earnings (at 49$) and historical average P/E since 1900 (at 18.5x), gives S&P500 fair value at 900. Using the P/E average since 1945 (20x) gives fair value at 1000, and P/E since 1980 (24x) gives fair value at 1175. Historically, valuations remained cheap for a long time in the aftermath of structural bear markets Risks to the ultimate carry trade: lower potential growth rates, deflation, de-leveraging of consumer, fiscal consolidation, rise of real interest rates, protectionism, regulation, structurally weaker labour markets, no capital deepening etc
S&P500 cyclically adjusted P/E
60 50 40 30 20 10 0 00 05 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 S&P500 cy clically adjusted P/E Av erage
200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 US non-financial corporates Equities/net worth average
S&P500 Q - ratio
Source: Datastream, Shiller data, J.P. Morgan
Source: Federal Reserve
45
If we have full cycle, the upside could still be significant

We have seen five EPS cycles over the past 40 years in Europe. The subsequent EPS peaks averaged 76% above the prior peaks, taking 7.5 years in between the peaks Assuming earnings in this upcycle follow the same dynamic, and assuming the average P/E that equities traded on peak EPS, we arrive at 100% upside from here over the next 4-5 years Clearly, this is not taking into account the structural drags present now, and could be seen as the blue sky scenario
MSCI Europe EPS integer vs trend

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Europe earnings log
EPS cycles and P/E at the time of peak EPS
Peak date May-70 Nov-74 Oct-80 Jan-90 May-01 Jan-08 Average
Peak EPS integer 7.2 11.8 17.5 34.9 69.2 117.0
% above past peak na 63% 49% 99% 99% 69% 76%
time taken to new high/years n/a 4.5 5.9 9.3 11.3 6.7 7.5 7.5
P/E 11.7 5.6 6.8 12.6 19.6 11.7 11.3 11.3
Trend
next peak? in 2015 Source: Datastream, MSCI
205.6
76%
46
Regional calls: re-entering EM vs DM

We started 2010 cautious on EM vs DM exposure as we saw adverse Growth Inflation tradeoff developing in EM this year. However, we reversed this call recently as we see a potential change in Chinese policy stance in particular, from tightening towards being more market friendly
EM vs DM valuations
1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 90 91 92 93 94 95 96 97 98 99 00 01 av erage 02 03 04 05 06 07 08 09 10
EM vs DM equity performance
140 135 130 125 120 115 110 105 100 95 Jan-09 Apr-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10
MSCI EM 12m Fwd P/E rel to MSCI DM
+1stdev
-1stdev
MSCI EM v s DM
47
OW Europe vs the US
We prefer European equities vs the US as we view them as under owned and relatively attractively priced In addition, European macro backdrop is proving to be rather resilient and interbank market stress is easing
Europe vs US valuations
Europe 12m Fwd P/E 10.8 8.3 13.5 11.7 8.4 13.2 14.9 11.7 17.3 12.1 14.6 13.5 12.3 14.4 17.1 9.9 10.9 9.1 8.3 15.8 15.5 12.9 13.7 10.0 10.4 Div 12m Yield Fw d P/E 3.6% 12.2 5.4% 10.4 2.8% 14.3 2.8% 37.2 1.5% 10.7 2.4% 13.7 2.4% 15.2 0.8% 10.3 1.5% 14.0 4.4% 14.1 3.5% 13.7 3.4% 17.4 3.2% 12.1 2.8% 13.4 2.3% 15.0 3.7% 10.5 3.2% 13.5 2.4% 10.4 4.7% 9.3 3.5% 34.2 1.5% 12.8 3.7% 12.7 0.9% 10.5 6.5% 15.6 6.2% 12.2 US Div Yield 2.2% 2.3% 2.6% 2.1% 1.3% 2.3% 2.1% 0.7% 2.1% 1.6% 1.5% 2.2% 2.1% 3.8% 3.1% 2.3% 1.2% 0.8% 1.8% 4.7% 1.2% 0.4% 2.3% 5.7% 4.6%
Europe vs US vs Bond Yields spread

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 A p r-1 0 M a y -1 0 J u n -1 0 U S - G e rm a n 1 0 y b o n d y ie ld J u l-1 0
Market Energy Chem icals Construction Materials Metals & Mining Capital Goods Transport Autom obile Consum er Durables Media Retailing Hotels,Restaurants&Leisure Food & Drug Retailing Food Beverage & Tobacco Household Products Healthcare Banks Diversified Financials Insurance Real Estate Software and Services Technology Hardware Sem icon & Sem icon Equip Telecom s Utilities
P/Book 1.5 1.3 2.1 1.0 1.5 2.1 1.6 1.0 2.9 2.0 2.6 2.3 1.9 3.4 3.7 2.9 0.8 1.0 0.9 0.9 3.2 1.9 2.3 1.4 1.3
P/Book 1.9 1.7 2.8 1.7 2.0 2.2 2.6 6.1 2.1 1.7 2.5 3.4 2.0 3.6 3.4 2.2 1.1 0.9 1.0 1.9 3.7 2.9 2.6 1.7 1.3
Source: Datastream
European vs US equities and EUR/USD

40% 30% 20% -20% 10% 0% -10% -20% 30% -30% -40% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 40% 50% -10% 0% 10% 20% -50% -40% -30%
Source: Datastream, MSCI, IBES up to 28th July Source: Datastream
MSCI Europe rel to US (%y oy )
US$ to Euro (%y oy , RHS)
48
Within Europe, reducing our preference for Dax vs Eurostoxx

German equities strongly outperformed the rest of Europe this year. We think that this will continue on a two-year view, but also that it is a crowded trade in the short term, and could suffer some reversals
2008 Chinese and German total exports
2008 exports (U$ trillion) China Germany
Source: Datastream
Cyclically-adjusted primary budget position (%GDP)

2009 Euro area Germany France Italy Spain Netherlands Greece
Source: J.P. Morgan estimates
2010e -2.2 -1.7 -4.3 1.4 -6.2 -1.8 -0.6
-1.4 1.5 -3.3 1.8 -8.1 -0.7 -7.6
1.58 1.56
Dax vs Euro zone and IFO

120
Dax vs Europe, since March 09 and March 03

25% 20%
115
30%
20%
15% 10% 5%
110
10%
0% -10%
0% -5% -10% -15% -20%
105
100
-20%
95
-30% 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
-25%
90 tro u g h +1 m +2 m +3 m +4 m +5 m +6 m +7m +8 m +9 m +1 0 m +1 1 m +1 2 m +13m +1 4 m +1 5 m +1 6 m
Da x re l to E u rs to x x (T R ) in 2 0 0 3
Da x re l to E u ro s to x x (T R ) in 2 0 0 9
DAX rel to EM U (T R , % y oy )
IF O (% y oy , rhs )
Source: Datastream, re-based to 100 on 12 March 03 and 09 March 09
Source: Datastream
49
Sector valuations: Europe

Valuations favour Defensives
European sector valuations vs history

12m Fwd P/E Last 10.8 8.4 13.6 11.8 8.3 13.2 14.9 11.8 17.3 12.2 14.6 13.7 12.3 14.4 17.0 9.9 10.9 8.3 15.9 15.7 13.1 13.6 10.0 10.4 12.5 11.6 1.08 Median 13.2 13.4 13.7 11.9 11.3 13.8 14.1 11.7 15.3 17.6 16.2 15.5 14.9 15.1 21.1 17.5 11.3 11.4 20.5 25.8 17.9 20.3 14.2 13.4 14.8 15.2 0.97 % to median 22% 60% 1% 1% 35% 4% -6% -1% -12% 45% 11% 13% 21% 4% 24% 77% 4% 38% 29% 64% 37% 50% 42% 28% 18% 31% -13% Last 1.6 1.3 2.4 1.4 2.0 2.1 2.0 1.2 3.1 2.8 2.9 1.5 2.2 2.9 2.9 3.0 1.1 1.1 1.0 2.7 2.0 3.0 1.8 1.4 2.1 2.4 0.9 P/book Median 1.9 1.5 1.7 1.6 1.1 1.9 1.6 1.2 2.5 2.7 2.6 1.5 2.3 2.1 2.1 2.8 1.2 1.8 1.0 3.8 2.2 2.4 1.8 1.5 1.7 2.2 0.8 % to median 18% 13% -30% 13% -43% -11% -16% -2% -19% -3% -10% 1% 3% -28% -26% -8% 11% 64% -7% 39% 12% -20% 4% 5% -16% -9% -7% Last 14.7 12.7 21.8 12.5 17.4 18.1 17.1 11.7 29.0 15.9 20.5 14.3 19.3 24.5 22.5 19.1 9.3 9.6 12.9 26.5 10.3 27.7 16.0 15.7 17.6 19.3 0.9 Cycle-adj P/E Median 21.2 18.5 17.3 17.3 16.4 22.3 23.1 12.9 35.5 28.9 25.0 22.3 27.7 22.5 22.2 27.0 15.0 36.2 29.6 35.7 24.1 25.3 22.7 21.1 20.5 24.8 0.8 % to median 45% 45% -21% 38% -6% 23% 35% 10% 23% 81% 22% 56% 44% -8% -1% 41% 61% 276% 129% 35% 134% -9% 41% 34% 17% 28% -11% 2-year out P/E Last 9.3 7.2 11.9 9.3 6.9 11.2 11.5 8.8 14.8 10.7 12.9 12.2 11.0 13.3 15.6 9.7 8.0 7.1 14.1 14.2 11.1 11.6 9.2 9.6 10.4 10.7 1.0 Median 12.1 13.1 12.6 10.7 10.5 12.2 12.2 9.5 13.2 14.8 14.2 13.7 13.5 13.8 19.1 15.8 10.1 10.8 19.3 20.8 15.7 17.5 12.5 12.4 12.8 13.8 0.9 % to median 30% 83% 5% 16% 52% 9% 6% 7% -11% 38% 11% 12% 22% 4% 22% 63% 26% 53% 37% 47% 41% 51% 37% 29% 23% 29% -6% 12m Fwd P/Sales Last 1.1 0.9 1.1 1.0 0.8 0.8 0.6 0.4 1.6 1.3 0.7 0.5 0.3 1.2 2.2 2.1 1.6 0.5 8.3 1.7 1.1 1.5 1.3 0.8 0.8 1.4 0.6 Median 1.1 0.9 0.7 0.9 0.5 0.5 0.6 0.4 1.2 1.6 1.0 0.6 0.3 1.1 1.9 2.7 2.8 0.7 8.0 2.5 1.5 2.2 1.5 1.3 0.7 1.4 0.5 % to median 0% -4% -33% -3% -31% -31% 5% -11% -27% 21% 34% 19% 17% -10% -11% 27% 73% 56% -3% 49% 32% 42% 8% 70% -8% -1% -6%
Europe Energy Chemicals Cons Mat Metals&Mining Capital Goods Transport Automobile Cons Durables Media Retailing Hotels,Rest&Leis Food&Drug Ret Food Bev&Tob HPC Healthcare Banks Insurance Real Estate Software&Svs TechHardware Semicon Telecoms Utilities Cyclicals Defensives Cyc. vs Def.
Source: Datastream, MSCI, IBES. At cob 27th July 2010, 12m Fwd P/E and two-year out P/E since 1995, Cycle-adjusted P/E since 1983, P/Book since 1980, P/Sales since 2000
50
Sector valuations: UK
Valuations favour Defensives
UK sector valuations vs history

12m Fwd P/E Last 9.9 8.1 15.8 7.7 10.7 12.6 20.0 13.7 10.6 12.8 11.8 12.8 15.5 9.1 12.2 7.8 17.4 15.4 9.5 11.6 9.6 10.3 0.93 Median 13.0 14.1 13.4 11.5 12.7 12.5 13.7 12.8 8.6 18.6 14.5 14.5 14.9 13.7 18.3 16.4 11.0 10.7 22.0 16.3 18.0 24.9 14.3 12.5 14.0 14.5 0.97 % to median 31% 75% -15% 64% 17% 8% -57% 35% 37% 13% 27% 7% 18% 82% -9% 37% 26% 6% 50% 8% 45% 40% 6% Last 1.8 1.2 3.9 1.4 2.7 1.9 2.4 2.3 5.9 2.9 1.9 1.3 1.8 3.1 3.3 5.3 1.0 1.4 1.0 2.7 2.5 5.9 1.4 3.0 2.6 3.3 0.8 P/book Median 2.0 1.4 2.1 1.6 1.8 2.2 2.2 1.7 3.8 2.8 2.5 1.4 2.3 2.7 2.8 5.6 1.4 1.8 0.8 2.7 3.5 3.5 2.0 2.4 2.0 3.5 0.6 % to median 14% 14% -47% 12% -32% 13% -6% -26% -35% -3% 33% 1% 22% -12% -16% 7% 34% 27% -19% 1% 41% -40% 42% -21% -23% 5% -28% Last 14.2 14.0 29.9 9.8 24.1 13.3 15.5 8.5 51.8 20.0 12.1 15.9 21.4 24.1 22.1 16.9 6.9 10.3 13.7 27.4 12.0 68.1 15.8 17.4 19.7 20.4 0.97 Cycle-adj P/E Median 19.4 19.9 17.8 17.0 17.7 14.7 22.8 16.8 26.0 26.0 23.9 20.8 24.3 20.6 19.5 24.2 17.0 31.0 29.6 29.4 9.2 39.7 23.1 16.2 22.4 22.7 0.99 % to median 37% 42% -40% 73% -27% 10% 47% 97% -50% 30% 97% 31% 13% -15% -12% 43% 147% 200% 115% 7% -23% -42% 46% -7% 14% 11% 2% 2-year out P/E Last 8.5 6.8 12.7 0.0 6.5 9.7 8.4 0.0 16.6 12.0 9.5 11.7 10.7 11.9 15.0 9.1 8.6 6.7 15.7 14.9 0.0 0.0 9.0 10.6 8.9 10.3 0.9 Median 12.0 14.0 12.0 10.4 11.4 11.0 11.6 11.2 8.2 16.0 12.8 12.8 13.4 12.7 16.7 15.1 10.0 10.3 20.5 14.6 15.6 20.5 12.9 11.4 12.5 13.1 1.0 % to median 41% 105% -5% 75% 13% 38% -51% 34% 35% 10% 25% 7% 11% 65% 17% 55% 30% -2% 44% 7% 40% 27% 13% 12m Fwd P/Sales % to Last Median median 1.2 1.3 8% 1.1 1.3 14% 0.3 0.4 42% 2.1 1.6 -26% 0.7 0.3 2.3 1.1 0.5 0.6 0.4 2.3 2.7 2.0 1.5 0.5 7.6 4.5 1.3 1.2 1.6 0.9 1.8 0.6 0.5 2.4 1.4 0.9 0.6 0.5 1.2 2.1 3.4 2.7 0.7 7.9 4.7 2.2 1.3 1.5 1.0 1.5 -7% 69% 5% 30% 85% 10% 25% -47% -20% 66% 74% 51% 4% 4% 67% 10% -8% 12% -21%
UK Energy Chemicals Cons Mat Metals&Mining Capital Goods Transport Automobile Cons Durables Media Retailing Hotels,Rest&Leis Food&Drug Ret Food Bev&Tob HPC Healthcare Banks Insurance Real Estate Software&Svs TechHardware Semicon Telecoms Utilities Cyclicals Defensives Cyc. vs Def.
Source: Datastream, MSCI, IBES. At cob 27th July 2010, 12m Fwd P/E and two-year out P/E since 1995, Cycle-adjusted P/E since 1983, P/Book since 1980, P/Sales since 2000
51
Stick with Cyclicals

Cyclical valuations remain elevated compared to Defensives in the historical context, although they have improved significantly vs their most stretched level, seen in September 09. While the valuation angle is not outright supportive for Cyclicals, we think these will be tolerated as long as EPS momentum is on the clear uptrend. For Eurozone only, the 2010 consensus EPS integer for Cyclicals has been revised up by 10% ytd, but has been downgraded for Defensives by 1%.
Cyclicals relative to Defensives fwd P/E
1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 95 96 97 98 99 00 01 02 03 04 av erage 05 06 07 +1s tdev 08 09 -1s tdev 10
Europe C y c lic als 12m F w d P/E rel to Defens iv es
Cyclicals vs Defensives valuations and performance

12m Fwd P/E Sep-09 Cyclicals Defensives Cyclicals/Defensives
2010 consensus sector EPS estimates

11 5
Performance Sep-09 to current 9% 2% 6%
current 12.5 11.6 1.08
11 0
16.6 11.9 1.40
10 5
10 0
95
90 J an F eb M ar Apr M ay J un J ul E M U F in an c ia ls 20 1 0e E P S
E M U C y c lic als 2 01 0 e E P S
E M U De fen s iv e s 20 1 0e E P S
52
Source: IBES
Exploring the potential EPS driven upside

Potential cyclical upside at sector level
The potential cyclical upside? P/E multiples staying put or derating to 04-06 levels Assuming various EPS scenarios, Cyclicals appear to consistently offer double the upside of Defensives
current 12m Fwd P/E Europe Energy Chemicals Cons Mat Met&Min Cap Goods Transport Automobile Cons Durables Media Retailing Hotels,Rest&Leis Food Drug Ret Food Bev&Tob HPC Healthcare Banks Div Fin Insurance Real Estate Software Tech Hardware Semicon Telecoms Utilities Cyclicals Defensives 10.8 8.3 13.5 11.7 8.4 13.2 14.9 11.7 17.3 12.1 14.6 13.5 12.3 14.4 17.1 9.9 10.9 9.1 8.3 15.8 15.5 12.9 13.7 10.0 10.4 12.6 11.6
2004-06 median 12m Fwd P/E 12.8 11.9 13.2 11.5 10.3 13.5 13.4 9.9 13.3 15.5 13.9 14.4 14.2 14.5 19.7 17.4 10.8 11.1 10.6 21.7 21.7 16.8 23.2 12.5 13.3 13.4 14.9
Price upside assuming 12m Fwd Lowest EPS 2012e Past Peak P/E as of Jun- EPS EPS 2011 11.1 10% 19% 23% 8.3 12% 20% 32% 13.2 6% 14% 14% 11.5 18% 35% 140% 8.4 13% 20% 22% 13.2 11% 21% 21% 13.4 11% 24% 38% 9.9 10% 33% 33% 13.3 -14% -7% -3% 12.1 6% 12% 17% 13.9 3% 11% 11% 13.5 8% 17% 17% 12.3 10% 19% 19% 14.4 7% 14% 14% 17.1 6% 13% 13% 9.9 4% 7% 7% 10.8 22% 42% 42% 9.1 12% 21% 21% 8.3 9% 15% 15% 15.8 3% 5% 5% 15.5 10% 19% 19% 12.9 17% 27% 87% 13.7 12% 17% 17% 10.0 3% 6% 11% 10.4 4% 9% 21% 12.1 9% 19% 26% 11.6 5% 10% 13%
Ytd perf -2.4% -13.1% 1.8% -17.4% -5.9% 7.7% 4.1% 10.7% 17.7% 3.8% 8.5% 8.4% 0.5% 4.9% 2.0% -8.6% -2.0% 1.4% -3.8% -3.8% 8.4% -5.8% 14.3% -3.6% -12.7% 3% -4%
Perf since Sep-09 0.4% -8.1% 14.5% -19.7% 11.0% 8.9% 7.3% 11.5% 29.1% 8.7% 11.0% 11.9% 8.6% 15.4% 20.0% -0.9% -8.0% -8.8% -3.2% -7.5% 4.2% -19.0% 28.0% -0.7% -11.7% 9% 2%
Source: Datastream, MSCI, IBES, as at 28th July 2010
53
Drivers of stock selection: value starting to outperform most recently

The low quality has outperformed in the initial stages of the rally, within all sectors, Cyclicals, Defensives and Financials. The initial out-performers can be characterized as the biggest fallers over the past two years, smaller caps, low ROE, low P/B, low P/E, -ve EPS revisions and relatively more leveraged names 1H of this year saw EPS momentum and quality as the key factors
Factors that have worked for European outperformers
2010 Q3 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 2010 Q2 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 2010 Q1 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 2009 Q4 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 2009 Q3 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 2009 Q2 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Rel perf 10% 3% -1% -4% -9% Rel perf 20% 11% 4% -2% -11% Rel perf 17% 8% 2% -3% -12% Rel perf 15% 6% 0% -7% -16% Rel perf 22% 7% 0% -7% -17% Rel perf 34% 14% 4% -4% -13% MV weight 18% 16% 20% 21% 22% MV weight 17% 23% 18% 20% 19% MV weight 13% 16% 21% 29% 21% MV weight 19% 27% 23% 15% 14% MV weight 14% 17% 22% 24% 22% MV weight 13% 13% 24% 22% 29% ND/Equity 0.26 0.28 0.41 0.58 0.26 ND/Equity 0.15 0.47 0.27 0.56 0.39 ND/Equity 0.26 0.30 0.46 0.44 0.44 ND/Equity 0.36 0.51 0.54 0.42 0.40 ND/Equity 0.41 0.31 0.67 0.48 0.42 ND/Equity 0.49 0.33 0.60 0.43 0.42 %ch EPS 1% 1% 1% 0% 0% %ch EPS 15% 10% 10% 4% 2% %ch EPS 10% 7% 5% 4% 0% %ch EPS 11% 5% 4% 1% 0% %ch EPS 2% 1% 3% 0% -3% %ch EPS -9% -4% -4% -2% 0% RoE 10% 12% 14% 15% 16% RoE 16% 14% 11% 12% 10% RoE 12% 13% 13% 13% 11% RoE 15% 14% 13% 11% 9% RoE 8% 10% 13% 14% 16% RoE 9% 11% 14% 14% 14% P/E 10.3 12.6 12.9 12.2 13.7 P/E 16.6 13.9 15.1 12.5 12.6 P/E 14.5 15.3 14.8 13.8 13.3 P/E 14.9 13.1 14.7 13.7 13.4 P/E 10.9 12.1 12.6 12.8 11.8 P/E 7.1 9.8 10.6 10.1 10.5 P/Book 0.90 1.17 1.77 1.88 2.10 P/Book 2.6 2.0 1.8 1.4 1.3 P/Book 1.8 1.9 2.0 1.7 1.3 P/Book 2.2 1.9 1.8 1.3 1.2 P/Book 0.9 1.2 1.7 1.9 1.8 P/Book 0.6 1.0 1.5 1.5 1.4 Div Yield 3% 4% 4% 3% 3% Div Yield 2.5% 3.1% 3.0% 3.9% 3.2% Div Yield 2.5% 2.7% 2.9% 3.5% 3.4% Div Yield 2.8% 3.5% 3.1% 3.1% 2.8% Div Yield 3.0% 3.1% 3.5% 3.6% 4.0% Div Yield 4.5% 4.2% 4.4% 4.4% 5.1%
Source: J.P. Morgan, MSCI, IBES, performance relative to sector, data is 12 months forward IBES estimates
54
2010 Theme: M&A activity to pick up

Corporates are in a strong position (16% of market cap in cash, stronger profit margins and lower leverage than at the similar stage of the past cycle) Cost of financing is near record low Valuations and FX favour European targets (and UK vs continent) in cross-border deals Improving equity market leads to M&A
M&A activity vs equity performance
200% 150% 100% 50% 0% -5 0 % -1 0 0 % 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 50% 40% 30% 20% 10% 0% -1 0 % -2 0 % -3 0 % -4 0 % -5 0 %
E u ro p e a n De a l V a lu e ($ m ) % y o y 6 m m a
M S C I E u ro p e % y o y 6 m m a (rh s )
Source: Datastream, MSCI, Bloomberg
European net debt to equity

0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 99
Euro area corporate high grade yield*
00
01
02
03
04
05
06
07
08
09
10
Europe ex -Financials Net Debt/Equity

Source: Worldscope
Euro corporate high grade y ield
Source: J.P. Morgan, * all maturities
55
2010 Theme: Dividends to start growing again

Corporate balance sheets are in a strong position The earnings cycle is on the up and has historically been coincident with the dividend cycle Financials sector profitability is picking up We advise positioning in areas where dividends are likely to grow the most, i.e. Cyclicals and Financials
55 50 45 40 35 30 25 20 15 10 5 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
MSCI Europe dividend per share
MSCI Europe Div idend per share
European EPS and DPS growth

60%
Dividend upside potential at sector level

Payout ratio 04-'07 average Europe 43.8% 37.1% 33.6% 40.3% 41.9% 44.2% 42.1% 45.3% 37.9% 61.2% 58.1% 2012e 41.5% 40.5% 26.4% 37.9% 39.9% 46.3% 44.4% 36.8% 33.2% 71.4% 61.1% 2012e DPS upside 5.7% 27.3% 6.5% 4.9% 23.0% 14.1% -
40%
20%
Energy Materials Industrials
0%
-20%
Discretionary Staples Health Care
-40%
-60% 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
Financials IT Telecoms Utilities

Source: IBES
MSCI Europe DPS (%y oy )
M SCI Europe EPS (%y oy )
56
Top Picks
Name Energy BP BG Group Statoil TOTAL Materials ArcelorMittal Rio Tinto Xstrata Anglo American Industrials Siemens Schneider BAE Systems Man Philips Discretionary Daimler LVMH Intercontinental Hotels ITV JCDecaux Staples Anheuser Busch Inbev Carrefour BAT Givaudan Nestle Healthcare Roche Novartis Astrazeneca Financials Credit Suisse BNP Paribas UniCredit Societe Generale BBVA HSBC Swiss Re Ageas Barclays IT Alcatel Lucent ASML SAP Telecoms Vodafone KPN Telenor Utilities Centrica CNA LN 306.7 9% OW Centrica remains our top pick in UK Utilities, which has cleanest generation fleet in the UK and a fast growing energy services business. VOD LN KPN NA TEL NO 150.5 10.6 E 93.0 NK 5% -10% 15% OW OW OW Macro driven recovery should support evolutionary improvements in growth. Further, scope for higher dividend payments on the back of better FCF guidance. We continue to see hidden value within Vodafone's portfolio. Cost cutting and shareholder returns remain best in class. Operational leverage could offer medium term upside. Post April jitters, KPN will emerge with its core attractions (earnings growth, s/holder returns, valuation) Q2 results were mixed, but guidance upgrade and buyback announcements are positives along with cheap valuations make the stock an OW in our view ALU FP ASML NA SAP GR 2.1 E 24.5 E 35.5 E -13% 2% 7% OW OW OW Strong gross margins development, improved pension funding status, EBIT margins ahead of expectations, application and enterprise margin stronger than expected and services segment was also strong The company reported 17.5% qoq growth in 2Q and a guidance of 10% qoq gr in 3Q'10. With the under-capacity in DRAM & overall lack of capacity in semi market unlikely to end in 2H10, we remain Overweight on ASML 2Q results solid, guidance more confident. Software & rel Svs are expected to grow at 6-8% with management optimistic that customers continue to invest for growth. We remain OW on the cyclical growth story. CSGN VX BNP FP UCG IM GLE FP BBVA SM HSBA LN RUKN VX AGS BB BARC LN 47.7 SF 53.4 E 2.2 E 44.7 E 10.5 E 656.3 48.0 SF 2.2 E 334.1 -7% -4% -4% -9% -18% -7% -4% -17% 21% OW OW OW OW N OW OW OW N Continues to tick the right boxes: i) attractive business mix ii) strong capital position iii) less impact from IB regulatory proposals than peers iv) excellent and stable management team In our view, BNP Paribas is well positioned for growth, remaining a counterparty of choice with strong cash flow generation and high gearing to a recovery in the credit cycle. Shift from balance sheet repair to earnings progression. After significant decline in the stock price following sovereign risk concerns, UCG now trades at 0.7x P/NAV11E, we remain overweight especially on valuation. The group posted solid set of results with a better earnings mix, valuation is hugely supportive in our view. Also considering the ongoing provisioning improvement, Soc Gen can generate E8 per share in the long term in our view. BBVA is s solid option with Europe given its i) above average profitability ii) solid capital position highlighted in Bank of Spain's stress test iii) attractive international exposure through Mexico/Latam. Cyclical & Structural optimism remains. Our basic premise of Cyclical recovery & structural uplift remain in place, also expected swing in earnings from lower provisions due to run-off and improvement of HFC. We see return to an AA- level rating in 2011 as a major catalyst. Also, We think the 37% discount to book value and 7% discount to NAV are simply too wide, we reiterate our OW rating Ageas remains ver undervalued in our opinion at 60% of BV. There are numerous areas of conservatism in the Ageas book value, and there is significant excess capital. We also note that the book value is highly tangible (no DAC) Trading on 0.8x 2011E P/NAV Barclays remains our favorite domestic UK bank. We believe BarCap will remain the main earnings driver. ROG VX NOVN VX AZN LN 136.3 SF 51.0 SF 3,289.0 -22% -10% 13% OW OW N Strong sales performance across the board. Solid underlying growth of continuing business should put to rest concerns about a significant slowdown in the sales growth. Recent approval for Sandoz Generic in US to have positive impact. Novartis has a strong pipeline with several potential blockbuster candidates and the long term outlook remains underappreciated by the market. Strong Q2 numbers, 5% upgrade to FY'10 EPS guidance, increase to the share buyback (though widely speculated) and positive Brilinta FDA AdCom could drive the share price up in our view. ABI BB CA FP BATS LN GIVN VX NESN VX 40.9 E 35.0 E 2,197.0 961.5 SF 51.7 SF 12% 4% 9% 16% 3% OW NA OW OW OW The background to the industry remains extremely supportive. Innovation and mix improvements remain at the heart of the strategy rather than just volumes growth. Clear scope for a higher PE multiple in due course Topline momentum to continue. Strong 1H'10 to lay ground for upgrades. With high teens EPS growth and a potential cash return, we think Givaudan's superior fundamentals deserve a premium rating Q1 sales bodes well for Nestle to sustain volume growth and EBIT margins expansion. Nestle is top pick amongst pan-European Food Producers since it is better placed to pass on the rising raw material costs in 2H'10 Long term value, multiple positive medium and long term catalysts for ABI. Capacity to exceed AB cost synergies target to 2.25Bn$ from ZBB, headcount reduction & procurement. DAI GR MC FP IHG LN ITV LN DEC FP 41.4 E 92.1 E 1,107.0 53.6 19.9 E 11% 17% 24% 2% 17% OW OW OW N OW Truck margins seem to be on an upward trend markets, also new line of efficient engines in Mercedes could lead to a better price/mix and a positive surprise from Mercedes LVMH has the potential to post significant growth on tougher comps than peers with a strong operating leverage. Also the possibility of cash utilization at year-end could support the stock Upbeat comments at NYU lodging conference, likely to be replicated in the forthcoming Q2 reporting season. Further impressive evidence on Holiday Inn re-launch is an important tailwind in the recovery of hotel cycle Good strategy on digital channels with ITV2,3,& 4. Largest cost cutting guidance in media, UK advertising market to recover in '10 and grow by 4.3% leading to increased revenues in TV JCDecaux remains top preference because of the structural growth potential of the outdoor industry, exposure to Emerging Markets, and growth due to contracts won in 08 & 09 SIE GR SU FP BA/ LN MAN GR PHIA NA 74.4 E 86.4 E 320.1 70.1 E 23.4 E 16% 6% -11% 29% 13% OW OW OW OW N We remain overweight on Siemens on a combination of attractive relative valuations and good earnings momentum. Relative to consensus, our PBT is still 7% ahead of Bloomberg average. Superior top-line growth potential based on an improved portfolio, higher EM exposure and ~30% exposure to late cyclicals should support growth relative to the sector in H2 2011 and beyond. Growth drivers to start to re-emerge with strong sales in Programmes (Eurofighter and JFS) and International (Saudi Exports) to become more visible. EPS has held better than feared and we consider Rating to be the key for perf. Significant improvement in the intrinsic business model, reduction of fixed costs, and improvement in commercial vehicles margins and sales performance are the core reasons to remain overweight on MAN. Strong growth from Q1 has continued into Q2. Near term expectations on earnings for Philips have risen materially but the company seems to be on track to deliver while the valuations remain undemanding. MT NA RIO LN XTA LN AAL LN 23.7 E 3,355.0 1,032.0 2,541.0 -26% -1% -8% -6% OW OW OW OW Steel price momentum to underpin margins on 3Q. MT remains top pick given its operating leverage to rising steel prices and it competitive advantage in raw materials. Rio Tinto remains compelling from a cashflow and valuation perspective, in our view, with free cashflow yield expected to exceed 16% based on our forecasts in FY 2011 and PER of 5.3x, reflecting under pricing by the market. We expect Xstrata to continue best performance amongst big four based on exposure to favored commodities, best in class operational management and a strong growth pipeline. The story still has some way to run at this stage. We expect platinum business to move down the cost curve, The self-help theory also still has legs with operational performance likely to be strong through H2. BP/ LN BG/ LN STL NO FP FP 413.5 1,013.0 126.0 NK 38.4 E -31% -10% -13% -15% OW OW N N Q2 results in line with consensus with strong cash generation. The stock is underpriced in our view since the peer adjusted loss in market value exceeds our worst case liability estimate by more than 15Bn $. We remain overweight ahead of 3 key triggers i) public certification of Brazilian pre-salt resource ii) resolution to the 'tax dispute' with Khazak govt iii) development sanction for QC LNG by year end 2010. Strong oil price leverage and benefits from currency safe haven status (i.e. stronger Krona rather than Euro) . Positive catalysts are continued exploration successes in NCS & recovery in European gas demand. Total appears poised to deliver strong production growth in 2010 and the recovery in its downstream earnings is also a plus. Ticker Price YTD perf Rating JPM view
Source: Datastream, MSCI, IBES, J.P. Morgan, Prices and Valuations as of COB 29th July, 2010 Please see the most recent company-specific research published by J.P. Morgan for an analysis of valuation methodology and risks on companies recommended in this report. Research is available at http://www.morganmarkets.com, or you can contact the covering analyst or your J.P. Morgan representative
57
Stocks that derated the most since recent peak, despite +ve EPS trend intact
MSCI Eurozone and UK stocks with the biggest P/E de-rating since 15th April to 28th June
Fall in 12 Mth Fwd PE since Mkt Peak -84% -38% -35% -32% -29% -29% -25% -25% -24% -23% -22% -22% -20% -20% -19% -19% -18% -18% -17% -17% -16% -16% -15% -14% -14% -14% -14% -14% -13% -13% -13% -13% -13% -12% -12% -12% -11% -11% -11% -11% 12 Mth Fwd EPS move since Mkt Peak 22% 24% 48% 24% 3% 21% 3% 0% 22% 16% 24% 13% 0% 12% 1% 0% 1% 3% 6% 11% 1% 6% 0% 8% 10% 3% 1% 8% 2% 12% 8% 3% 2% 1% 8% 5% 4% 6% 3% 2% Fall in 12 12 Mth Fwd Mth Fwd Price move EPS move PE since since Mkt since Mkt Mkt Peak Peak Peak -91% 10% 11% -55% -25% 50% -50% -4% 87% -47% -18% 52% -41% 5% 87% -39% -32% 13% -38% 13% 87% -35% -2% 67% -34% -12% 34% -33% -29% 4% -33% -11% 35% -32% -1% 44% -31% -14% 34% -30% -13% 21% -30% -6% 34% -29% -29% 0% -29% -21% 10% -29% -24% 3% -29% -30% 1% -29% -18% 13% -28% -22% 9% -28% -11% 24% -28% 15% 64% -28% -21% 6% -27% 10% 57% -27% -5% 28% -26% -4% 31% -26% -21% 6% -26% -3% 11% -26% -15% 12% -25% -17% 0% -25% -22% 1% -25% -21% 6% -24% -1% 32% -24% -20% 12% -24% -20% 4% -23% -16% 5% -22% -18% 7% -22% -9% 19% -21% -3% 25%
Stock RESOLUTION LONMIN TULLOW OIL ITV THOMAS COOK GROUP VEDANTA RESOURCES EURASIAN NATRES.CORP. CABLE & WIRELESS WWD. WOLSELEY RIO TINTO PRUDENTIAL ANGLO AMERICAN KAZAKHMYS BHP BILLITON SMITH & NEPHEW HOME RETAIL GROUP LONDON STOCK EX.GROUP XSTRATA SCHRODERS ROYAL DUTCH SHELL B BALFOUR BEATTY RECKITT BENCKISER GROUP BAE SYSTEMS ROYAL DUTCH SHELL A(LON) BRITISH LAND CARNIVAL COBHAM WHITBREAD TESCO HSBC HDG. (ORD $0.50) INVESTEC BG GROUP LAND SECURITIES GROUP GLAXOSMITHKLINE JOHNSON MATTHEY MARKS & SPENCER GROUP KINGFISHER NEXT SERCO GROUP MORRISON(WM)SPMKTS.
Country UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK
Sector FINANCIALS MATERIALS ENERGY DISCRETIONARY DISCRETIONARY MATERIALS MATERIALS TELECOMS INDUSTRIALS MATERIALS FINANCIALS MATERIALS MATERIALS MATERIALS HEALTH CARE DISCRETIONARY FINANCIALS MATERIALS FINANCIALS ENERGY INDUSTRIALS STAPLES INDUSTRIALS ENERGY FINANCIALS DISCRETIONARY INDUSTRIALS DISCRETIONARY STAPLES FINANCIALS FINANCIALS ENERGY FINANCIALS HEALTH CARE MATERIALS DISCRETIONARY DISCRETIONARY DISCRETIONARY INDUSTRIALS STAPLES
Price move since Mkt Peak -22% -26% -3% -22% -30% -12% -26% -26% -7% -14% -5% -14% -23% -12% -21% -17% -14% -19% -10% -11% -17% -9% -16% -10% -3% -14% -13% -9% -11% -7% -8% -10% -9% -11% -3% -8% -7% -5% -11% -9%
Stock PIRELLI GROUPE EUROTUNNEL DEUTSCHE LUFTHANSA (XET) STMICROELECTRONICS (PAR) UPM-KYMMENE CIE.GL.DE GPHYQ.-VERT. DAIMLER (XET) IBERIA ACERINOX 'R' ARCELORMITTAL RAUTARUUKKI 'K' RENAULT TF1 (TV.FSE.1) AEGON RAIFFEISEN INTL.BK.HLDG. GAMESA CORPN.TEGC. ERAMET SBM OFFSHORE IPSEN TELECINCO OUTOKUMPU 'A' NESTE OIL BMW (XET) HOCHTIEF (XET) EXOR ORD ASML HOLDING UMICORE MEDIASET SOCIETE GENERALE OMV BANCO COMR.PORTUGUES 'R' VEOLIA ENVIRONNEMENT AGEAS (EX-FORTIS) INFINEON TECHS. (XET) VOESTALPINE QIAGEN (XET) RED ELECTRICA CORPN. TECHNIP JCDECAUX PHILIPS ELTN.KONINKLIJKE
Country ITALY FRANCE GERMANY FRANCE FINLAND FRANCE GERMANY SPAIN SPAIN FRANCE FINLAND FRANCE FRANCE NETHERLANDS AUSTRIA SPAIN FRANCE NETHERLANDS FRANCE SPAIN FINLAND FINLAND GERMANY GERMANY ITALY NETHERLANDS BELGIUM ITALY FRANCE AUSTRIA PORTUGAL FRANCE BELGIUM GERMANY AUSTRIA GERMANY SPAIN FRANCE FRANCE NETHERLANDS
Sector DISCRETIONARY INDUSTRIALS INDUSTRIALS IT MATERIALS ENERGY DISCRETIONARY INDUSTRIALS MATERIALS MATERIALS MATERIALS DISCRETIONARY DISCRETIONARY FINANCIALS FINANCIALS INDUSTRIALS MATERIALS ENERGY HEALTH CARE DISCRETIONARY MATERIALS ENERGY DISCRETIONARY INDUSTRIALS FINANCIALS IT MATERIALS DISCRETIONARY FINANCIALS ENERGY FINANCIALS UTILITIES FINANCIALS IT MATERIALS HEALTH CARE UTILITIES ENERGY DISCRETIONARY INDUSTRIALS
58
European stocks: US$ exposure

We advise to position portfolios for USD strength and positive DM growth surprise
European stocks with >30% revenues U$ denominated
Name DELHAIZE FRESENIUS MED.CARE TOMKINS PEARSON SYNTHES AHOLD KON. SMITHS GROUP ICTL.HTLS.GP. ASTRAZENECA DAIMLER (XET) NATIONAL GRID SMITH & NEPHEW NOVARTIS 'R' GLAXOSMITHKLINE HUSQVARNA 'B' WOLTERS KLUWER COBHAM UCB AEGON SWISS RE 'R' CRH CINTRA PUBLICIS GROUPE CREDIT SUISSE 'R' ZODIAC TATE & LYLE Ticker DELB BB FME GR TOMK LN PSON LN SYST VX AH NA SMIN LN IHG LN AZN LN DAI GR NG/ LN SN/ LN NOVN VX GSK LN HUSQB SS COB LN UCB BB AGN NA RUKN VX CRH ID CIN SM PUB FP CSGN VX ZC FP TATE LN Sector CONSUMER STAPLES HEALTH CARE INDUSTRIALS CONSUMER DISCRETIONARY HEALTH CARE CONSUMER STAPLES INDUSTRIALS CONSUMER DISCRETIONARY HEALTH CARE CONSUMER DISCRETIONARY UTILITIES HEALTH CARE HEALTH CARE CONSUMER DISCRETIONARY HEALTH CARE CONSUMER DISCRETIONARY INDUSTRIALS HEALTH CARE FINANCIALS FINANCIALS MATERIALS INDUSTRIALS CONSUMER DISCRETIONARY FINANCIALS INDUSTRIALS CONSUMER STAPLES % U$ sales 72% 71% 65% 64% 64% 60% 59% 54% 51% 50% 58% 49% 48% 48% 47% 47% 46% 46% 46% 45% 45% 45% 45% 42% 42% 42% 40% BAE SYSTEMS ASSA ABLOY 'B' SAGE GROUP UBS 'R' NOBEL BIOCARE INVENSYS ROLLS-ROYCE GROUP SYNGENTA BP PORSCHE PREF. (XET) SANOFI-AVENTIS MICHELIN ELECTROLUX 'B' IMPERIAL CHM.INDS. ACERINOX 'R' ADIDAS (XET) NOVO NORDISK 'B' GIVAUDAN 'N' SWEDISH MATCH DIAGEO DASSAULT SYSTEMES NESTLE 'R' LAFARGE SSAB 'A' IBERIA
Source: Datastream, Worldscope, Bloomberg
Name
Ticker BA/ LN ASSAB SS SGE LN UBSN VX NOBE VX ISYS LN RR/ LN SYNN VX BP/ LN POR3 GR SAN FP ML FP ELUXB SS ICI LN ACX SM ADS GR GIVN VX SWMA SS DGE LN DSY FP NESN VX LG FP SSABA SS IBLA SM
Sector INDUSTRIALS HEALTH CARE INDUSTRIALS INFORMATION TECHNOLOGY FINANCIALS HEALTH CARE INDUSTRIALS INDUSTRIALS MATERIALS ENERGY CONSUMER DISCRETIONARY HEALTH CARE CONSUMER DISCRETIONARY CONSUMER DISCRETIONARY MATERIALS MATERIALS CONSUMER DISCRETIONARY MATERIALS CONSUMER STAPLES CONSUMER STAPLES INFORMATION TECHNOLOGY CONSUMER STAPLES MATERIALS MATERIALS INDUSTRIALS UTILITIES
% U$ sales 39% 40% 39% 39% 38% 37% 36% 36% 36% 36% 35% 35% 35% 34% 33% 33% 33% 32% 31% 31% 31% 31% 30% 30% 30% 30% 30%
ROCHE HOLDINGS GSH. ROG VX
UNITED BUSINESS MEDIA UBM LN
WLSNC NA CONSUMER DISCRETIONARY
NOVOB DC HEALTH CARE
INTERNATIONAL POWER IPR LN
59
European stocks correlation to bond yields

Cyclical sectors display the highest positive correlation to bond yields, as long as they are moving up for the right reasons
European sectors correl to 10Y bond yields
Cyclicals Discretionary Industrials IT Materials Defensives Staples Healthcare Telecom Utilities Cyclicals vs Defensives Financials Energy
Source: Datastream, MSCI, since 1995
Stocks + correlation with bond yields

Industrials ALFA LAVAL PRYSMIAN SANDVIK RENEWABLE ENERGY GAMESA SKF 'B' SIEMENS (XET) MAN (XET) ABB 'R' VESTAS WINDSYSTEMS ADP GEA GROUP INVENSYS ATLAS COPCO ADECCO ATLAS COPCO PHILIPS SCANIA 'B' SCHNEIDER ELECTRIC HOCHTIEF METSO VOLVO KONE Discretionary THE SWATCH GROUP CHRISTIAN DIOR LVMH HUSQVARNA BURBERRY GROUP FIAT ICTL.HTLS.GP. Correl to 10Y Bdy 0.67 0.61 0.52 0.51 0.49 0.47 0.46 0.46 0.45 0.43 0.43 0.4 0.4 0.38 0.38 0.37 0.35 0.33 0.32 0.32 0.32 0.31 0.3 Correl to 10Y Bdy 0.47 0.46 0.42 0.39 0.34 0.33 0.3 Tech ASML HOLDING STMICROELECTRONICS Correl to 10Y Bdy 0.33 0.32 Materials WACKER CHEMIE EURASIAN NATRES. THYSSENKRUPP LONMIN SSAB 'A' SSAB 'B' XSTRATA ANGLO AMERICAN BHP BILLITON ANTOFAGASTA VEDANTA OUTOKUMPU VOESTALPINE NORSK HYDRO FRESNILLO JOHNSON MATTHEY ERAMET RIO TINTO KAZAKHMYS UMICORE HOLCIM 'R' STORA ENSO HEIDELBERGCEMENT ARCELORMITTAL RAUTARUUKKI AKZO NOBEL Correl to 10Y Bdy 0.63 0.62 0.6 0.54 0.53 0.52 0.51 0.5 0.48 0.48 0.48 0.47 0.44 0.41 0.4 0.4 0.4 0.39 0.37 0.35 0.31 0.3 0.3 0.3 0.3 0.3
US 10y BDY German 10y BDY 0.58 0.60 0.33 0.13 0.46 0.52 0.19 0.22 0.35 0.48 -0.62 -0.48 -0.46 -0.18 -0.53 0.69 0.17 -0.07 -0.55 -0.36 -0.45 -0.22 -0.37 0.66 0.05 0.00
Source: Datastream, MSCI, since 1995
60
European stocks: operational leverage screen

We screen for the cyclical stocks that suffered the largest derating this year, display low leverage and high ROE
Operational leverage screen
N am e S e c to r R IO T IN T O M A T E R IA L S B H P B IL L IT O N M A T E R IA L S T E L E C IN C O C O N S U M E R D IS C KAZAKHM YS M A T E R IA L S ANTO FAG ASTA M A T E R IA L S E U R A S IA N N A T R E S .C O R M A T E R IA L S A C T E L IO N HEALTH CARE K + S (X E T ) M A T E R IA L S T O M K IN S IN D U S T R IA L S Z A R D O Y A O T IS IN D U S T R IA L S S K A N S K A 'B ' IN D U S T R IA L S N O V A R T I S 'R ' HEALTH CARE STR AU M AN N H LD G . HEALTH CARE IN V E N S Y S IN D U S T R IA L S S H IR E HEALTH CARE G E B E R I T 'R ' IN D U S T R IA L S A B B 'R ' IN D U S T R IA L S M 6 -M E T R O P O L E T V C O N S U M E R D IS C ALFA LAVAL IN D U S T R IA L S BAE SYSTEM S IN D U S T R IA L S E L E C T R O L U X 'B ' C O N S U M E R D IS C B E IE R S D O R F (X E T ) CO NSUM ER STAP IN D IT E X C O N S U M E R D IS C B IO M E R IE U X HEALTH CARE P U M A R U D O L F D A S S L E RC O N S U M E R D IS C W A C K E R C H E M IE (X E T ) M A T E R IA L S BALFO U R BEATTY IN D U S T R IA L S SO NO VA N HEALTH CARE L 'O R E A L CO NSUM ER STAP S I K A 'B ' M A T E R IA L S N O K IA N R E N K A A T C O N S U M E R D IS C N E S T L E 'R ' CO NSUM ER STAP H E N N E S & M A U R I T Z 'B ' C O N S U M E R D I S C H E R M E S IN T L . C O N S U M E R D IS C IC A P F IN A N C IA L S K O N E 'B ' IN D U S T R IA L S LVM H C O N S U M E R D IS C
Y td P E C hange -5 5 % -5 1 % -4 3 % -4 2 % -4 1 % -3 3 % -3 2 % -3 1 % -2 9 % -2 3 % -2 0 % -1 9 % -1 6 % -1 6 % -1 5 % -1 5 % -1 4 % -1 4 % -1 4 % -1 2 % -1 1 % -1 1 % -1 0 % -9 % -8 % -7 % -7 % -6 % -6 % -5 % -4 % -4 % -4 % -4 % -3 % -2 % -1 %
Y td E P S C hange 93% 72% 43% 25% 34% 38% 3% 39% 60% 6% 18% 11% 1% 12% 27% 11% 13% 10% 22% 5% 20% 10% 17% 11% 7% 9% 2% 11% 12% 29% 29% 9% 14% 17% 1% 18% 21%
O p e ra tio n a l L e v e ra g e 1 .4 1 .5 2 .1 1 .5 1 .5 1 .4 1 .8 2 .3 1 .4 1 .4 1 .8 1 .1 1 .6 1 .2 1 .3 1 .1 1 .7 2 .0 1 .8 1 .1 1 .8 3 .2 7 .2 1 .2 3 .3 3 .8 1 .1 8 .6 3 .1 2 .7 1 .5 1 .2 2 .0 4 .3 1 .5 2 .6 2 .9
ND E q u ity 0 .0 0 .0 0 .1 0 .1 -0 .3 -0 .1 -0 .7 0 .1 0 .0 -0 .4 -0 .5 0 .2 -0 .5 -0 .8 -0 .1 -0 .3 -0 .5 -0 .4 -0 .1 -0 .1 -0 .1 -0 .6 -0 .6 -0 .1 -0 .4 0 .1 -0 .3 -0 .1 0 .0 0 .0 0 .1 0 .0 -0 .6 -0 .3 0 .0 -0 .5 0 .1
RoE 22% 32% 36% 17% 21% 21% 23% 21% 18% 90% 15% 18% 22% 33% 26% 24% 18% 20% 22% 28% 20% 17% 26% 18% 17% 18% 18% 23% 16% 18% 17% 20% 41% 18% 18% 31% 16%
61
MSCI Europe constituents that showed largest EPS upgrades in the past month
European stocks that showed outright EPS upgrades in the past month
Name ORKLA ROYAL BANK OF SCTL.GP. RENEWABLE ENERGY PEUGEOT GROUPE EUROTUNNEL ALCATEL-LUCENT DEUTSCHE LUFTHANSA (XET) COMMERZBANK (XET) BRITISH AIRWAYS SWEDBANK 'A' STORA ENSO 'R' SCANIA 'B' IBERIA VOLVO 'B' BMW (XET) DAIMLER (XET) TUI (XET) RAUTARUUKKI 'K' ITV LLOYDS BANKING GROUP SEB 'A' FIAT BANCO COMR.PORTUGUES 'R' A P MOLLER - MAERSK 'B' SANDVIK UPM-KYMMENE INVESTOR 'B' CONTINENTAL (XET) ASML HOLDING RESOLUTION TF1 (TV.FSE.1) INFINEON TECHS. (XET) KESKO 'B' RENAULT EXOR ORD AKZO NOBEL ACERINOX 'R' TELECOM ITALIA RAIFFEISEN INTL.BK.HLDG. ATLAS COPCO 'A' Mkt Cap (E) 12 Mth Fwd PE 6,583.9 34,600.5 2,266.9 5,583.2 2,671.9 4,868.0 5,859.3 8,165.5 3,046.2 8,141.7 3,851.9 5,679.9 2,489.5 13,871.8 24,532.3 44,001.9 2,071.4 2,108.5 2,490.2 56,660.2 11,433.3 10,720.4 3,253.4 14,357.5 11,773.9 5,797.7 6,587.8 9,729.3 10,611.7 4,196.7 2,673.0 5,631.5 1,995.1 10,252.7 2,371.8 10,575.5 3,360.6 13,340.8 5,472.1 10,689.2 11.05 36.91 29.13 9.03 194.69 30.68 20.79 18.03 34.62 14.57 10.29 13.48 56.17 15.00 11.50 10.98 15.08 17.19 11.60 14.02 14.06 16.66 8.98 11.57 14.13 15.63 52.82 10.83 10.77 6.95 17.80 12.63 18.15 9.38 19.49 12.48 13.04 8.47 9.96 14.75 Ytd Perf (%) -7% 82% -50% 1% -14% -12% 9% 17% 26% 23% 29% 58% 38% 59% 28% 11% 42% -7% 8% 46% 22% -4% -18% 33% 18% 34% 11% 33% 3% -26% -3% 34% 29% -4% 9% -2% -7% -8% -10% 24% YTD EPS -1m Price Perf -1m Chg in 12 Mth Fwd Ch(%) (%) EPS (%) Rank Name -3% -60% -50% 729% 154% 209% 400% 364% 128% 147% 105% 200% 227% 51% 0% 191% 126% 92% 125% 118% 113% 290% 163% 193% 41% 583% 114% 25% 58% 9% 191% 54% 15% 13% 4% 7% -5% -7% 7% 15% 3% 8% 1% 9% 4% 1% -1% -4% 8% 17% -2% 22% 16% 9% 9% -3% -6% 0% 6% 10% 3% 1% 11% 2% 8% 7% 4% 2% 1% 6% 5% 1% 104% 100% 60% 50% 50% 40% 35% 35% 33% 31% 30% 30% 25% 25% 24% 23% 23% 22% 20% 20% 20% 18% 17% 14% 13% 13% 13% 12% 12% 11% 11% 11% 11% 10% 10% 10% 10% 9% 9% 9% 41 VOLKSWAGEN PREF. (XET) 42 ALFA LAVAL 43 NESTE OIL 44 TOMKINS 45 WARTSILA 46 LVMH 47 HOLMEN 'B' 48 MAN (XET) 49 TELE2 'B' 50 HERMES INTL. 51 CIMENTOS DE PORTL.SGPS 52 SKF 'B' 53 JCDECAUX 54 THALES 55 SCA 'B' 56 TULLOW OIL 57 SCHNEIDER ELECTRIC 58 EDP RENOVAVEIS 59 UNICREDIT 60 KONE 'B' 61 WACKER CHEMIE (XET) 62 AGEAS (EX-FORTIS) 63 SIEMENS (XET) 64 BUREAU VERITAS 65 HUSQVARNA 'B' 66 RANDGOLD RESOURCES 67 ADIDAS (XET) 68 TERNA 69 STMICROELECTRONICS (PAR) 70 MODERN TIMES GP.MTG 'B' 71 PIRELLI 72 BIC 73 NORDEA BANK 74 DANSKE BANK 75 DEXIA 76 SKANSKA 'B' 77 ADECCO 'R' 78 STANDARD LIFE 79 DSV 'B' 80 RANDSTAD HOLDING Mkt Cap (E) 12 Mth Fwd PE 13,371.5 5,014.0 3,158.9 3,426.1 4,054.3 45,396.8 1,205.2 10,289.7 5,683.1 13,565.7 3,138.9 6,027.7 4,372.3 5,363.7 6,739.8 13,683.4 23,587.0 4,099.8 41,534.0 7,945.3 7,019.8 5,506.4 69,616.4 5,085.5 2,310.0 6,182.4 8,667.8 6,363.6 5,766.0 2,813.0 2,597.5 2,724.1 30,938.8 12,791.2 7,069.9 5,173.7 7,436.1 5,487.0 2,796.9 6,081.2 13.70 15.18 12.52 13.84 14.75 17.52 19.00 17.04 11.26 34.32 10.64 11.91 24.83 11.13 10.98 44.37 13.53 26.71 11.62 17.74 14.79 11.47 12.40 16.54 13.96 29.74 15.09 15.61 10.28 15.91 13.18 13.50 12.08 10.92 9.08 15.52 17.26 10.70 15.08 16.00 Ytd Perf (%) 20% 23% -1% 79% 46% 18% 9% 34% 25% 38% -27% 22% 16% -25% 20% 5% 7% -29% -4% 19% 10% -17% 19% 28% 3% 21% 10% 6% -1% 37% 18% 16% 7% 15% -10% 9% 2% 0% 6% 3% YTD EPS -1m Price Perf -1m Chg in 12 Mth Fwd Ch(%) (%) EPS (%) 46% 40% 35% 100% 19% 29% 14% 61% 38% 25% 7% 60% 116% -20% 20% 113% 37% -5% 20% 25% 14% -5% 44% 15% 22% 68% 17% 18% 307% 48% 24% 15% 40% 130% -38% 33% 49% 5% 11% 50% 3% 9% -1% 32% 6% -1% -4% 5% 9% 16% 2% -3% -2% -2% 13% 17% 0% -6% 11% 6% 8% 13% 0% 2% 2% -15% 1% 6% -7% 2% 4% -6% 9% 11% 22% 5% -3% 10% 6% 5% 8% 8% 8% 8% 8% 7% 7% 7% 7% 7% 7% 7% 7% 7% 6% 6% 6% 6% 6% 6% 6% 6% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%
Source: Datastream, IBES, as at 28th July 2010
62
INDUSTRIALS: NEUTRAL Downgraded Capital Goods to N on 27th July

We closed our long running bullish view on Capital Goods on 27th July, having upgraded the sector to OW in Feb 09 OW Capital goods is the most crowded trade at present and the sector price relative is at 15-year high Manufacturing momentum is rolling over and consensus is already implying record high margins for the sector
Capital Goods relative to Europe
1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
C a p g d s (S X N P ) re l to E u ro p e (S X X P )
Capital goods EPS momentum vs IP

40% 30% 20% 10% 0% -10% -20% -30% -40% 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 8% 6% 4% 2% 0% -2% -4% -6% -8%
6% 5% 4% 8% 7% 10% 9%
Capital goods EBIT margins
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Industrials fw d earnings (%6mom)
Europe IP(%6mom,3mma,rhs)
EBIT/Sales C apital Goods
IBES forecasts
63
INDUSTRIALS: NEUTRAL Pricing will get weaker, valuations are rich

Pricing lags the activity and is likely to get incrementally worse for Capital Goods Capital goods relative performance has decoupled significantly from bond yields Stretched valuations have been tolerated for some time, but might be seen as more challenging a hurdle in the backdrop of peaking of macro momentum
Capital goods pricing relative and volume growth
50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 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 Germ an m ac hinery orders (%y oy , 3m m a) EM U C apital Goods PPI relativ e (%y oy , rhs , 21m lag) -4% -6% -8% 2% 0% -2% 8% 6% 4%
Source: Eurostat
Industrials relative and German 10-year bund yield

20% 15% 10% 5% 0% -5% -10% -15% -20% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 40% 30% 20% 10% 0% -10% -20% -30% -40%
Capital Goods 12m Fwd P/E relative

1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 95 96 97 98 99 00 01 02 03 04 05 06 +1stdev 07 08 09 -1stdev 10
Capital Goods 12mth Fw d P/E rel
av erage
Industrials rel (%6mom)
German 10y Bdy %6mom (rhs)
64
FINANCIALS: OVERWEIGHT Cyclical positives to prevail vs current credit dislocation

Sector is still a consensus short, in our view Credit cycle at the inflection point Regulatory uncertainty is easing
75% 50% 25% 0% -25% -50% 89 91 93 95 97 99 01 03 05 07 09
UK banks relative and mortgage applications

150% 100% 50% 0% -50% -100%
UK Banks rel to market (%y oy )

Source: Datastream
Mortgage approv als (%y oy , rhs)
European bank provisioning vs profitability

100 80 60 40 0% 20 20% 0 -2 0 -4 0 97 98 99 00 01 02 03 04 05 06 07 08 09 40% 60% 80% -8 0 % -6 0 % -4 0 % -2 0 %
European banks EPS revisions vs shape of the yield curve

0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1.0 0.5 0.0 -0.5 3.0 2.5 2.0 1.5
E u ro p e - P ro v is io n s / to ta l lo a n s c h o y a
E u ro p e B a n k s O p e ra tin g in c o m e % y o y (rh s , rs )
Source: Datastream, Worldscope
European Bank s +v e to -v e EPS rev is ions relativ e Euroz one Yield c urv e (10y - 2y , adv 12m , rhs )
65
BANKS: OVERWEIGHT. Pre-provision valuations attractive

European banks pre-provision P/E and P/Book
Price/PrePrice/Preprovision provision operating operating 12 Mth Fwd profit 2010E profit 2011E PE UK Barclays HSBC Lloyds TSB Royal Bank of Scotland France BNP Paribas CASA Societe Generale Ireland Allied Irish Banks Bank of Ireland Spain Bankinter BBVA Popular Sabadell Santander Pastor Italy Intesa Sanpaolo UBI Mediobanca Montepaschi UniCredito Banco Popolare Banca Popolare di Milano Switzerland Credit Suisse UBS 3.6 3.4 2.4 4.9 3.8 4.0 3.7 3.7 0.6 0.5 0.7 4.0 5.6 3.6 3.3 5.4 3.8 2.5 3.5 3.3 4.3 4.7 3.1 3.7 2.3 3.1 7.0 6.2 7.9 3.4 3.1 2.2 5.0 3.6 3.8 3.5 3.3 0.7 0.7 0.7 4.1 5.9 3.4 3.4 5.7 3.5 3.0 3.2 2.8 3.5 5.3 2.8 3.2 2.1 2.7 5.7 5.5 5.9 11.9 9.5 12.1 14.0 7.2 7.7 6.5 7.4 10.9 12.1 8.1 10.6 12.8 8.9 13.0 10.8 13.1 9.3 10.7 11.6 10.0 10.1 9.0 8.5 9.4 Price/PrePrice/Preprovision provision operating operating 12 Mth Fwd profit 2010E profit 2011E PE Germany Commerzbank Deutsche Bank Deutsche Postbank Nordics Danske Bank DNB SEB Swedbank CEEMEA Erste Raiffeisen KBC Greece Agricultural Bank of Greece Alpha Bank Bank of Cyprus Eurobank EFG Bank of Piraeus Benelux Dexia Portugal BCP BES BPI Europe 5.1 2.8 3.9 8.6 5.7 4.4 6.2 7.9 4.2 2.6 3.6 2.8 1.4 3.7 4.3 3.7 4.6 2.8 3.2 3.8 3.8 3.4 2.8 4.0 3.3 3.9 3.4 1.9 3.6 4.8 5.3 4.2 6.0 7.2 3.8 2.2 3.2 1.3 3.0 3.3 2.9 3.7 2.6 2.7 3.1 3.1 3.1 2.6 3.6 3.1 3.5 12.3 18.0 7.1 11.7 12.4 10.9 10.0 14.1 14.6 9.6 10.7 10.0 8.0 13.1 14.5 7.7 14.2 16.0 9.1 9.1 8.7 9.0 9.2 7.9 10.7
P/Book 1.0 0.8 1.5 1.1 0.4 0.8 0.9 0.6 0.8 0.1 0.1 0.2 1.0 1.1 1.3 0.8 1.0 1.3 0.8 0.5 0.5 0.5 1.0 0.4 0.6 0.3 0.4 1.5 1.5 1.5
P/Book 0.7 0.3 0.9 1.0 1.1 0.9 1.3 1.1 1.1 0.9 1.1 1.0 0.7 0.9 1.7 0.7 0.8 0.6 0.7 0.7 0.7 0.6 0.7 0.8 0.8
Source: Datastream, J.P. Morgan, prices as at cob 29th July, 2010
66
BANKS: longer-term context difficult

Near-term picture more favourable than longer-term one, long term ROE to be muted
European banks P/E relative to the market
1.7 1.5 1.3 1.1 0.9 0.7 0.5 0.3 73 75 77 79 81 83 85 87 89 91 93 95 97 99 +1 s d 01 03 05 -1 s d 07 09
European banks P/Book relative to the market

1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 80 82 84 86 88 90 92 94 96 98 00 +1 s d 02 04 -1 s d 06 08 10
Bank s trailing P/E relativ e to m ark et
Av erage
Bank s P/B relativ e to m ark et
Av erage
Source: Datastream
Source: Datastream
US financial corp. profits % GDP vs Financials % market cap

4. 0% 3. 5% 3. 0% 2. 5% 2. 0% 1. 5% 1. 0% 0. 5% 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 U S Dom es tic financ ial c orporate profits as a % of G DP F inanc ials s hare of U S m ark et c ap (rhs ) av erage av erage (rhs ) 25% 23% 21% 19% 17% 15% 13% 11% 9% 7% 5%
European Financials ROE

18% 16% 14% 12% 10% 8% 6% 4% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
European Financials RoE

Source: Datastream
RoE average to '98
Source: BEA, Datastream
67
Banks: Sovereign risk exposure and sensitivity

Direct exposure to government bonds/loans for European banks is c. 7% of assets Banks with larger holdings of bonds are KBC, NBG and BNP (20%, 16% and 12%) Our analysts calculate that for each 100bp decline in government bond values, the sector would potentially see 1% of NAV erosion
European banks holdings (m) of government bonds and NAV sensitivity
Total Government securities o.w. domestic o.w. Greece o.w. other non domestic Other Government risk Other public finance risk Government securities o.w. trading o.w. AFS o.w. Held to maturity Gvt bonds as a % of assets NAV sensitivity to 1% decline in value SEB Government securities o.w. domestic o.w. Greece o.w. other non domestic Other Government risk Other public finance risk Government securities o.w. trading o.w. AFS o.w. Held to maturity Gvt bonds as a % of assets NAV sensitivity to 1% decline in value 3% 1% 8% 2% 7,896 5560 16,715 9632 69,632 8,056 39,439 10,662 20% 10% 17,900 3,000 8,100 0 16% 3% 2,800 100 100 2,600 4% 1% 6,500 260 3,432 1,391 8% 2% 3% 1% 5% 1% 5% 1% 6% 1% 5% 1% 4% 1% 10% 1% 38,200 27,000 6,000 5,000 6,516 2,233 2,783 0 0 0 0 0% 2% 4,800 2,300 2,000 500 5% 1% 2,660 0 1,055 1,605 3% 0% 701 7,896 7,195 1,525,347 675,535 610,562 69,207 8% 2% Erste 16,715 10,713 50,346 20,613 21,499 8,234 5% 1% KBC 69,632 29,400 1,200 29,400 17,900 3,600 2,800 676 6,500 5,832 2,374 55,531 28,820 22,815 3,896 9% 2% NBG 21,500 41 5,748 4,699 794 255 4% 1% 0 4,126 450 3,676 0 3% 1% Alpha 3,476 EFG 12,332 50 15,935 4,304 11,628 3 7% 1% SAN 38,200 24,000 200 14,000 0 567 79 488 0 1% 0% 168 5,383 4,256 1,125 1 9% 1% BBVA 27,000 9,000 0 18,000 BTO 6,000 6,000 0 0 immaterial 1,546,930 UCG 50,346 ISP 55,531 36,650 1,000 17,881 30,333 298,989 48,467 1,026 46,294 1,147 8% 4% SAB 5,000 1,500 0 3,500 63,127 63,127 0 0 7% 8% POP 6,516 5,662 0 854 256,178 99,075 143,367 13,736 12% 4% 123,995 43,042 63,365 17,588 8% 4.30% BKT 2,233 1,700 0 533 AIB 2,783 749 700 1,334 59,723 42,035 15,950 1,738 6% 2% 4% 1% BKIR 11,475 3,941 0 7,534 BCP 4,800 n.a. n.a. n.a. 2% 0% BES 2,660 n.a. n.a. n.a. 5% 1% 2% 0% 15,542 4,900 9,216 8,349 20 BP 5,748 UBI 4,126 MPS 15,935 BPM 567 MB 5,383 Dexia 48,467 CBK 63,127 n.a. 3,200 immaterial n.a. 20,873 850 BNP 256,178 CASA 123,995 SG Danske 59,723 15,542 13,677 nd 1,865 DNB Nor 4,900 1,548 0 3,352 1,625 Swed 9,216 7,595 Nordea 8,349
Source: J.P. Morgan Banks research team, Company reports and J.P. Morgan estimates. * Split of govt. securities across trading, AFS or HTM portfolios for NBG, Alpha and EFG only includes GGB holdings, as at 30th April 2010
68
Banks: Potential capital loss in the context of 08 sub-prime crisis

Ytd Investment gains/losses on Govt Bonds
Immediate debt restructuring unlikely to achieve anything. Credibility needs to be regained first. Restructuring of debt further down the line is probable, but the losses might not need to be booked directly by the retail banks=> the bad exposures will be offloaded in the meantime to the ECB and the SPV Ytd, Eurozone sovereign bonds as an asset class actually appreciated and the ultimate potential loss likely to be far smaller than from the sub-prime crisis
Ytd Investment gains/losses, on Government Bonds (bn) Germany France Netherlands Austria Belgium Finland Italy Gains Ireland Spain Portugal Greece Losses 31 29 8 7 6 2 1 84 -1 -3 -5 -41 -50 34
Banks writedowns and capital raised for subprime

Writedowns & Credit losses Worldwide Americas Europe Asia 1771 1192 538 41 Capital Raised 1483 811 537 135 New Capital / Losses 84% 68% 100% 328%
Net Gains
Source: J.P. Morgan Fixed income research, *based on GBI indices, up to 27th July
Source: Bloomberg, Billion US$
69
INSURANCE: NEUTRAL Bonds / Equity exposure

The sector suffers from the environment of low yields and will be under pressure if/when yields start rising. Insurance is not leveraged to equity upside anymore
70% 60% 50% 40% 30% 20% 10% 0%
European Insurance investments breakdown
95
96
97
98
99
00
01
02
03
04
05
06
07
08
F ix e d in c o m e / T o ta l in v e s tm e n ts
E q u itie s / T o ta l in v e s tm e n ts
Source: Worldscope, bottom-up aggregated
Corporate bond gearing

4Q 09 / 1Q 10 Aegon ING Axa Swiss Re (SFm) Allianz ZFS ($m) Munich Re Generali Baloise (SFm) Swiss Life (SFm) Aviva m Market cap 8,132 29,304 32,598 17,808 40,338 34,080 20,915 24,240 4,170 3,555 10,265 Corporate bonds on balance sheet 56,215 69,000 146,000 17,537 98,900 51,240 27,821 96,100 11,681 38,288 30,234 % A-rated or better 53% 81% 73% 51% 66% 85% 69% 88% 94% 70% 60% %BBB 38% 15% 20% 43% 24% 14% 26% 9% 5% 22% 30% % sub-inv grade 9% 2% 5% 4% 3% 1% 1% 1% 1% 8% 4% % N.R. 0% 2% 2% 2% 7% 0% 4% 2% 1% 0% 6% BBB % market cap 263% 35% 89% 42% 59% 21% 35% 36% 14% 237% 88% Sub-inv % Market cap 62% 5% 21% 4% 7% 2% 1% 4% 3% 86% 12%
Period 1Q 10 4Q 09 4Q 09 1Q 10 1Q 10 1Q 10 1Q 10 4Q 09 4Q 09 4Q 09 4Q 09
Source: J.P. Morgan Equity Research Insurance team, Figures are in million, unless otherwise stated, Mkt cap as on 29th July 2010
70
Insurance: Sovereign credit exposure

Sovereign credit net exposure
Shareholder Equity 8,350 3,585 16,652 6,166 3,888 33,863 40,166 5,042 38,829 29,117 22,049 8,053 11,548 3,712 10,356 7,208 23,201 3,894 Portugal1 1,398 0 600 na na 1,197 500 na 800 291 222 32 154 31 140 26 32 na Italy1 4,055 1,801 6,513 na 1,337 4,977 7,600 819 5,200 4,659 1,334 80 438 24 na 102 105 34 Ireland3 272 33 304 na na 1 500 na 400 437 667 77 103 105 na 64 134 Greece4 1,855 15 749 541 232 1,827 900 149 500 168 667 52 113 20 70 38 582 Sovereign credit net exposure (local currency, millions) Spain5 UK Germany France US Benelux 911 252 762 782 124 3,468 49 na na na na na 576 na 2,768 1,449 na na 2,226 na na na na na na na na na na na 1,890 1,800 447 3,800 1,456 667 999 241 79 350 44 22 na 1,300 na na 5,824 1,334 352 na 501 1,877 na 8,120 606 6,741 7,200 2,011 na 1,747 7,557 na 559 1,843 na na na 281 8,694 4,100 1,713 19,835 1,747 1,334 na 2,483 595 na na na 563 4,473 2,800 na 3,450 6,115 3,334 7,713 467 1,915 2,057 144 20,300 895 9,765 3,500 1,564 na na na 6,503 na 114 na na na 50 Others 1,333 1,114 3,323 4,076 4,478 15,875 6,600 745 45,707 6,675 5,112 90 828 1,687 7,352 4,380 11,304 763 Total 15,213 3,013 16,282 6,843 6,048 55,440 36,800 7,448 79,692 29,120 22,225 15,898 5,386 6,915 11,846 4,797 40,600 3,193 1+2+3 +4+5 8,491 1,899 8,742 2,766 1,570 9,892 11,300 1,415 10,700 7,011 3,556 1,240 1,049 259 560 273 876 34 As % SH equity 102% 53% 52% 45% 40% 29% 28% 28% 28% 24% 16% 15% 9% 7% 5% 4% 4% 1%
Fortis Unipol Generali Mapfre Delta Lloyd ING Allianz SNS Reaal Axa Zurich -$m Munich Re Aegon CNP Hannover Re Aviva - m Swiss Life Swiss Re SCOR
Source: J.P. Morgan Insurance research team, companies report, as at 6th May 2010
71
MATERIALS: OVERWEIGHT Metals & Mining top pick for 09, moved to N for 2010 and upgraded back to OW on 28th May
Mining is the only Cyclical sector underperforming the market ytd Chinese inflation to peak in Q3 and to allow policymakers to slow down the tightening process
Sectors ytd perf vs EPS revisions
15% 10% 5% IT 0% -5% -10% Utilities -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% Energy
-60% 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
EM relative performance and Mining relative

80% 60% 40% 20% 0%
Ytd perf Discretionary Industrials Staples Ytd revision in 2010e EPS Financials Europe Telecom s Healthcare M aterials
-20% -40%
M S C I E M v s DM % y oy
M et& M in rel to E urope % y oy
Source: Datastream
Metals & Mining 12m Fwd P/E rel

1.6 1.4 1.2 1.0 0.8 0.6 0.4 95 96 97 98 99 00 01 02 03 04 av erage 05 06 07 +1stdev 08 09 10 -1stdev
China merchandise exports

150,000 140,000 130,000 120,000 110,000 100,000 90,000 80,000 70,000 06 07 08 09 China Merchandise ex ports (US$ million, sa) 10
M etals & M ining 12m th Fw d P/E rel
Source: Datastream, IBES, MSCI
72
DISCRETIONARY: OVERWEIGHT Labour market is the key

The stabilisation in labour market and corporate profitability to drive the sector
ISM manufacturing employment
70 65 60 55 50 45 40 35 30 25 20 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Eurozone Advertising spend vs GDP

10% 6%
5%
4% 2%
0% 0% -5 % -2 % -1 0 %
-4 % -6 % 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10e
-1 5 %
IS M m a n u fa c tu rin g s u rv e y - e m p lo y m e n t
E u ro -a re a a d v e rtis in g s p e n d in g (% y o y )
E M U R e a l G DP (% y o y , rh s )
Source: Datastream
EMU Retail sales vs unemployment rate

4% 3% 2% 1% 0% -1% -2% -3% -4% -5% 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 forec as ts -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35%
US hotels revenues per room

20 15 10 5 0 -5 -10 -15 -20 -25 -30 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10
EM U R etail s ales v olum e ex autos (%y oy )
EM U unem ploy m ent rate (%y oy , rhs , rs )
U S Hotels R ev PAR (%y oy )
3 m onth m ov ing av erage
Source: J.P. Morgan
73
DISCRETIONARY: OVERWEIGHT
European sectors relative performance in the 6 months following the first positive payrolls
+6m Europe Energy Chemicals Construction Materials Metals & Mining Capital Goods Transport Automobile Consumer Durables Media Retailing Hotels,Restaurants&Leisure Food & Drug Retailing Food Beverage & Tobacco Household Products Healthcare Banks Insurance Real Estate Software and Services Technology Hardware Semicon & Semicon Equip Telecoms Utilities
Source: Datastream
1975 2% 3% 2% -12% 6% -4% 6% 7% -1% -8% 4% -3% 0% 2% 0% 0% -9% -22% 46% 22% -2% 0%
1980 5% -13% 4% -3% -10% -5% -24% -9% -9% 6% 11% 10% -4% -3% -1% 4% 14% 3% 19% -24% 3% -16%
1983 15% 12% -10% -6% -7% 10% 20% 6% 15% -5% -1% -15% -9% -15% -7% -5% -2% -13% 82% 0% -6% -16%
1991 -4% 1% -12% -14% -5% 4% -11% 20% 12% 13% 5% 3% 9% -1% 14% -3% -5% -8% -3% -14% -6% 3% 8%
2003 -4% 1% -12% -14% -5% 4% -11% 20% 12% 13% 5% 3% 9% -1% 14% -3% -5% -8% -3% -14% -6% 3% 8%
Average 3% 1% -6% -10% -4% 2% -4% 8% 6% 4% 5% 0% 1% -3% 4% -1% -1% -10% 28% -6% -6% 0% -3%
Median hit ratio 2% 1% -10% -12% -5% 4% -11% 7% 12% 6% 5% 3% 0% -1% 0% -3% -5% -8% 19% -14% -6% 3% 0%
60% 80% 40% 0% 20% 60% 40% 80% 60% 60% 80% 60% 60% 20% 40% 40% 20% 20% 60% 20% 60% 60% 60%
74
IT: OVERWEIGHT Preference for semiconductors/Software

US Financials profits vs Tech capex
Within the sector, we are most positive on semiconductors. They should benefit from significant operational leverage and USD strength The sector will benefit from a recovery in IT spend The inventories in the supply chain are not flashing warning signs yet
Taiwan and Korea High-tech Inventory/Shipment ratio
1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 01 02 03 04 05 06 07 08 09 M e d ia n 10
40% 30%
100% 80% 60%
20% 10%
40% 20% 0%
0% -1 0 %
-2 0 % -4 0 % -6 0 %
-2 0 % 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 U S te c h c a p e x (% y o y )
-8 0 %
U S F in a n c ia ls c o rp o ra te p ro fits (% y o y , b ro u g h t fo rw a rd 3 q u a rte rs )
Source: BEA, Datastream
IT 12m fwd P/E relative

3.5 3.0 2.5 2.0 1.5 1.0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 -1 SD
T a iw a in a n d K o re a H ig h -te c h in v e n to ry to s h ip m e n t ra tio
European IT 12m fwd P/E rel to mkt

Avg ex bubble
+1 SD
Source: J.P. Morgan
75
ENERGY: OVERWEIGHT Cheap, high yield, +ve EPS momentum

The relative performance of Energy has displayed a tight correlation to relative EPS momentum Valuations are also attractive, Energy trades at a 25% P/E discount, near record DY relative at a 50% premium, and third most attractive equity yield vs credit yield
Energy P/E relative
1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
E nergy 12m th F w d P /E rel to E urope +1S D
av erage -1S D
Source: IBES
Energy annual perf vs EPS relative

50% 40% 30% 20% 10% 0% -1% -10% -20% -30% -40% 95 96 97 -16% -26% -32% 98 99 00 01 02 03 04 05 06 07 08 09 10e -8% -7% -11% -17% -14% -5% -7% 18% 10% 10% 2% 12% 10% 5% 14% 13% 10% 9% 2% 6% 8% 1% 44%
European sectors dividend yield vs high grade yield %

Dividend yield Utilities
24% 15%
High grade yield 3.6 3.8 3.6 2.6 3.0 3.6 3.5 4.1 3.5 3.5 2.6
Difference 2.3 2.3 1.3 0.1 -0.3 -0.5 -1.1 -1.2 -1.2 -1.3 -1.8
LT average -0.9 -1.8 -1.5 -1.5 -2.2 -1.8 -3.4 -2.2 -2.1 -2.1 -1.7
5.9 6.0 4.9 2.7 2.7 3.1 2.3 2.9 2.3 2.2 0.8
Telecom Energy Chemicals Staples Real Estate Technology

-28%
Building Materials Capital Goods Transport Autos

Source: Datastream
Energy %y oy perf rel
Energy %y oy EPS rel
Source: Datastream, IBES, MSCI
76
TELECOMS: NEUTRAL Downgraded on 8th December

Telecom displays the highest free cash flow yield among European sectors Seasonality usually supports the sector in Q4
8% 6% 4% 2%
Telecoms seasonality
5.8% 6.0%
1.1% 0.0%
0% -2% -4% Q1 -0.6% -1.0% -3.3% Q2 Q3 Q4 -1.1%
Telecoms rel to Europe (%qoq av g, since 1995)

Telecoms rel to Europe (%qoq median, since 1995)
Telecoms 12m Fwd P/E relative to Europe

2.5 2.3 2.1 1.9 1.7 1.5 1.3 1.1 0.9 0.7 95 96 97 98 99 00 01 02 03 04 av erage 05 06 07 +1s tdev 08 09 -1s tdev 10
European sectors FCF yield

2010e Telecommunications Services Healthcare Consumer Staples Information Technology Europe Consumer Discretionary Industrials Materials Utilities Energy
2011e 10.7% 9.6% 6.2% 7.9% 5.9% 6.1% 6.1% 7.9% 3.0% 3.2%
10.3% 8.7% 5.7% 6.0% 4.2% 4.5% 4.4% 4.5% 1.8% -0.5%
T elec om 12 m th fw d P/E relativ e to m ark et
77
UTILITIES: UNDERWEIGHT Regulatory risks, weak pricing

Low FCF yield, high capex requirements, risk of rising taxation Valuations attractive, power usage stabilizing Gas oversupply to remain a concern in the medium-term
Power CPI vs Oil Price*
20% 15% 10% 5% 0% -5% -10% 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 200% 150% 100% 50% 0% -50% -100%
CPI - Europe Electricity , Gas and other fuels(%y oy , lags by 7m)

Source: Datastream, * assuming 70$/bbl WTI until year end)
Crude oil (%y oy , rhs)
Utilities 12mth Fwd P/E relative

1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 95 96 97 98 99 00 01 02 03 04 05 06 07 +1 sd 08 09 10 -1 sd
-2.0 -3.0 -4.0 98 4.0 3.0 2.0 1.0 0.0 -1.0
Utilities dividend-corporate bond yield spread
99
00
01
02
03
04
05
06
07
08
09
10
Utilities 12 mth fw d P/E relativ e to market
Av erage
Utilities Div idend - High grade Yield
Source: IBES
78
HEALTHCARE: UNDERWEIGHT Consensus long; faces political pressures

We downgraded Pharma in December 2008 Pharma faces a number of headwinds such as political pressures, pricing weakness and downgrades to long-term earnings outlook Historically, a Democrat victory was negative for the sector On the positive side, sectors valuations are attractive
Healthcare valuations
1.7 1.6 1.5 1.4 1.2 1.1 1.0 0.9 0.8 95 96 97 98 99 00 01 02 03 04 05 06 07 +1 sd 08 09 10 -1 sd
0.9 0.7 76 1.5 1.3 1.1 2.3 2.1 1.9 1.7
Healthcare performance vs US presidential elections

2000 - Republicans 1993 Clinton health care plan
1988 - Republicans
1980 - Republicans
1976 - Democrats
1984 - Republicans
1.3
1992 - Democrats
1996 - Democrats
2004 - Republicans
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
Healthcare 12 mth fw d P/E relativ e to market

Source: IBES
Av erage
Pharma rel Europe
Pharma rel US
79
2008 - Democrarts
10
STAPLES: UNDERWEIGHT No-win situation; rich valuations a problem

The valuation overhang for Staples is still significant on a number of measures In addition, margin pressure is building Low food inflation is a negative for Staples earnings
Staples P/E relative
1.8 1.6 1.4 1.2 1.0 0.8 0.6 95 96 97 98 99 00 01 02 03 av erage 04 05 06 +1stdev 07 08 09 -1stdev 10
Staples 12mth Fw d P/E rel

Staples earnings vs Food inflation

80% 60% 40% 20% 0% -20% -40% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 5% 4% 3% 2% 1% 0% -1% -2% -3%
Food CPI-PPI and Staples EPS relative

8% 6% 4% 2% 0% -2% -4% -6% 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 80% 60% 40% 20% 0% -20% -40% -60%
Food & Bev trailing EPS relativ e (%y oy ) Food & Bev CPI relativ e (%y oy , brought forw ard 12m, rhs)
Eurozone Food CPI - PPI (%yoy)

Source: Datastream, Eurostat
Food & Bev trailing EPS relative (%yoy, rhs)
80
The latest bear market in a historical context

Past US bear markets since 1900
In past bear markets, the S&P500 posted median falls of 32% with a median duration of 14 months, compared to the recent 57% fall in 16 months Historically, the median fall of European equities was 35%, lasting only 6 months. In the latest bear market they fell 57% over 20 months
Peak
Trough
% fall
Length of fall (m)
Backdrop
Sep-02 Sep-06 Dec-09 Nov-16 Jul-19 Sep-29 Sep-32 Feb-34 Feb-37 May-46 Jul-57
Oct-03 Nov-07 Dec-14 Dec-17 Aug-21 Jun-32 Feb-33 Mar-35 Apr-42 Jun-49 Oct-57 Jun-62 Oct-66 May-70 Oct-74 Aug-82 Dec-87 Oct-90 Oct-02
-29% -38% -29% -33% -32% -85% -41% -32% -57% -25% -21% -22% -22% -36% -48% -27% -34% -20% -49%
-32% -36%
13 14 61 13 25 33 5 13 63 38 3 6 8 18 21 21 3 3 31
14 21
US Recession (Sep 02-Aug-04) US Recession (May 07-Jun-08) US Recession (Jan 10-Jan 12 and Jan 13Jan-14) World War I US Recession (Jan 20-Jul 21) US Depression (Aug 29-Mar 33) US Depression (Aug 29- Mar 33)
US Recession (May 37-Jun 38) US Recession (Nov 48-Oct 49) US Recession (Aug 57-Apr-58) US Recession (Apr 60-Feb-61)
European bear markets since 1970*

Peak Bottom % fall Length of fall (m) Macro
Dec-61 Feb-66 Nov-68 Jan-73 Nov-80 Aug-87 Jul-90 Mar-00

Median Mean
US Recession (Dec 69-Nov 70) US Recession (Nov 73-Mar-75) and 1st oil shock US Recession (Jul 81-Nov 82) and 2nd oil shock Black Monday US Recession (Jul 90-Mar-91), S&L crisis US Recession (Mar 01-Nov 01)
Feb-72 Oct-87 Jul-90 Jul-98 Sep-00

Median Average
Jan-75 Nov-87 Jan-91 Oct-98 Mar-03
-41% -35% -24% -31% -58%

-35% -38%
36 1 6 3 31
6 15
US (Nov 73-Mar-75) and European Recession Black Monday US (Jul 90-Mar-91) and European Recession, S&L LTCM US (Mar 01-Nov 01) and German Recession
Jun-07
Mar-09
-57%
20
Financial crisis and 3rd oil shock
Oct-07
Mar-09
-57%
16
Financial crisis and 3rd oil shock
Source: Datastream, MSCI, *market down 20% for more rom peak, daily data since 80, monthly before *assuming March 9th was the low
Source: Datastream, Data Shiller, Bloomberg, NBER *assuming Mar 9th was the low
81
The Dark Side: Scandinavian and Japanese experience

Finland 5 year performance to peak Market peak to bottom Period -75% Apr 89 to Sep 92 Norway 276% -54% Aug 90 to Aug 92 Sweden 203% -57% Aug 89 to Oct 92 Japan 216% -62% Dec 89 to Oct 98 US 104% -57%* Oct 07 to Mar 09
Valuations at peak Premium to last 5 yr average
12.8 #N/A
15.6 71%
23.9 36%
60.7 19%
17.8 -9%
Valuations at bottom
4.9
12.2
9.5
30.9
10.3
Real GDP (peak to bottom) Period
-12.3% -4.1% -5.8% 1989 Q2 to 1993 Q2 1987 Q2 to 1991 Q4 1990 Q2 to 1992 Q4
-1.7%* - 2008 Q2 to 2008 Q4
IP (peak to bottom) Period
-40.3% Aug 89 to Jun 91
-4.1% Sep 91 to Oct 91
-6.7% Dec 90 to Feb 93
-14.4% May 91 to Jan 94
-11%* Jan 08 to current
5 year change in house prices to peak House price fall Period
107% -41% 1989 Q2 to 1993 Q1
96% 88% -30% -20% 1987 to 1992 1991 Q1 to 1993 Q3
134% -59% 1991 to 2006
75% -27%* Jul 06 to current
Unemployment rate change Trough unemployment rate Peak unemployment rate
17.8% 2.1% 19.9%
5.0% 1.3% 6.3%
8.6% 1.0% 9.6%
3.5% 2.0% 5.5%
3.7%* 4.4% 8.1%*
10 yr yields peak to bottom 10 yr yields peak 10 yr yields bottom
-6.6% 13.0% 6.4%
-8.0% 13.5% 5.6%
-6.7% 13.8% 7.0%
-7.2% 7.9% 0.7%
-3.2% 5.2% 2.1%
Use of public funds as % of GDP
7%
3%
4%
14%
Source: Datastream, Bloomberg, J.P. Morgan. Japan house prices relate to Tokyo residential land prices. *latest
82
Economic, Interest Rate and Exchange Rate Outlook

Real GDP % oya 2009E United States Eurozone United Kingdom Switzerland Japan Emerging markets Global -2.4 -4.1 -4.9 -1.5 -5.3 1.1 -2.5 2010E 2.9 1.3 1.6 2.3 3.6 6.8 3.4 2011E 2.8 1.4 2.6 2.5 2.2 5.6 3.0 1Q10E 2.7 0.8 1.3 1.6 5.0 7.5 3.6 2Q10E 2.5 3.0 4.5 2.8 2.8 5.7 3.5 3Q10E 2.5 2.0 2.5 2.5 2.5 4.7 2.9 Real GDP % oqa, saar 4Q10E 3.0 1.0 2.5 2.3 2.5 5.2 2.9 1Q11E 2.5 1.0 2.0 2.3 2.2 5.8 2.8 2Q11E 2.5 1.0 2.5 2.5 2.0 6.0 2.8 3Q11E 3.0 1.8 3.0 2.8 1.5 5.2 3.0 1Q10E 2.4 1.1 3.3 1.1 -1.2 5.1 2.2 Consumer prices % oya 2Q10E 1.8 1.5 3.5 1.1 -1.4 5.1 2.1 4Q10E 0.9 1.5 2.5 0.9 -0.7 5.2 1.9 2Q11E 1.2 0.9 1.7 0.6 0.1 4.9 1.9
Forecast Official interest rate Federal funds rate Refi rate Repo rate 3-month Swiss Libor Overnight call rate next change 4Q 11 (+25bp) On Hold May 11 (+25bp) 16 Dec 10 (+25bp) 2Q 12 (+15bp) Current 0.125 1.00 0.50 0.25 0.10 Sep 10 0.125 1.00 0.50 0.25 0.10 Dec 10 0.125 1.00 0.50 0.50 0.10
Forecast for Mar 11 0.125 1.00 0.50 0.75 0.10 Jun 11 0.125 1.00 0.75 1.00 0.10 Sep 11 0.125 1.00 1.00 1.25 0.10
Forecast for end of 10 Yr Govt Bond Yields United States Eurozone United Kingdom Japan July 28, 2010 2.98 2.75 3.57 1.08 Sep 10E 3.45 2.90 3.55 1.30 Dec 10E 3.85 3.15 3.90 1.40 Mar 11E 4.15 3.25 4.10 1.50 Jun 11E 4.50 3.35 4.25 1.55
Exchange rates vs US$ EUR GBP CHF JPY
July 28, 2010 1.30 1.56 1.06 87.4
Sep 10E 1.25 1.47 1.06 90
Dec 10E 1.25 1.44 1.03 93
Mar 11E 1.25 1.42 1.02 93
June 11E 1.25 1.42 1.00 93
Sep 11E 1.20 1.38 1.04 95
Dec 11E 1.15 1.35 1.09 98
Source: J.P. Morgan estimates, Datastream
83
Technical indicators
AAII Bulls vs Bears index
75% 60% 45% 30% 15% 0% -15% -30% -45% -60% 04 05 06 07 08 09 10 AAII Bull - Bear -1% 0% 3% 4% 3% 5% 5% 5% 29% -10% 0% 10% 20% 30% 40% Europe 6m fwd average return
VIX index
90 80 70 60 50 40 30 20 10 0 -10 04 05 VIX
Source: Datastream
06 6m av g
07 +1 sd
08 -1 sd
09 +2 sd
10 -2 sd
Source: Bloomberg, J.P. Morgan
Put Call ratio

2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 04 05 06 07 08 S&P Put Call ratio 09 10
Skew
7% 4% 4% 4% 1% 4% 2% 3% 5% 0.0% 2.0% 4.0% 6.0% 8.0%
3.5 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 00 01 02 03 04 05 06 07 08 09
4% 7% 6% 3% -2% 1% -4% -9% -11% -15% -10% -5% 0% 5% 10% Europe 6mfwd average return
Europe 6m fw d av erage return
EStoxx 1 year Skew
84
European Sector Allocation

Sector Allocation Sector Allocation
M S C I E u r o p e W e ig h ts E n e rg y M a te r ia ls C h e m ic a ls C o n s tru c tio n M a te ria ls M e ta ls & M in in g In d u s tr ia ls C a p ita l G o o d s T ra n s p o rt C o n s u m e r D is c r e tio n a r y A u to m o b ile C o n s u m e r D u ra b le s M e d ia R e ta ilin g H o te ls ,R e s ta u ra n ts & L e is u re C o n s u m e r S ta p le s F o o d & D ru g R e ta ilin g F o o d B e v e ra g e & T o b a c c o H o u s e h o ld P ro d u c ts H e a lth c a r e F in a n c ia ls B a n ks D iv e rs ifie d F in a n c ia ls In s u ra n c e R e a l E s ta te In fo r m a tio n T e c h n o lo g y S o ftw a re a n d S e rv ic e s T e c h n o lo g y H a rd w a re S e m ic o n & S e m ic o n E q u ip T e le c o m s U tilitie s
Source: MSCI, J.P. Morgan
A llo c a tio n 11% 11%
D e v ia tio n 0 .8 % 1 .7 %
R e c o m m e n d a tio n O v e rw e ig h t N e u tra l = = +
1 0 .2 % 9 .3 %
1 0 .4 %
10%
-0 .4 %
N e u tra l = =
8 .1 %
9%
0 .9 %
O v e rw e ig h t + + + + +
1 3 .1 %
12%
-1 .1 %
U n d e rw e ig h t = -
1 0 .4 % 2 3 .0 %
9% 24%
-1 .4 % 1 .0 %
U n d e rw e ig h t O v e rw e ig h t + = = =
3 .0 %
4%
1 .0 %
O v e rw e ig h t + = +
6 .8 % 5 .6 % 100%
7% 3% 100%
0 .2 % -2 .6 % 0%
N e u tra l U n d e rw e ig h t B a la n c e d
85
European Asset Allocation

Asset Allocation
B enchm ark w eighting Equities Bonds Cash 60% 30% 10% 100% A llocation 70% 25% 5% 100% Deviation 10% -5% -5% 0% Recom m endation O verw eight U nderw eight U nderw eight B alanced
Regional Asset Allocation

M SC I Europe W eights Eurozone United K ingdom O thers* 50% 33% 17% 100% A llocation 53% 30% 17% 100% Deviation 3% -3% 0% 0% Recom m endation O verw eight U nderw eight N eutral B alanced
Index Targets
Index Europe Eurozone United K ingdom
Source: MSCI, J.P. Morgan, Datastream *Others include Denmark, Norway, Sweden and Switzerland Note: We use the MSCI Europe index as the benchmark against which to determine our regional allocations. Our Overweight/Underweight recommendations reflect our belief that the relevant region will out- / underperform the index over the next six to 12 months.
YE 2010 1,300 185 6,150
M SCI Europe M SCI Eurozone FTSE 100
86
European Market Performance & Valuations

29-Jul-10 3M Performance US Europe UK Euro Switzerland 12M Performance US Europe UK Euro Switzerland P/Book (-1M) US Europe UK Euro Switzerland 12M Frw Cons P/E pre GW US Europe UK Euro Switzerland Cons 12M EPS% pre GW US Europe UK Euro Switzerland Dividend Yield US Europe UK Euro Switzerland 12.8% 13.6% 17.1% 10.9% 9.9% 2.3% 0.3% -0.8% 1.4% 12.2% 25.4% 38.3% 18.1% 10.2% 27.3% 27.8% 27.3% 28.3% 19.1% 26.1% 24.1% 31.7% 20.2% 65.7% 11.0% 23.2% 19.9% 28.1% 20.3% 2.1% 4.2% 6.7% 6.2% -5.7% 16.3% 12.3% 19.5% 7.5% 12.6% 14.3% 9.6% 47.7% 5.9% -4.5% 5.9% 10.5% 23.8% 0.6% 11.5% 6.5% -0.9% 13.0% -4.6% Market -7.3% -2.4% -4.8% -0.7% -4.0% Energy -11.8% -14.4% -19.1% -5.8% Materials -7.2% -5.8% -5.3% -5.9% -10.3% Industrials -7.7% -0.3% -2.9% 0.4% 1.0% Discretionary -9.5% 2.7% -0.4% 4.8% 4.2% Staples -1.3% 0.5% -2.0% 2.5% 1.2% Healthcare -7.9% -6.7% -0.1% -9.4% -12.2% Financials -9.4% 3.0% 0.7% 5.2% 0.3% IT -7.9% -7.1% 8.6% -8.7% -11.2% Telecom 3.5% 2.8% 4.0% 0.8% 2.4% Utilities 2.4% -6.8% -0.6% -8.8% -
2.0 1.5 1.7 1.3 2.3
1.8 1.5 1.4 1.5 -
2.6 1.6 2.0 1.4 2.0
2.4 2.1 2.9 1.8 3.3
2.6 1.8 2.3 1.5 2.8
3.1 3.0 3.4 2.5 3.8
2.3 2.9 4.2 1.7 3.5
1.1 0.9 1.1 0.7 1.1
3.4 2.4 3.1 2.5 2.8
1.7 1.5 1.0 1.9 3.0
1.3 1.4 2.6 1.3 -
12.0 10.3 9.5 10.2 11.3 21.5 23.2 25.1 22.3 20.3
10.2 8.0 7.8 8.3 27.6 24.7 27.4 21.2 -
12.7 9.4 7.4 11.8 12.9 41.0 43.5 45.8 45.5 13.8
13.3 12.8 11.5 12.6 15.7 18.9 24.4 13.4 21.0 9.0
13.6 12.8 12.3 12.3 16.5 24.1 46.7 10.8 76.4 25.7
13.3 14.0 12.7 14.4 15.9 7.8 10.6 9.4 12.9 9.1
10.6 10.0 9.2 9.6 10.2 8.5 7.9 1.2 6.7 14.6
11.1 9.0 10.2 8.3 8.0 54.1 36.3 64.7 27.5 41.2
12.2 13.8 19.3 13.2 15.2 17.4 32.3 15.5 39.1 82.4
14.9 9.5 9.1 9.5 10.6 8.7 2.4 1.0 2.3 0.3
12.0 10.0 11.3 9.6 3.2 -0.5 -0.2 -0.6 -
2.5 4.1 4.6 4.4 3.1 Forward ROE
2.4 7.3 7.9 6.9 -
2.1 2.5 1.8 3.3 2.4 12M fwd P/E 12.0 10.3 9.5 10.2 11.3
2.3 2.8 2.4 3.3 2.7
2.0 3.1 3.3 3.2 1.0
3.2 3.1 3.7 2.8 2.8 Discount -14.1% -20.3% -14.4% -5.1%
3.1 4.5 6.1 4.5 3.8
1.6 3.6 3.5 4.0 3.1
1.8 2.5 1.3 2.8 0.0
7.1 6.4 5.6 7.4 5.2
4.6 6.8 6.3 7.0 -
Sector neutral P/E 11.2 12.0 11.0 13.0
Sector neutral discount -6.3% 0.1% -8.1% 8.9%
US Europe UK
17.1% 14.9% 17.8%
12.6% Euro Switzerland 20.2% Note: Swiss calculations exclude Energy and Utilities sectors
Source: IBES, MSCI, Datastream
87
Disclosures
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures MSCI: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an 'as is' basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates. Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgans website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406) Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stocks expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts coverage universe. A list of these analysts is available on request. The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.
J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2010 Overweight Neutral Underweight (buy) (hold) (sell) JPM Global Equity Research Coverage 46% 42% 12% IB clients* 49% 46% 31% JPMSI Equity Research Coverage 44% 48% 9% IB clients* 68% 61% 53% *Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
88
Disclosures
Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative. Analysts Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMSI, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMSI, and may not be subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Other Disclosures J.P. Morgan is the global brand name for J.P. Morgan Securities Inc. (JPMSI) and its non-US affiliates worldwide. J.P. Morgan Cazenove is a brand name for equity research produced by J.P. Morgan Securities Ltd.; J.P. Morgan Equities Limited; JPMorgan Chase Bank, N.A., Dubai Branch; and J.P. Morgan Bank International LLC. Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporations Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCCs website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf. Legal Entities Disclosures U.S.: JPMSI is a member of NYSE, FINRA and SIPC. J.P. Morgan Futures Inc. is a member of the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited is a member of the National Stock Exchange of India Limited and Bombay Stock Exchange Limited and is regulated by the Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 020/01/2010 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorised by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.
89
Disclosures
Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require that a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to wholesale clients only. JPMSAL does not issue or distribute this material to retail clients. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms wholesale client and retail client have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider for derivative warrants issued by J.P. Morgan Structured Products B.V. and listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk/prod/dw/Lp.htm. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMSI and/or its affiliates and the analysts involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMSI distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. Other Disclosures last revised March 1, 2010. Copyright 2010 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.
90

JP Morgan Equity Strategy August 2010

Uploaded by

Copyright:

Available Formats

You might also like

JP Morgan Equity Strategy August 2010

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

JP Morgan Equity Strategy August 2010

Uploaded by

Copyright:

Available Formats

European Equity Research 2nd August 2010

Mislav Matejka, CFA AC (44-20) 7325-5242 mislav.matejka@jpmorgan.com

Key trades and themes

1 - Macro momentum is peaking, driven by manufacturing slowdown

Global Manufacturing PMI

Eurozone composite PMI

ISM and recessions

Source: J.P. Morgan

Source: Datastream, NBER

Peak in macro momentum does not mean equities need to fall

Forward S&P500 perf when ISM goes above 60

Source: Datastream, J.P. Morgan, *% of time performance is positive

May-04 ISM peak

Jun-07 MSCI Europe peak (+65%)

55 1400 50 1200 45 1000 40 800

600 03 04 05 06 MSCI Europe 07 ISM (rhs) 08

Source: Datastream, MSCI

Typical ISM and S&P500 moves during recovery

135 130 125

110 105 100

ISM s inc e Dec -08

Av erage S&P500 (rhs )

Forward S&P500 perf in different ISM ranges

Source: Datastream, J.P. Morgan

Source: Datastream, J.P. Morgan

2 - What is the Yield curve really saying? Still constructive

NBER dated recessions

Yield curv e (10y r - Fed funds)

Source: Datastream, NBER

Timing of recessions and peak of the yield curve

10Y-30Y spread and US recessions

Source: Datastream, *latest

Yield curve and equity market direction

12m S&P500 perf* from different levels of the yield curve

3 - Monitoring the stress in funding markets the pace of deterioration is slowing

LIBOR-OIS spread 2007-to-date

LIBOR-OIS spread year-to-date

250 200 150 100 50 0 07 08 Libor-OIS spread 09 10

Euro Swap spread

Euro swap spread 2007-to-date

Euro swap spread year-to-date

0 07 08 09 Euro sw ap spread 2YR 10

40 Jan-10 Feb-10 Mar-10 Apr-10 May -10 Jun-10 Jul-10

Euro sw ap spread 2YR

TED spread 2007-to-date

TED spread year-to-date

Corporate credit spreads

US and Euro corporate high grade spreads year-to-date

US corporates high grade spreads

Euro corporate high grade spreads (rhs)

US corporates high grade spreads

Euro corporate high grade spreads (rhs)

US and Euro corporate high yield spreads 2008-to-date

US and Euro corporate high yield spreads year-to-date

US corporates high y ield spreads

Euro corporate high y ield spreads (rhs)

US corporates high y ield spreads

Euro corporate high y ield spreads (rhs)