2013January

ASEAN equities have delivered impressive gains in 2012. The MSCI South East Asia Index was up more than 18% in 2012. Thailand’s SET index surged almost 40%, in USD terms, in the year, while Singapore’s STI rose 28%. The natural question now is whether this winning streak can continue in 2013, especially when the market focus seems to have switched back to China and India, as their economies showed signs of stabilisation in recent months. We believe strong public investment could be the next growth driver while resilient domestic demand remains the key to sustainability for the Southeast Asian region.

Although ASEAN’s export sector was hard hit by the global slowdown, overall economic growth, surprisingly, has remained strong. The weighted average real GDP growth for the ASEAN region was 4.9% in 3Q 2012. The larger countries in the region appear to be in a strong investment phase. Support from public spending and plans to increase production by private enterprise should have multiple benefits, including growth spillovers to other sectors. Development of infrastructure should help attract more FDI and lower the cost of capital. Indonesia and Thailand have both announced ambitious investment projects, with over USD445bn worth of investments by 2025 in Indonesia and USD85bn by 2021 in Thailand.

The ASEAN region accounts for 14% of the Asian middle class*, far below China’s 61% but bigger than India’s 11%. Although each individual economy in ASEAN may be “small”, together they are powerful enough to support a strong regional domestic demand theme. Within the ASEAN region, Thailand, Indonesia, Malaysia and the Philippines are in the best position to benefit from a demographic dividend, given their young and rapidly growing working population. Furthermore, while the average monthly wage in China was lower than the ASEAN region ten

years ago, today the cost of labour in China is roughly double that of its ASEAN counterparts. The ASEAN economy in our view should continue to attract foreign investment to take advantage of the cheap labour costs and favourable growth prospects.

While valuation is at a premium to the Asian region, this is largely due to the de-rating of China. Relative to its own historical average, only the Philippines market appears expensive. We remain most positive on Thailand thanks to the country’s strong EPS growth, infrastructure spending plans, and close links to the potentially rapid growth of the LVMC region (LVMC stands for Laos, Vietnam, Myanmar, and Cambodia). Although investing in emerging economies often involves higher volatility, this should not stop investors from including the ASEAN markets in their portfolios to take advantage of the continued strong performance potential in 2013.

* Middle class is defined by CLSA as a household that earns per-capita annual disposable income of USD3,000 dollars or above.

Market Focus | Will ASEAN Continue to Outperform?

Contribution to GDP Growth

Source: IMF, FactSet, J.P. Morgan Economics, J.P. Morgan Asset Management “Guide to the Markets – Asia”.Pre-Crisis period defined as the contribution to real GDP growth from 2005 to 2007, whereas Post-Crisis period defined as contribution to real GDP growth from 2008 to 2012.

The information contained in this document does not constitute investment advice, or an o�er to sell, or a solicitation of an o�er to buy any security, investment product or service. Informational sources are considered reliable but you should conduct your own verification of information contained herein. Investment involves risk. Please refer to the o�ering document(s) for details, including the risk factors before investing. Issued by JPMorgan Funds (Asia) Limited.

%, Pre-Crisis vs. Post-Crisis150%

Investment Net ExportsGovernmentConsumption

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100%

-50%

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Indonesia Malaysia Philippines Singapore ThailandPre Post Pre Post Pre Post Pre Post Pre Post

Fund Focus |IMPORTANT INFORMATION The Fund invests in equities, convertibles, fixed income instruments and real estate investment trusts (“REITs”), primarily in income generating securities

of countries in the Asia Pacific region (excluding Japan), and may invest a significant proportion of its assets in below investment grade and unrated debt securities.

The Fund is therefore exposed to equity, liquidity and convertibles risks, interest rate risks which may affect the price of bonds, credit market related risks and real estate market related risks (associated with the risk of investing in REITs and other property related securities; direct investment in real estate is not permitted) as well as the emerging markets risks. Pertaining to investments in below investment grade or unrated debt securities, these securities may be subject to higher liquidity risks and credit risks comparing with investment grade bonds, with an increased risk of loss of investment.

The investment manager may at its discretion pay dividend out of (i) capital and (ii) gross income while charging/paying all or part of the Fund’s fees and expenses to/out of the capital of the Fund, resulting in an increase in distributable income for the payment of dividends by the Fund and therefore, the Fund may effectively pay dividend out of capital. Payment of dividends out of capital amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment. Any distributions involving payment of dividends out of the Fund’s capital or payment of dividends effectively out of the Fund’s capital (as the case may be) may result in an immediate reduction of the net asset value per share.

Investors may be subject to substantial losses. Investors should not solely rely on this document to make any investment decision.

JF Asia Pacific Income Fund^

Investment Centres 1/F, Jardine House, Central, Hong Kong G62, E Plaza, Legend Tower, 7 Shing Yip Street, Kwun Tong, Hong KongJ.P. Morgan Funds InvestorLine (852) 2265 1188 | Fax no. (852) 2868 5013 | www.jpmorganam.com.hk

Contact Us :

The information contained in this document does not constitute investment advice, or an o�er to sell, or a solicitation of an o�er to buy any security, investment product or service. Informational sources are considered reliable but you should conduct your own verification of information contained herein. Investment involves risk. Past performance is not indicative of future performance. Please refer to the o�ering document(s) for details, including the risk factors before investing. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.

Asian Equity Yields Attractive Versus Bonds

A Balance Between Risk and Return

Current Positioning and Outlook

Source: Bloomberg, UBS AG, October 2012*High DY portfolio consists of the top 1/3rd stocks in the MSCI Asia ex-Japan index ranked by forecast dividend yield, based on 12-month forward DPS estimates.Yields for US Treasuries (10-year) and J.P. Morgan Asia Credit Index (JACI Composite) are yields-to-maturity.

The Asia Pacific Income Fund o�ers the benefits of an income stream from a relatively less volatile product than a pure equity fund. Negative real deposit rates have encouraged investors to seek other opportunities to boost investment income. Asian high dividend yield stocks provide an attractive option, generating higher yields than government bonds while also possessing the potential for capital appreciation.

Given the risk of investing in a single asset class, investors should stay well-diversified and maintain a balanced portfolio to cope with the di�erent phases of the economic and market cycles, and strike a balance between achieving return while managing volatility. Asian bonds provide good diversification benefits, as well as contributing to the income stream. The lower volatility of Asian bonds helps to reduce the volatility of the Fund relative to that of an Asian equity portfolio.

We see a better risk/reward prospect in high yield equities than in bonds and have therefore maintained an equity weighting of 60-65%. The current yields on our bond and equity portfolios are very similar, but we see the potential for improving earnings growth in 2013 and therefore more capital upside in equities.

Within equity, the sectors the Fund currently prefers are telecoms, REITS, toll roads and utilities. We have relatively little in the industrial and materials sectors. By country, Hong Kong, Singapore, Australia and Thailand are the most favoured, contributing about 85% to 90% of the equity portfolio. Taiwan is

seen as being less favourable, as the sustainability of dividends in the major technology sector is uncertain. The overall equity proportion in the Fund is likely to remain in the 60% to 70% range in the near term, taking on slightly more risk in order to maintain the Fund’s dividend yield target.

The Fixed Income portion of the portfolio has seen strong returns this year. Historically, Asian bonds were subject to foreign flows. However, local investors, including pensions, insurance and mutual funds, have helped to provide additional sources of stability. Overall credit ratings are on an uptrend from improvements in sovereign and corporate fundamentals. 2012 was a record year in terms of gross issuance, driven by strong demand. Inflows into Emerging Market Debt have maintained their momentum, with investor interest spreading from the USD segment to local currency issues. The announcement of QE3 and good YTD performance have reinforced confidence amongst investors in the asset class.

Within fixed income, we are currently active participants in the Investment Grade new issuance market and have been increasing our allocation there while trimming some high yield positions in order to lock in gains. The bond portfolio is well-diversified in terms of issuers, with the largest sector exposure in Chinese and Hong Kong property names.

Asian markets have performed well lately, with investors hungry for yield in a low interest rate environment. The Fund aims to be flexible in its asset allocation, maintaining a good balance between income and overall risk/reward.

^ JF share class of JPMorgan Funds. Formerly JF Pacific Balanced, current fund name and investment objective e�ective on 14 June 2012.

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High DY Portfolio*US10YR Govt Bond YieldJACI Composite

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