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From: US GIO <us.gio®jpmorgan.com> To: Undisclosed recipients:; Subject: Eye on the Market, October 26, 2010: From Nehru to Now Date: Tue, 26 Oct 2010 17:52:01 +0000 Attachments: 10-26-10_ EOTM_-_From_Nehru_to_Now.pdf Inline-Images: image00 1 jpg; image002.png Eye on the Market, October 26. 2010 Topics: US/Chinese smoke signals; a close-up on India It looks like U.S. equity markets are heading for our 2010 target, 1175-1225 on the S&P 500. Profit trends are supportive (60%-70% of companies are beating modest Q3 revenue and earnings expectations). But we harbor no illusions about where the latest equity market rally came from. Look at how the Treasury rally coincided with a declining equity market until Bemanke's Jackson Hole speech in August. Thereafter, weak growth and labor markets coincided with a Treasury rally and rising equity markets; bad news became good news. The reality of QE2 is more a rejection of the strong recovery view than its validation. What will the Fed actually do? Public statements on the topic have been all over the map, so the Vaticanesque wait will continue until November 3M. I find it interesting that the older our clients are, the more concerned they are that another round of Fed money-printing may be a big mistake. 10 year Treasury rates and the S&P 500 Percent Level 420% 1250 3.95% • 10 year Treasury S&P 500 (RHS) (LHS) 1200 3.70% • 3.45% • 3.20% • 295% • 2 70% • 2.45% • 2.20% No -09 Jan-10 Source: Bloomberg. Mar-10 May-10 Jul-10 Sel;•10 1150 1100 1050 1000 950 900 More smoke-signals: a Chinese Party communiqué mentioned "economic development" 13 times, and "economic growth" only 2 times. References to leading industries included technology and energy efficiency, but now exclude real estate and autos; another comment mentioned a new pattern of growth relying on consumption, investment and exports. This suggests a gradual move to more household consumption and a smaller trade surplus, which supports the general thrust of our Asian private equity investments we reviewed three weeks ago. It's certainly more information than we got from the G-20 meeting. On our investments in India Of 13 managers on our platform who invest in emerging or Asian equities, 10 are overweight India. This has been a winning strategy so far this year, given India's outperformance versus most other developed and developing equity EFTA00753462 markets. Our Asia private equity managers have also invested in India, in telecom, financials, technology and retailing. Many discussions about India start with comparisons to China, and in ways that are unfavorable to India. But China's superior growth dynamics only tell part of the story, and neglect issues that are of greater concern to investors (such as corporate profitability). This week's Eye on the Market (in the attached PDF file) reviews how far India has come, how far it still has to go, and why it remains one of our preferred equity investment regions for the long run. India real per capita GDP Constant 2000 USD.with compound annual growth rates $800 5700 $600 $500 3400 $300 $200 NehrulGandhl model: 2.7% CAGR Rao reforms: 4.7% CAGR $100 1960 1964 1988 1972 19M 1980 1984 1988 1992 1996 2000 2004 2008 Source: World Bank. Michael Cembalest Chief Investment Officer The material contained herein is intended as a general market commentary. Opinions expressed herein air thaw of Michael Cembalest and may differ from those of other J.P. Morgan employees and affiliates. This inlarmation in no way constitutes J.P. Morgan research and. hould not be treated as such. Further, the views expressed herein may differ from that contained in J.P. Morgan research reports. 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