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
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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)
1200
(LHS)
3.70% • 1150
3.45% •
1100
3.20% •
1050
295% •
2 70% • 1000
2.45% • 950
2.20% 900
No -09 Jan-10 Mar-10 May-10 Jul-10 Sel;•10
Source: Bloomberg.
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
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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
Rao reforms:
$600 4.7% CAGR
$500 NehrulGandhl model:
2.7% CAGR
3400
$300
$200
$100
1960 1964 1988 1972 19M 1980 1984 1988 1992 1996 2000 2004 2008
Source: World Bank.
Michael Cembalest
Chief Investment Officer
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