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3 Emerging markets: Hard dollar, soft oilInvestment trends in emerging markets amid strong dollarand low oil pricesA strong U.S. dollar and weak oil prices were two important themes surrounding emergingmarkets at the end of 2014. Many investors fear that a strong U.S. dollar and the FederalReserve’s normalization could triggered financial crisis in emerging markets, similar tothose in the 1990s. Meanwhile, a sharp drop in oil prices could also undermine oilproducers, especially Russia and the Middle East, as well as hurt broader commodityproducers. We recognize that some emerging markets are vulnerable in this environment,but differentiation is going to be key to capturing investment opportunities.Page 60 of the Guide to the Markets-Asia shows the dollar index, USD movements againsta trade weighted basket of currencies. This shows that, despite the surge in the USDagainst the Japanese yen and euro in 2014, the current USD index is still only at the top ofthe range for the past 10 years, and potentially still has some way to go before beingconsidered overvalued. This USD strength is partly driven by favorable interest ratedifferentials, as well as improvement in the U.S. current account position.It is important to recognize that not all emerging markets are equal in a strong dollarenvironment. Many of the Asian economies have experienced less currency depreciationsince the dollar index hit bottom in 2011. Countries with strong current accounts that areless dependent on commodities should be more resilient in this environment.OVERVIEWEmerging markets (EM) will need toface the prospects of further U.S. dollar(USD) strengthening and possiblefurther downward pressure on oilprices. Since each emerging economy isunique in its external payment positionand exposure to oil, differentiation iskey.USD strength has been a headwindhistorically for emerging markets. Thosecountries with external imbalances arelikely to require more adjustments torestore balance, which could put shorttermpressure on market performance.While all emerging markets benefitfrom low inflation brought on by low oilprices, oil importers have an advantageover exporters.Other Assets andnvestor Beha viorIU.S. Dollar Exchange RateU.S. Dollar PerformanceIndex130120110U.S. DollarIndex (DXY)1009080Real Trade Weighted70Exchange Rate Index(REER)60'86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14U.S. Current Account BalanceUSD billions50 Value % of GDP 2%00%-50-2%-100-4%-150-200-6%-250-8%'86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14ChinaKoreaPhilippinesUKSingaporeThailandTaiwanMalaysiaCanadaEuropeMexicoAustraliaIndiaIndonesiaJapanClickCurrency Performance vs. USD% since the beginning of the USD uptrend in April 2011TurkeyBrazilSouth AfricaArgentinaRussiaAsian CountriesOther EM CountriesDM Countries-51.8%-54.4%-40.8%-43.1%-30.0%-30.9%-32.3%-35.0%-25.2%-6.5%-7.8%-9.3% 93%-9.4%-15.3%-18.1%-18.4%-21.8%-3.2%-4.3%60GTM - Asia46% 4.6%-70% -50% -30% -10% 10%There are significant differencesamongst the performance of EMcurrencies since the USD hitbottom in 2011.Source: Federal Reserve, U.S. Bureau of Economic Analysis, Reuters, FactSet, J.P. Morgan Asset Management “Guide to the Markets – Asia 1Q 2015.”(Top Left) The Real Trade Weighted Exchange Rate Index is the weighted average of a country’s currency relative to a basket of other major currencies adjusted for theeffects of inflation. The weights are determined by comparing the relative trade balances, in terms of one country’s currency, with other countries within the basket. TheDollar Index is a trade-weighted index calculated using six major world currencies. Data reflect most recently available as of 31/12/14.Source: Guide to the Markets - Asia, page 60J.P. Morgan Asset Management | 7