Exhibit 3: Sector rotation and inventory cycle
Chart 3: Higher inflation/yields suggests banks will outperform REITs
Slowdown Inventory Expansion
Defensives
June '12
Fundamentals June '14
Production
June '13
Contraction Recovery
Cyclicals
Source: BofA Merrill Lynch Global Research, Bloomberg, Haver
23
09 07 05
e SF SF SF 9 eee TSE Bank/ TSE REIT
Source: BofA Merrill Lynch Global Research, Bloomberg,
Exhibit 4: Reactions to US Treasury curve moves (%, simple average of past 43 quarters) — Japan equities have outperformed during bear-steepening led by
cyclicals, banks and insurance
12 5 10 + 8 4
Japan Sector = cyclical outperform on UST bear-steepening
44
34 0 4
USDJPY DXY MSCI JP MSCIJP/ ex JP
m Bear steep = Bear flat
Source: BofA Merrill Lynch Global Research, Bloomberg.
Discretionary Financials
IT Industrials Energy Telecom Staples Utilities | Health care
m Bull steep m Bull flat
Curve movements based on 2yr move and 2s10s move (Bloomberg US Treasury yield index), so includes twist movements, but even if we exclude these implications do not materially change. Bear steepening (2yr + 16bps, 2510s +33bps) = 11 quarters, bear flattening (2yr +26bps, 2510s -20bps) = 10 quarters, bull steepening (2yr -48bps, 2510s +28bps) = 10 quarters, bull flattening (2yr -27bps, 2s10s -30bps) =
12 quarters
Bankof America Merrill Lynch
Japan Investment Strategy | 18 November 2016 3
HOUSE_OVERSIGHT_014406