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The combination of these factors suggest Japanese equities have further to run. We also
see the position as being complementary to our EM position since whereas a stronger
USD is a drag on EM performance, it is beneficial for the NKY position.

Chart 31: Japan equities have outperformed during US bear-steepening led by cyclicals, banks and
insurance

[Bar Chart showing performance of various sectors]

Japan Sector = cyclical outperform on
UST bear-steepening

12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
USDJPY DXY MSCI JP MSCI JP / Discretionary Financials Materials IT Industrials Energy Telecom Staples Utilities Health care
ex JP

■ Bear steep ■ Bear flat ■ Bull steep ■ Bull flat

Source: BofA Merrill Lynch Global Research, Bloomberg.
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, 2s10s +33bps) = 11 quarters, bear flattening (2yr +26bps, 2s10s -20bps) = 10 quarters, bull steepening (2yr -48bps, 2s10s +28bps) = 10 quarters, bull flattening (2yr -
27bps, 2s10s -30bps) = 12 quarters

Long Europe equities via yield stocks & index dividends
We continue to run two yield related trades in European equities. First, we remain long a
broad selection of high yielding European equities. The dividend yield on offer in
European equities is one of the asset class’s key attractions. Europe offers a higher
dividend yield than the other regions, with a 1.1% yield pick-up versus the DM average
and 0.9% against EM equities. Those also look attractive relative to history: Europe’s
yield spread to DM ranks at the 87th percentile of the 20-year range. Europe’s DY also
looks attractive relative to sovereign and corporate bonds despite the recent sell off in
fixed income markets: the yield pick-up relative to investment grade corporates is still
289bp. Given the concerns over European politics we prefer yield based strategies in
Europe to those looking for capital appreciation at least in the short term.

Chart 32: Equity DYs remain attractive relative to credit & sov bond
yields

5
4
3
2
1
0
-1
-2
-3
2004 2006 2008 2010 2012 2014 2016

— Stoxx 600 DY less 10yr Bund yield
— Stoxx 600 DY less Euro IG credit yield

Source: BofA Merrill Lynch Global Research, Bloomberg, Datastream

Chart 33: Europe offers a yield premium vs global equities too

2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
12/80 12/84 12/88 12/92 12/96 12/00 12/04 12/08 12/12

— MSCI Europe less
EM DY spread
— MSCI Europe less
DM DY spread

Source: BofA Merrill Lynch Global Research, MSCI, Datastream

European Yield Screen
The rising rates backdrop has left yield not quite as scarce as it has been, but we
continue to think investors should own yield where they can get it at decent value, such
as in European equities. Last month we recommended investors rotate out of lower risk

Bank of America
Merrill Lynch

Global Cross Asset Strategy – Year Ahead | 30 November 2016 17

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