HOUSE_OVERSIGHT_014406.jpg

Exhibit 3: Sector rotation and inventory cycle
Chart 3: Higher inflation/yields suggests banks will outperform REITs
Slowdown
Inventory
Expansion
2.3
Defensives
8
2.1
June '12
1.9
6
1.7
June '15
1.5
Fundamentals
1.3
June '14
2
Production
1.1
(6)
(4)
(2)
0
2
4
6
8
10
0.9
(2)
Sep '16
0.7
June '13
(4)
0.5
Contraction
Recovery
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Cyclicals
TSE Bank/TSE REIT
Source: BofA Merrill Lynch Global Research, Bloomberg, Haver
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
Japan Sector = cyclical outperform on
UST bear-steepening
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
USDJPY
DXY
MSCI JP
MSCI JP /
ex JP
Discretionary
Financials
Materials
IT
Industrials
Energy
Telecom
Staples
Utilities
Health care
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

Bank of America
Merrill Lynch
Japan Investment Strategy | 18 November 2016
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HOUSE_OVERSIGHT_014406