Japan

Special Report

Several tail risks appear less ominous compared to last month. Nonetheless, the earnings outlook has not improved and the FOMC will turn more hawkish ahead of the June meeting. Stay defensively positioned.

Several tail risks appear less ominous compared to last month. Nonetheless, the earnings outlook has not improved and the FOMC will turn more hawkish ahead of the June meeting. Stay defensively positioned.

Risk assets are stuck in a range driven by the Fed feedback loop. But the current rally may continue for another quarter or two.

Special Report

There is little evidence suggesting that declining productivity growth in recent years has resulted from measurement error. Businesses have plucked many of the low-hanging fruits made possible by the IT revolution, while cyclical factors stemming from the Great Recession have also weighed on productivity. Low productivity growth tends to be deflationary in the short run, but inflationary longer-term. For now, this is good news for bonds, but is likely to become bad news by decade-end.

The British pound may be prone to further weakness in the coming months as the odds of a Brexit rise.

While the FOMC was more dovish than expected, rising inflation may cause the Fed to escalate hawkish rhetoric. The bounce in oil should help high-beta stocks. Underweight U.S. equities versus Europe, Japan and H-shares. We estimate U.S. equities will deliver returns of 4%, ann. over the next 10 years, <i>vis-à-vis</i>  9% for the euro area and Japan, and 14% for H-shares. Central banks have more options to combat any possible debt-deflation spiral in Europe/Japan/China than is often recognized.

A surprisingly dovish outcome from this week's FOMC meeting has led to broad-based weakness in the U.S. dollar. The monetary policy divergence supporting the dollar may have peaked.

Similar to the euro area, Japanese consumer discretionary stocks have a long runway ahead. Japan is the latest country to join the NIRP club following the late-January BOJ surprise move to charge deposit-taking institutions a negative deposit rate. While interest rate suppression has negative connotations for Japanese banks, it should spur demand for discretionary consumer outlays if it breaks the deflationary consumer mindset. The top panel of the chart shows that relative share prices are inversely correlated with interest rates and the current message is to expect a rebound in Japanese consumer discretionary relative performance. Japan's NIRP should also lure banks to focus on loan volumes. Loosening bank credit standards typically boost discretionary spending. Importantly, a wide gap has opened between loan growth and relative share prices, which will likely narrow via a catch up phase in the latter. Meanwhile the Japanese labor market is tight, but this is neither reflected in relative consumer discretionary share prices, nor in relative valuations (third & fourth panels). Bottom Line: Overweight Japanese consumer discretionary stocks. For additional information on global consumer discretionary stocks please read the Global Alpha Sector Strategy report titled "In the Eye Of The Hurricane" at gss.bcaresearch.com.

Special Report

This <i>Special Report</i> reviews all of our active recommendations, including our over/underweight country and asset allocation positions, as well as our current tactical trades.

The euro stopped weakening in March 2015, which coincided with the ECB starting its asset purchases. Since then, the ECB's incremental policies have been unable to push the euro lower. The price action speaks to the resilience of the currency and indicates that a lot of bad news has been discounted.