Japanese equities face a final hurdle that must be overcome for a positive breakout from the relatively tight (and lackluster) trading range overserved throughout the past six months : Consensus earnings forecasts are bound to be cut significantly in the upcoming results season. In our view, the likely adjustment downward in analyst consensus numbers should be a positive trigger.
While the shape of global yield curves is generally relegated to the purview of fixed income strategists and economists, many investors are now starting to take note of not only the level of interest rates but also their relative slope.
From stronger banks to a steeper yield curve and a possible overshoot in inflation−our Japan CEO, Jesper Koll, summarizes the outcome of BOJ meeting yesterday.
One of biggest drivers of performance in 2016 has been declining interest rates and all the ramifications across markets and sectors geared both positively and negatively to falling interest rates. Sectors that typically benefit from falling rates tend to be more defensive, higher-dividend-yield sectors often referred to as “bond-like” sectors because of their sensitivity to interest rates. Utilities fit this bill well and have been one of the strongest performers in early 2016. That is, until July 8.
Investors who have been embracing the low-volatility/high-dividend/utilities sector trade should be aware of how much “bond duration” or interest rate risk they may have added to their portfolios. If interest rates continue to rise, these three areas of the market could face a tough period of performance and compound poor returns from bond allocations, in our view.