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Exhibit 3: Sector rotation and inventory cycle Chart 3: Higher inflation/yields suggests banks will outperform REITs Slowdown Inventory Expansion 23 Defensives June '12 19 Fundamentals June '14 13 Production 11 07 June '13 0.5 es S$ s¢s SF © PY KH PF QD LY RY w w RY w w wv RY w wv RY SF LK LK LK LK LL LL HL HM L Contraction Recovery se TSE Bank/ TSE REIT Cyclicals Source: BofA Merrill Lynch Global Research, Bloomberg, Source: BofA Merrill Lynch Global Research, Bloomberg, Haver 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 Japan Sector = cyclical outperform on 10 4 UST bear-steepening 8 4 44 34 0 4 USDJPY DXY MSCIJP MSCIJP/ Discretionary Financials Materials IT Industrials Energy Telecom Staples Utilities | Health care ex JP m Bear steep = Bear flat m Bull steep m 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, 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 <2 Merrill Lynch Japan Investment Strategy | 18 November 2016 3 HOUSE_OVERSIGHT_014406