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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 125 Japan Sector = cyclical outperform on 10 4 UST bear-steepening 8 6 4 2 Q 2 4 6 8 -10 424 USDJPY DXY MSCI JP MSCI JP/ Discretionary Financials Materials IT Industrials Energy Telecom Staples Utilities Health care exJP m Bear steep = Bear flat Bull steep m= Bull flat Source: BofA Merrill Lynch Global Research, Bloomberg. Curve movements based on 2yr move and 2510s move (Bloomberg US Treasury yield index), so includes twist movernents, 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 - 27 bps, 2510s -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 87" 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 Chart 33: Europe offers a yield premium vs global equities too yields 20 1.5 1.0 0.5 0.0 0.5 -1.0 -1.5 ~ ====—=Stoxx 600 DY less 10yr Bund yield 20 =———=|MSCI Europe less EM DY spread ———MSCl Europe less DM DY spread 3 ten----2-------------- Sezer StonK 600 DY less Euro.G ctedtt yield 12/80 12/84 12/88 12/92 12/96 12/00 12/04 12/08 12/12 200: 2006 2008 2010 2012 2014 2016 Source: BofA Merrill Lynch Global Research, MSCI, Datastream Source: BofA Merrill Lynch Global Research, Bloomberg, 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 Bankof America 2 Global Cross Asset Strategy - Year Ahead | 30 November 2016 Merrill Lynch HOUSE_OVERSIGHT_014448