MORGAN Stanley calls it "the end of easy", that witching hour in global stock markets when economic growth is slowing, the Federal Reserve is tightening, and inflation is ticking up. After a long bull run, strategists the world over are getting nervous - and watching for the top.
And over in Tokyo, a warning is starting to flash.
A feared rotation is taking hold, as investors dump the shares that propelled the good times, such as industrials and technology companies, in favour of an entirely different class of firms: those needed no matter how bad the economy gets. When investors become less optimistic about the future, the theory goes, that's where they turn.
Yoshinori Shigemi, a global market strategist at JPMorgan Asset Management Japan, has been to this rodeo before. And he's alert to the danger.
"No one can really tell whether global stocks will go into a bear market," Mr Shigemi said. "But when Japanese defensives outperform, it can be a leading indicator." Utilities, health care, consumer staples and real estate stocks - all so-called defensive shares - are the top performers of the 11 industry groups in the MSCI Japan Index this year, beating information technology and industrial companies, so-called cyclical shares seen as benefiting the most from economic expansion.
It's a change that hasn't happened in the US and Europe, where cyclicals are still mostly in the ascendancy as defensives generally lag behind. But Mr Shigemi of JPMorgan Asset has a theory about that. Essentially, he says, Japan's market can respond more to US developments than the US itself.
"Japan is a cyclical stock market, and it could be reacting more sensitively to a possible slowdown in the US economy," Mr Shigemi said.
The MSCI Japan Utilities Index has jumped 15 per cent this year, the best performance among the industry groups, as the broader Japan gauge retreated. Last year, when the MSCI Japan surged 18 per cent, utilities were the only group to decline, tumbling 5.6 per cent.
Concerns that the global economy may peak, uncertainties over US President Donald Trump's policies and the yen's appreciation against the dollar earlier this year have contributed to the rally in Japanese defensives, according to Hiroshi Matsumoto, head of Japan investment at Pictet Asset Management Ltd.
"The phase when cyclical stocks are purchased because of solid global growth is probably over," Mr Matsumoto said. But that doesn't mean investors are completely bearish either, he said.
For Mitsushige Akino, it's all about US Treasuries. Yields on US 10-year notes rose past 3.1 per cent on Wednesday to the highest level in about seven years, helping fuel bets that the Fed may need to raise interest rates three more times in 2018.
"That could jeopardise the global economy, said Mr Akino, an executive officer with Ichiyoshi Asset Management Co in Tokyo. "That's why investors can't buy cyclicals in Japan."
Japanese defensive shares have been harbingers of global equity downturns before. Most notably, they started to outperform cyclicals in 2007, not long before the global financial crisis sent equities tumbling. An index of global shares sank 44 per cent the following year.
But the link doesn't always apply. Defensives also started outperforming in early 2014, just before Japan raised its consumption tax. And that time, global equities had continued to advance.
What will happen this time is hard to tell, but two questions are worth asking. Is Japan's shift to defensives preceding a similar trend in other markets? And does it mean the bull run is set to end?
Morgan Stanley strategists including Michael Wilson are certainly monitoring for such a turning point. The research team isn't convinced that the market is ready to move into full defensive mode just yet, they wrote in a report dated May 13. But it does "bear close watching", they wrote. BLOOMBERG
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