TOKYO • Morgan Stanley calls it "the end of easy", that witching hour in global stock markets when economic growth is slowing, the United States 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, like industrial 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 is where they turn.
Mr Yoshinori Shigemi, a global market strategist at JPMorgan Asset Management Japan, is alert to the danger. "No one can really tell whether global stocks will go into a bear market," he said. "But when Japanese defensives outperform, it can be a leading indicator."
Utilities, healthcare, 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 firms, so-called cyclical shares seen as benefiting the most from economic expansion.
It is a change that has not happened in the US and Europe, where cyclicals are still mostly in the ascendancy as defensives generally lag behind. But Mr Shigemi said: "Japan is a cyclical stock market, and it could be reacting more sensitively to a possible slowdown in the US economy."
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.
Concerns that the global economy may peak, uncertainties over US President Donald Trump's policies and the yen's appreciation against the US dollar earlier this year have contributed to the rally in Japanese defensives, according to Mr Hiroshi Matsumoto, head of Japan investment at Pictet Asset Management. "The phase when cyclical stocks are purchased because of solid global growth is probably over," he said. But that does not mean investors are completely bearish either, he said.
For Mr Mitsushige Akino, it is 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 the Fed may need to raise interest rates three more times this year.
"That could jeopardise the global economy, said Mr Akino, an executive officer with Ichiyoshi Asset Management in Tokyo.
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 does not always apply. 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 are monitoring for such a turning point. The research team is not convinced the market is ready to move into full defensive mode just yet, they wrote in a report dated Sunday. But it does "bear close watching".