Japan: Repricing of Risk

Japan's current risk rally is historically stretched, with record correlation between high-risk and momentum styles driven by AI concentration. Investors are advised to pivot toward earnings-backed, low-volatility momentum to protect against a potential style unwind.

Key Takeaways

• 1.Japan is experiencing an unusually steep and potentially stretched risk rally, with the current 13-month cycle delivering a 78% US$ total return.
• 2.The correlation between momentum and high-risk styles has surged to a record high of 0.9, making momentum vulnerable to sharp unwinds.
• 3.AI concentration is distorting traditional style dynamics, accounting for 40% of the high-risk basket and 89% of its returns this year.

Table of Contents

• Japan: The mother of all risk rallies
• High-risk: Growing AI concentration risk
• High-risk momentum stocks at risk
• Dislocation in the conventional style dynamics
• High-risk: Overlap with value at historical lows
• Momentum – Overlap with high-risk near record highs
• Screen - Focus on risk-adjusted, earnings-backed momentum

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