How to Protect Your Portfolio Against Rising Inflation

Global CIO Office

Weekly focus | page 3 How to protect your portfolio against rising inflation

Investment Weekly |

This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd. |

08/03/2021, 07:09, UTC

USD short bias to continue Investor confidence in US economic recovery may have trig- gered concerns that the US Federal Reserve (Fed) might now move to adjust monetary policy. We expect US inflation at the beginning of the recovery cycle to temporarily reach the policy target level of 2%. Nevertheless, inflation pressure would be lower as the economy reopens and full production capacity, such as that of factories, resumes. This year, we therefore expect the Fed to maintain its dovish monetary policy stance.

Meanwhile, the USD has strengthened against the JPY, with the markets pricing in higher US interest rates and investors Soichiro Matsumoto closing their USD short positions against the JPY. Market Chief Investment Officer Japan data shows short-term trading positions on USD/JPY have turned neutral. Once the US long-term yield stabilizes around the current level, as we expect, the relatively low US real interest rate will start to bring the USD down against the JPY.

Important Information: This report represents the views of the Investment Strategy Department of CS and has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. It is not a product of the Credit Suisse Research Department even if it contains published research recommendations. CS has policies in place to manage conflicts of interest including policies relating to dealing ahead of the dissemination of investment research. These policies do not apply to the views of Investment Strategists contained in this report. Please find further important information at the end of this material. Japan Surabaya, IWD and equity investments

Nannette Hechler-Fayd'herbe between the need for continued economic growth and living Chief Investment Officer – International Wealth Management sustainably. As of end-February, the Climate Change Su- pertrend and the Infrastructure Supertrend had returned 5.0%

Surabaya is the second-largest city in Indonesia, with Tri and 1.2% YTD and 20.6% and 26.9% since inception in

Rismaharini its mayor from 2010 to 2020. Presently Indone- February 2020 and May 2017, respectively. sia’s minister of social affairs, she not only stands out as the first directly elected and first female mayor of Surabaya. What Global Investment Returns Yearbook 2021 she has done for the city of Surabaya as mayor, tackling its Published by the Credit Suisse Research Institute in collabo- waste problem with innovative “waste banks” as well as waste ration with the London Business School, the Credit Suisse management infrastructure, greening urban neighborhoods Global Investment Returns Yearbook is the authoritative guide through community engagement, facilitating the set-up of to historical long-run returns. It now covers stocks, bonds, simple waste water filtering systems to enable the sustainable bills, inflation and currencies in 32 individual markets (including watering of hanging gardens and introducing fish-culture nine new markets this year) and the 90-country world index. basins in urban infrastructures is truly remarkable. Unsurpris- Our latest study shows that equities remain the best long-run ingly, Tri has been named one of the world’s 50 greatest financial investment ahead of bonds and bills. Over the last leaders by Fortune Magazine and one of the top mayors listed 121 years, global equities have provided an annualized real by City Mayors Foundation, and her city of Surabaya has won USD return of 5.3% versus 2.1% for bonds and 0.8% for a number of awards, including the ASEAN Environmentally bills. Since 1900, equities have outperformed bonds and bills Sustainable City Award! As the world marks International in all markets. For the world as a whole, equities have outper- Women’s Day (IWD) on 8 March, I salute strong women like formed bills by 4.5% per year and bonds by 3.2% per year. Tri Rismaharini who decisively lead their communities and Prospectively, the authors estimate that the equity risk premi- countries’ citizens to a more harmonious co-existence with um will be around 3.5%, a little lower than the historical figure their environment and one another. In this note, I write about of 4.4%, but a level that still implies that equity investors can our Infrastructure and Climate Change Supertrends stocks expect to double their money relative to short-term govern- as investors wonder how to best invest in equities. Our just ment bills in 20 years despite low real interest rates. In terms released Global Investment Returns Yearbook notes that since of equity returns, the emerging world offers the prospect of the 1960s, emerging market stocks have outperformed de- potentially outstanding performance of individual markets. veloped market stocks by an average 1.5% per annum, while Since 1900, emerging market (EM) equities have underper- risk has steadily declined. I share some of the key findings formed developed market (DM) equities by 1.4% per year, of this extraordinarily insights-rich publication with you. while EM bonds have underperformed by 2.2%. This under- performance can be tracked back mostly to the 1940s. Yet Supertrends Infrastructure and Climate Change since 1960, EM equities have outperformed DM equities by

As regular readers of my note know very well, Supertrends around 1.5% per annum. Moreover, the risk of individual EMs are Credit Suisse’s long-term thematic equity investment has fallen sharply over the last 20 years, while the gap be- framework and build on our understanding of deep societal tween the average risk of EMs versus DMs has also dimin- trends. As investors worry about how to invest in times of ished. Even so, EMs still offer important diversification benefits rising yields, the answer is to identify stocks of companies for investors. As recently as 20 years ago, EMs made up less that we expect to see positive and accelerating earnings than 3% of world equity market capitalization and 24% of trends. All six of our Supertrends, designed to highlight such GDP. Today, they account for 14% of the free-float investable trends, remain of relevance, but two stand to benefit from universe of world equities and 43% of GDP. China, the largest particularly strong catalysts this year: infrastructure and climate EM, has increased its weight in the EM indexes from just 3% change. Both are supported by governments’ massive fiscal in the early 2000s to 39% today. With the gradual inclusion programs in response to the COVID-19 crisis that have led, of A-shares, the country’s weighting is expected to grow among others, to increased infrastructure expenditures and further. We thus believe investors are well advised to hold a step change in decarbonizing economic activity. This directly sufficient equity exposure including EM equities in their port- benefits companies that participate in the development of folios. In our strategic asset allocation, we recently increased transport, power, water, urban and communications infrastruc- equity allocations, for example to 50% from 45% in balanced ture as countries around the world have one priority as they profiles, with a significant strategic exposure of 7% to EM (04/03/2021) prepare for the next 30 years: establishing a better balance equities.

Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 08/03/2021, 07:09, UTC 2 Weekly focus How to protect your portfolio against rising inflation

In the next 3–6 months, we expect moderately higher US government bond yields, primarily driven by rising inflation expectations, with the risk of a potential inflation overshoot. Here we assess cross-asset ideas for investors who want to protect their portfolios against rising inflation and any inflation overshoot in a more volatile market environment.

Philipp Lisibach flation. In terms of style, growth and large caps tend to Chief Global Strategist underperform value and small caps in an environment of rising Jessie Gisiger inflation. Head of Credit Strategy and Investment Themes Regionally, we prefer cyclical markets such as Germany and In the next 3–6 months, we expect to see higher US core the UK. We also note that we expect South Korea and government bond yields primarily driven by rising US inflation emerging market (EM) materials equities to outperform given expectations, with the risk of a potential overshoot. In our their cyclical nature and high beta to a global recovery. The base scenario, US headline inflation is forecast to trend EM materials sector exhibits a more attractive 12-month for- higher gradually during this period (slightly above 2% and ward P/E than the US or European materials sector. Mean- close to 2.5%, similar to what we witnessed in 2018), driven while, South Korea, an export-oriented economy, is likely to mainly by factors such as supply constraints during the reopen- benefit from improving global trade. ing of economies, rising energy prices and likely large fiscal stimulus. A temporary overshoot could be fueled by factors Growth stocks could face re-rating if real yields rise such as accelerating global industrial production growth and too fast positive vaccine developments. A tail risk to our base case is that investors start to position prematurely for a tapering of Federal Reserve asset purchas- Importance of a well-diversified multi-asset portfolio es, leading to a pick-up in real yields. In this scenario, richly Investors looking for ways to protect their portfolio against valued growth stocks such as technology and investments the risk of rising and overshooting inflation should ensure with a focus on environmental, social and governance (ESG) having a well-diversified portfolio, in our view. Real assets criteria could be subject to a re-rating. Although a potential such as broad-based commodity and selected direct real es- drawdown could present opportunities for investors to build tate investments can benefit from factors such as rising input exposure for the long term, options structures that provide prices and thus protect investors’ purchasing power. Similarly, some downside protection and upside participation while commodity currencies are expected to do well. In fixed in- capitalizing on short-term volatility spikes could be a more come, short-duration/active duration management and diver- conservative alternative. Sophisticated investors who are sification by adding floating components are key to hedging looking for a possible macro hedge could selectively go long against rising inflation risk. FX volatility in G7 currencies, which is relatively cheaper than equity and fixed income volatility after the recent spikes. (04/03/2021) Rising US inflation benefiting cyclicals, especially financial and materials stocks As for equities, higher inflation should help our positioning in financials and commodity-related sectors such as materials, which have historically delivered a solid return amid rising in-

Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 08/03/2021, 07:09, UTC 3 Special topic USD: Reflation, liquidity, deficits still argue for depreciation

Global reflation, low short-term US rate and ample USD liquidity, together with rising external deficits, suggest that the broad USD downtrend should remain in place. We still favor more cyclical, commodity-exposed and emerging market currencies.

Luca Bindelli serve’s (Fed’s) increased tolerance for inflation, short-dated Head of Fixed Income and Currency and Commodity Strategy yields are likely to remain anchored at current low levels for Patrick Ernst the foreseeable future. Hence, we do not expect a USD- Currency and G10 Interest Rate Strategist supportive effect from that angle. Furthermore, policy support and money market dynamics should provide ample USD liquidity and keep the USD’s funding characteristics intact via The ongoing vaccine rollouts should support economic re- suppressed short-term rates. acceleration and commodity price rebalancing. Meanwhile, the USD’s counter-cyclical nature will likely leave the currency under pressure as global growth and global trade recover. The unprecedented 2020 fiscal stimulus in the USA not only widened the fiscal deficit severely but also resulted in a dete- rioration of the current account balance. Government pro- Commodity-related currencies such as the CAD, NZD or grams bolstered demand for both domestic and foreign goods NOK should continue to benefit from such developments, in and services, resulting in a significant increase in net imports. our view. Moreover, they could constitute a source of protec- This development weighed on the USD and is likely to contin- tion should inflation surprise on the upside later in the year. ue to do so in 2021. Our base case is for only slightly higher inflation, though, given the remaining labor market slack in most major economies. A risk to our negative USD view stems from historically large USD short positions. If the COVID-19 situation were to worsen globally (e.g. because of new virus variants), this could Furthermore, we maintain our constructive view on emerging weigh on risk appetite and favor a correction higher in the US market currencies. Some emerging markets central banks dollar, with investors unwinding their existing short USD posi- will see less scope for further dovish policies, given the im- tions and buying safe assets such as US Treasuries. More- proving inflation outlook, more solid economic activity, sup- over, a persistently higher inflation could further challenge portive flows and sound external positions. In addition to at- the Fed’s relaxed stance and force a repricing in short-term tractive cyclical exposure, this should provide added carry yields, supporting the USD, predominantly against low-yielding support against the USD. We particularly like the RUB, BRL, currencies. CNY and KRW.

All in all, we still advise keeping a short USD bias, in particular A recent argument brought in favor of the USD relates to the against currencies that should benefit from a global reflation. repricing in bond markets of late. However, empirical evidence That includes cyclical, commodity-exposed and emerging suggests that the USD has predominantly responded to short- market currencies. We favor the CAD, NZD, and NOK among dated interest rate movements. With the US Federal Re- the G10 currencies. (04/03/2021)

Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 08/03/2021, 07:09, UTC 4 Special topic US economy: Suddenly everything has changed

Rates have risen fast in recent weeks. Hopes for a rapid improvement in activity, accelerating industrial production growth and an extreme change in the US fiscal outlook are among the factors that created a backdrop that is much changed versus a month ago. In this Economics Alert, we take a look at the Federal Reserve’s likely reaction.

James P Sweeney to exceed last spring’s stunning performance. This time, Chief Economist and Regional CIO Americas however, employment is higher, uncertainty is less, and the Jeremy H Schwartz cash is sufficient to drive savings sharply higher while also US Economist driving a jump in goods consumption now and a services re- Xiao Cui bound later. Once that bill passes, the Biden administration US Economist is likely to pursue green energy/infrastructure spending, leg- Justin Guo islation that will likely face the same practical political opposi- tion as pandemic relief. That is: not much. Total new govern- Investment horizon: 3-6 months ment borrowing including the December and March pandemic relief and later infrastructure spending may approach 20% A month ago, no point on the US swap curve, at spot or any of gross domestic product (GDP) or more. forward, yielded above 2.25%. Such rates made sense in early December when US fiscal and monetary policy appeared In other words, “everything” has quickly changed. No wonder to be gridlocked and zero-bounded, mass vaccinations were rates have risen. How is the Federal Reserve (Fed) likely to an undemonstrated hope, disposable income and retail sales react? were faltering, global industrial production growth was slowing, and full employment seemed years away. Figure 1: Fiscal stimulus will lead to a surge in disposable But much changed by the end of February; interest rates and personal income the Federal Reserve’s growth, inflation, and policy rate forecasts had become stale. Rapid vaccinations are now raising hopes for a sharp drop in social distancing and strong increase in services spending before the summer. This would generate powerful consumption growth and labor demand, although not necessarily an immediate return to pre-pandemic activity levels. Global industrial production growth is set to accelerate too, fueled by low inventories and strong business investment. Inflation measures globally will rise significantly by early summer, partly due to YoY base effects, but also due to ongoing goods sector supply issues, recent perkiness in parts of health care and financial services inflation (in the USA), Source: Credit Suisse, Bureau of Economic Analysis and a likelihood of services sector price rises as social un- distancing drives up demand faster than supply can follow.

And we have not yet mentioned the extreme change in the US fiscal outlook since early December. Pandemic relief was provided in December, and more is coming shortly with the USD 1.9 trn pandemic relief bill that has already passed in the House of Representatives. Importantly, most analysts did not expect USD 1.9 trn to be the real size of that bill when it is passed, but that now looks realistic. The surge in household disposable income due to newly sent checks will be sufficient

Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 08/03/2021, 07:09, UTC 5 Figure 2: Retail sales have grown above trend as the USD First, these options are easing measures. Easing is not the 600 checks sent in January boosted income and spending correct response to a rapidly improving growth and inflation outlook amid very strong fiscal stimulus.

Second, these policies would shorten the average maturity of publicly held government liabilities (including both Fed and Treasury liabilities). Shortening has been under way for a while, but it increases the sensitivity of government net interest payments to future interest rates, which could turn out to be higher than current forwards suggest.

Although many investors are acutely aware of the Fed’s abil-

Source: Credit Suisse, Bureau of Economic Analysis ity to purchase treasuries and raise money supply aggregates without igniting inflation, there are risks to perceiving these options as being unlimited, especially as fiscal policy puts full The Fed’s dot plot is as stale as old bread. Its artful guidance employment within sight. Political developments could later on future policy, on the other hand, is not. Commentators force serious austerity, especially given the government’s were wrong months back to argue that the Federal Open aging-related spending needs in coming years. Market Committee (FOMC) had said that it will not hike for a number of years or until a certain date. Actually, the committee eschewed calendar-based guidance in favor of state- Also, a disorderly inflation regime change (toward higher or dependent guidance, saying that rates will rise once the more volatile inflation) can result from these policies. Although economy reaches full employment and inflation has hovered inflation does not have a tidy relationship with money aggre- above 2% for a while. There is no need for the Fed to change gates, price levels are another story. It is roughly 100 yen to that guidance, but the objectives are likely to be met sooner a dollar and not vice versa because of monetary phenomena. than was thought in December. Cryptocurrency prices appear for now to be more perceptive on these risks than ordinary currencies are, an interesting and important development. Figure 3: CS projection of the FOMC dot plot In its March meeting, the Fed must acknowledge what has changed since December and accept that some endogenous tightening of financial conditions is a healthy response to those changes. If upside risks to growth and inflation materi- alize, tighter Fed policy will be in play, in-line with their stated Source: Credit Suisse, Federal Reserve objectives. Even hikes in 2022 are possible. We now expect the first two hikes to occur in 2023. The FOMC also need not change its statement that it will stop purchasing bonds when “substantial further progress” “Tighter” policy must balance the potential for disorderly bond has been made toward its objectives. But again, substantial markets. The Fed must communicate that it will use its tools progress is approaching faster than the calendar is turning. to keep markets orderly while gradually shifting into a tighten- Guidance on purchases this year is likely signaling reduced ing mode. One proposed balm from rising rates would be an purchases by mid-2022. In an extreme case of stimulus-fu- extension of the supplementary leverage ratio (SLR) relief. eled growth, plans to reduce purchases could arrive this au- This could free (only) a few banks to increase treasury pur- tumn. chases, but that change ultimately comes with costs and would not significantly ease the money market annoyances As yields surged last week, we received questions about yield set to occur as reserve balances rise sharply in coming months curve control, Fed purchases, and possible rhetoric to fight due to new stimulus and the Treasury reduces its own de- the move in rates. But the move is a healthy endogenous posits at the Fed. The Fed might need to raise RRP and IOER tightening of financial conditions, very much in-line with the rates too, moves that we will be told are “not real tightening,” developments we have listed. while real tightening is gradually becoming more appropriate, and short-term easing measures may be needed due to Whether the yield move is or will become disorderly is an en- chaotic markets for coupon treasuries. tirely separate question. The Fed will continue to remind investors that it possesses the tools to address a disorderly The March FOMC meeting will reveal a new dot plot, and it market. Besides old-fashioned jaw-boning, it could lengthen will be fascinating to see how members’ expectations for fu- the maturity of its bond purchases, raise the level of purchas- ture rates have changed. We expect the FOMC to significantly es, or implement yield curve control if high or sharply rising upgrade its economic projections, reflecting both the surge interest rates become a problem. Currently no major problem of fiscal stimulus as well as a strong start to the year for is obvious, and there are two reasons against these policies.

Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 08/03/2021, 07:09, UTC 6 spending and unemployment data. Even a conservative update Figure 5: CS forecast of FOMC’s economic projections to the forecasts would see GDP returning to trend and un- GDP & PCE price indexes (Q4/Q4 %); unemployment rate (Q4 employment below the long-run estimate by 2022. average); range is central tendency

There will be more flexibility with the inflation forecasts, but the core personal consumption expenditures (PCE) inflation has surprised on the upside twice since the December meeting, and stimulus should add more upside to the near- term base case. All in all, the Fed will likely project hitting its targets next year and be on track for a slight inflation overshoot in 2023. We expect a more hawkish curve to be shown in the dot plot, and the median dot to show one hike in 2023 and for several members to indicate a forecast in-line with market pricing for two to three hikes in 2023.

Figure 4: Core PCE inflation has surprised on the upside twice since the December meeting Source: Credit Suisse, Federal Reserve

If the steeper front end of the yield curve reflected in those market rates persists, another interesting question is whether dumping massive zero maturity government liabilities (reserves) on the market at a time when intermediate safe assets suddenly yield something positive in real terms has implications for currencies, risky assets, and even consumer inflation. It would appear that credit growth and demand for houses and inflation-sensitive assets can thrive under such conditions.

Source: Credit Suisse, Bureau of Economic Analysis Meanwhile, with the USA leading most of the world on vac- cines and stimulus, some large economies, including the Eurozone, may find rising interest rates uncomfortable and even inappropriate. Yield curve control and increased purchases are likely outside the USA, we would argue, and in Europe in particular. Our colleagues are already arguing that the ECB is resorting to “implicit yield curve control.”

In the horse race to post-pandemic normalcy, the United States is fast out of the gates. (05/03/2021)

Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 08/03/2021, 07:09, UTC 7 Targets & tactical views Market data as of Targets Tactical Views 04/03/2021 Equities Index YTD % 3m 12m Relative MSCI AC World (DM & EM) 1609 1.9 1690 1790 n.a. MSCI World (Developed Markets) 8811 1.4 9260 9790 Benchmark MSCI USA 16527 0.1 17580 18620 Neutral S&P 500 3768 0.3 3975 4155 Neutral MSCI EMU 480 3.8 488 517 Neutral MSCI Switzerland 4976 0.7 5030 5320 Neutral MSCI UK 15054 3.8 15500 16600 Outperform MSCI Japan 2680 4.5 2770 2930 Neutral MSCI EM (Emerging Markets) 179345 5.4 191000 203000 Outperform MSCI Sectors (GICS) Index YTD % 3m 12m Relative MSCI World (Developed Markets) 8811 1.4 9260 9790 Benchmark MSCI World Energy 318 25.8 318 336 Neutral MSCI World Materials 565 3.2 545 580 Outperform MSCI World Industrials 499 2.4 499 527 Neutral MSCI World Consumer Disc. 535 -2.0 542 573 Neutral MSCI World Consumer Staples 441 -5.9 440 452 Underperform MSCI World Healthcare 464 -3.4 480 512 Outperform MSCI World Financials 254 11.1 255 273 Outperform MSCI World IT 542 -3.0 566 599 Neutral MSCI World Com. Services 219 4.4 238 252 Neutral MSCI World Utilities 335 -6.8 350 370 Neutral MSCI World Real Estate 1218 0.1 1270 1300 Underperform Government bonds Yield 10y YTD bp 3m 12m Duration USD 1.5 56.6 1.4 1.5 Short Duration EUR -0.31 25.8 -0.3 -0.3 Short Duration GBP 0.73 53.4 0.5 0.6 Neutral CHF -0.27 28.4 -0.3 -0.3 Short Duration Fixed income Index YTD % 3m 12m Relative Barclays Global Aggregate 585 -2.2 593 594 Benchmark Barclays Global IG Corp 297 -2.9 303 306 Neutral Barclays Global HY Corp 430 0.8 435 443 Outperform JPM EMBI Global Diversified HC 958 -3.7 991 1000 Neutral JPM GBI-EM Global Diversified LC 227 -2.3 233 236 Neutral Commodities Index YTD % 3m 12m Relative Bloomberg Commodities 181 8.6 189 192 Benchmark BCOM Precious metals 457 -8.2 498 520 Neutral BCOM Energy 53 21.8 56 56 Outperform BCOM Industrial metals 309 8.9 323 300 Neutral Gold 1714 -9.2 1900 2000 Neutral WTI Oil 62 27.4 65 60 Outperform FX Total Return Indices Index YTD % 3m 12m Relative USD DXY TR Index 101 1.7 97.6 96.9 n.a. MSCI EM FX TR Index 1717 4.5 1764 1811 n.a. FX Spot Spot YTD % 3m 12m Relative USD/CHF 0.92 3.8 0.87 0.88 n.a. USD/JPY 107.05 3.7 102 100 n.a. EUR/USD 1.21 -1.4 1.24 1.25 n.a. GBP/USD 1.39 2.0 1.43 1.45 n.a. EUR/CHF 1.11 2.5 1.08 1.1 n.a. AUD/USD 0.78 1.2 0.78 0.79 n.a. USD/CAD 1.27 -0.5 1.23 1.20 n.a.

Tactical views are for 3-6 months. Targets are indicative index levels, yields and total returns expected to be reached during the stated time horizon. Relative views are expressed as expected performance relative to specified benchmark; for government bonds, it is the preferred position versus the duration of the 1-10y country index. Fixed income indices are hedged in USD. Past performance is not an indicator of future performance. Performance can be affected by commissions, fees or other charges as well as exchange rate fluctuations. Source: Bloomberg, Credit Suisse/IDC

Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 08/03/2021, 07:09, UTC 8 Glossary

Risk warnings

Emerging markets Emerging markets are located in countries that possess one or more of the following characteristics: a certain degree of political instability, relatively unpredictable financial markets and economic growth patterns, a financial market that is still at the development stage or a weak economy. Emerging market investments usually result in higher risks as a result of political, economic, credit, exchange rate, market liquidity, legal, settlement, market, shareholder and creditor risks. Hedge funds Regardless of structure, hedge funds are not limited to any particular investment discipline or trading strategy, and seek to profit in all kinds of markets by using leverage, derivative instruments and speculative investment strategies that may increase the risk of investment loss. Commodity investments Commodity transactions carry a high degree of risk and may not be suitable for many private investors. The extent of loss due to market movements can be substantial or even result in a total loss. Real estate Investors in real estate are exposed to liquidity, foreign currency and other risks, including cyclical risk, rental and local market risk as well as environmental risk, and changes to the legal situation. Currency risks Investments in foreign currencies involve the additional risk that the foreign currency might lose value against the investor’s reference currency. Equity risk Equities are subject to market forces and hence fluctuations in value, which are not entirely predictable. Market risk Financial markets rise and fall based on economic conditions, inflationary pressures, world news and business-specific reports. While trends may be detected over time, it can be difficult to predict the direction of the market and individual stocks. This variability puts stock investments at risk of losing value. High Yield bond risk High Yield Bonds are typically rated below investment grade or are unrated and as such are often subject to a higher risk of issuer default. Perpetual Bond risk Perpetual Bonds have no maturity date and therefore the Interest pay-out depends on the viability of the issuer in the very long term. Subordinated Bond risk In case of liquidation of the issuer, investors can only get back the principal after other senior creditors are paid. Risk of Bonds with variable/ deferral of interest terms Investors would face uncertainty over the amount and time of the interest payments to be received. Callable bond risk Investors face reinvestment risk when the issuer exercises its right to redeem the bond before it matures. Risk of Bonds with extendable maturity date Investors would not have a definite schedule of principal repayment. Convertible or exchangeable bond risk Investors are subject to both equity and bond investment risk. Cocos risk The bond may be written-off fully or partially or converted to common stock on the occurrence of a trigger event.

Explanation of indices frequently used in reports

Index Comment Australia S&P/ASX 200 S&P/ASX 200 is an Australian market-capitalization-weighted and float-adjusted stock index calculated by Standard and Poor's. BC High Yield Corp USD The US Corporate High Yield Index measures USD-denominated, non-investment grade, fixed-rate and taxable corporate bonds. The index is calculated by Barclays. BC High Yield Pan EUR The Euro Corporate Index tracks the fixed-rate, investment-grade, euro-denominated corporate bond market. The index includes issues that meet specified maturity, liquidity and quality requirements. The index is calculated by Barclays. BC IG Corporate EUR The US Corporate Index tracks the fixed-rate, investment-grade, euro-denominated corporate bond market. The index includes both US and non-US issues that meet specified maturity, liquidity and quality requirements. The index is calculated by Barclays. BC IG Corporate USD The IG Corporate Index tracks the fixed-rate, investment-grade, dollar-denominated corporate bond market. The index includes both US and non-US issues that meet specified maturity, liquidity and quality requirements. The index is calculated by Barclays. Canada S&P/TSX comp The S&P/TSX composite index is the Canadian equivalent of the S&P 500 Index in the USA. The index contains the largest stocks traded on the Toronto Stock Exchange. Consumer Confidence Indices Consumer Confidence Indices (CCIs) are based on surveys of consumers' spending intentions and economic situations, as well as their concerns and expectations for the immediate future. CS Hedge Fund Index The Credit Suisse Hedge Fund Index is compiled by Credit Suisse Hedge Index LLC. It is an asset-weighted hedge fund index and includes only funds, as opposed to separate accounts. The index reflects performance net of all hedge fund component performance fees and expenses. CS LSI ex govt CHF The Liquid Swiss Index ex govt CHF is a market-capitalized bond index representing the most liquid and tradable portion of the Swiss bond market excluding Swiss government bonds. The index is calculated by Credit Suisse. DAX The German Stock Index stock represents 30 of the largest and most liquid German companies that trade on the Frankfurt Exchange. DXY A measure of the value of the US dollar relative to the majority of its most important trading partners. The US Dollar Index is similar to other trade-weighted indices, which also use the exchange rates from the same major currencies. Eurostoxx 50 Eurostoxx 50 is a market-capitalization-weighted stock index of 50 leading blue-chip companies in the Eurozone. FTSE EPRA/NAREIT Global Real Estate Index Series The FTSE EPRA/NAREIT Global Real Estate Index Series is designed to represent general trends in eligible real estate equities worldwide. Hedge Fund Barometer The Hedge Fund Barometer is a proprietary Credit Suisse scoring tool that measures market conditions for hedge fund strategies. It comprises four components: liquidity, volatility; systemic risks and business cycle. Japan Topix TOPIX, also known as the Tokyo Stock Price Index, tracks all large Japanese companies listed in the stock exchange's "first section." The index calculation excludes temporary issues and preferred stocks. JPM EM hard curr. USD The Emerging Market Bond Index Plus tracks the total return of hard-currency sovereign bonds across the most liquid emerging markets. The index encompasses US-denominated Brady bonds (dollar-denominated bonds issued by Latin American countries), loans and Eurobonds. JPM EM local curr. hedg. USD The JPMorgan Government Bond Index tracks local currency bonds issued by emerging market governments across the most accessible markets for international investors.

Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 08/03/2021, 07:09, UTC 9 MSCI AC Asia/Pacific The MSCI All Country Asia Pacific Index captures large and mid cap representation across 5 developed market countries and 8 emerging markets countries in the Asia Pacific region. With 1,000 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. MSCI AC World The MSCI All Country World Index captures large and mid cap representation across 23 developed markets and 23 emerging market countries. With roughly 2480 constituents, the index covers around 85% of the global investable equity opportunity set. MSCI Emerging Markets MSCI Emerging Markets is a free-float-weighted Index designed to measure equity market performance in global emerging markets. The index is developed and calculated by Morgan Stanley Capital International. MSCI EMU The MSCI EMU Index (European Economic and Monetary Union) captures large and mid cap representation across the 10 Developed Markets countries in the EMU. With 237 constituents, the index covers approximately 85% of the free float-adjusted market capitalization of the EMU. MSCI Europe The MSCI Europe Index captures large and mid cap representation across 15 developed markets countries in Europe. With 442 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European developed markets equity universe. MSCI UK The MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market. With 111 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK. MSCI World MSCI World is an index of global equity markets developed and calculated by Morgan Stanley Capital International. Calculations are based on closing prices with dividends reinvested. OECD Composite Leading Indicators OECD Composite Leading Indicators (CLIs) are designed to provide early signals of turning points in business cycles with components that measure early stages of production, respond to changes in economic activity, and are sensitive to expectations of future activity. Purchasing Managers' Indices Purchasing Managers' Indices (PMIs) are economic indicators derived from monthly surveys of private-sector companies. The two principal producers of PMIs are Markit Group, which conducts PMIs for over 30 countries worldwide, and the Institute for Supply Management (ISM), which conducts PMIs for the United States. The indices include additional sub-indices for manufac- turing surveys such as new orders, employment, exports, stocks of raw materials and finished goods, prices of inputs and finished goods, and services. Russell 1000 Growth Index The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the US equity universe based on 1000 large-cap companies with higher price-to-book ratios and higher forecast growth values. Russell 1000 Index The Russell 1000 Index is a stock market index that represents the highest-ranking 1,000 stocks in the Russell 3000 Index (encompassing the 3,000 largest US-traded stocks, with the underlying companies all incorporated in the USA), and representing about 90% of the total market capitalization of that index. The Russell 1000 Index has a weighted average market capitalization of USD 81 billion and the median market capitalization is approximately USD 4.6 billion. Russell 1000 Value Index The Russell 1000 Value Index measures the performance of the large-cap value segment of the US equity universe based on 1000 large-cap companies with lower price-to-book ratios and lower expected growth values. Switzerland SMI The Swiss Market Index is made up of 20 of the largest companies listed of the Swiss Performance Index universe. It represents 85% of the free-float capitalization of the Swiss equity market. As a price index, the SMI is not adjusted for dividends. UK FTSE 100 FTSE 100 is a market-capitalization-weighted stock index that represents 100 of the most highly capitalized companies traded on the London Stock exchange. The equities have an investibility weighting in the index calculation. US S&P 500 Standard and Poor's 500 is a capitalization-weighted stock index representing all major industries in the USA, which measures the performance of the domestic economy through changes in the aggregate market value.

Abbreviations frequently used in reports

Abb. Description Abb. Description 3/6/12 MMA 3/6/12 month moving average IMF International Monetary Fund AI Alternative investments LatAm Latin America APAC Asia Pacific Libor London interbank offered rate bbl barrel m b/d Million barrels per day BI Bank Indonesia M1 A measure of the money supply that includes all physical money, such as coins and currency, as well as demand deposits, checking accounts and negotiable order of withdrawal accounts. BoC Bank of Canada M2 A measure of money supply that includes cash and checking deposits (M1) as well as savings deposits, money market mutual funds and other time deposits. BoE Bank of England M3 A measure of money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements and other larger liquid assets. BoJ Bank of Japan M&A Mergers and acquisitions bp Basis points MAS Monetary Authority of Singapore BRIC Brazil, Russia, China, India MLP Master Limited Partnership CAGR Compound annual growth rate MoM Month-on-month CBOE Chicago Board Options Exchange MPC Monetary Policy Committee CFO Cash from operations OAS Option-adjusted spread CFROI Cash flow return on investment OECD Organisation for Economic Co-operation and Development DCF Discounted cash flow OIS Overnight indexed swap DM Developed Market OPEC Organization of Petroleum Exporting Countries DMs Developed Markets P/B Price-to-book value EBITDA Earnings before interest, taxes, depreciation and amortization P/E Price-earnings ratio ECB European Central Bank PBoC People's Bank of China EEMEA Eastern Europe, Middle East and Africa PEG P/E ratio divided by growth in EPS EM Emerging Market PMI Purchasing Managers' Index EMEA Europe, Middle East and Africa PPP Purchasing power parity

Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 08/03/2021, 07:09, UTC 10 EMs Emerging Markets QE Quantitative easing EMU European Monetary Union QoQ Quarter-on-quarter EPS Earnings per share r.h.s. right-hand side (for charts) ETF Exchange traded funds RBA Reserve Bank of Australia EV Enterprise value RBI Reserve Bank of India FCF Free cash flow RBNZ Reserve Bank of New Zealand Fed US Federal Reserve REIT Real estate investment trust FFO Funds from operations ROE Return on equity FOMC Federal Open Market Committee ROIC Return on invested capital FX Foreign exchange RRR Reserve requirement ratio G10 Group of Ten SAA Strategic asset allocation G3 Group of Three SDR Special drawing rights GDP Gross domestic product SNB Swiss National Bank GPIF Government Pension Investment Fund TAA Tactical asset allocation HC Hard currency TWI Trade-Weighted Index HY High yield VIX Volatility Index IBD Interest-bearing debt WTI West Texas Intermediate IC Credit Suisse Investment Committee YoY Year-on-year IG Investment grade YTD Year-to-date ILB Inflation-linked bond Personal Consumption An indicator of the average increase in prices for all domestic Expenditure (PCE defla- personal consumption. tor)

Currency codes frequently used in reports

Code Currency Code Currency ARS Argentine peso KRW South Korean won AUD Australian dollar MXN Mexican peso BRL Brazilian real MYR Malaysian ringgit CAD Canadian dollar NOK Norwegian krone CHF Swiss franc NZD New Zealand dollar CLP Chilean peso PEN Peruvian nuevo sol CNY Chinese yuan PHP Philippine peso COP Colombian peso PLN Polish złoty CZK Czech koruna RUB Russian ruble EUR Euro SEK Swedish krona/kronor GBP Pound sterling SGD Singapore dollar HKD Hong Kong dollar THB Thai baht HUF Hungarian forint TRY Turkish lira IDR Indonesian rupiah TWD New Taiwan dollar ILS Israeli new shekel USD United States dollar INR Indian rupee ZAR South African rand JPY Japanese yen

Important information on derivatives

Pricing Option premiums and prices mentioned are indicative only. Option premiums and prices can be subject to very rapid changes: The prices and premiums mentioned are as of the time indicated in the text and might have changed substantially in the meantime. Risks Derivatives are complex instruments and are intended for sale only to investors who are capable of understanding and assuming all the risks involved. Investors must be aware that adding option positions to an existing portfolio may change the characteristics and behavior of that portfolio substantially. A portfolio’s sensitivity to certain market moves can be heavily impacted by the leverage effect of options. Buying calls Investors who buy call options risk the loss of the entire premium paid if the underlying security trades below the strike price at expiration. Buying puts Investors who buy put options risk loss of the entire premium paid if the underlying security finishes above the strike price at expiration. Selling calls Investors who sell calls commit themselves to sell the underlying for the strike price, even if the market price of the underlying is substantially higher. Investors who sell covered calls (own the underlying security and sell a call) risk limiting their upside to the strike price plus the upfront premium received and may have their security called away if the security price exceeds the strike price of the short call. Additionally, the investor has full downside participation that is only partially offset by the premium received upfront. If investors are forced to sell the underlying they might be subject to taxing. Investors shorting naked calls (i.e. selling calls but without holding the underlying security) risk unlimited losses of security price less strike price. Selling puts Put sellers commit to buying the underlying security at the strike price in the event the security falls below the strike price. The maximum loss is the full strike price less the premium received for selling the put. Buying call spreads Investors who buy call spreads (buy a call and sell a call with a higher strike) risk the loss of the entire premium paid if the underlying trades below the lower strike price at expiration. The maximum gain from buying call spreads is the difference between the strike prices, less the upfront premium paid.

Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 08/03/2021, 07:09, UTC 11 Selling naked call spreads Selling naked call spreads (sell a call and buy a farther out-of-the-money call with no underlying security position): Investors risk a maximum loss of the difference between the long call strike and the short call strike, less the upfront premium taken in, if the underlying security finishes above the long call strike at expiration. The maximum gain is the upfront premium taken in, if the security finishes below the short call strike at expiration. Buying put spreads Investors who buy put spreads (buy a put and sell a put with a lower strike price) also have a maximum loss of the upfront premium paid. The maximum gain from buying put spreads is the difference between the strike prices, less the upfront premium paid. Buying strangles Buying strangles (buy put and buy call): The maximum loss is the entire premium paid for both options, if the underlying trades between the put strike and the call strike at expiration. Selling strangles or straddles Investors who are long a security and short a strangle or straddle risk capping their upside in the security to the strike price of the call that is sold plus the upfront premium received. Additionally, if the security trades below the strike price of the short put, investors risk losing the difference between the strike price and the security price (less the value of the premium received) on the short put and will also experience losses in the security position if they owns shares. The maximum potential loss is the full value of the strike price (less the value of the premium received) plus losses on the long security position. Investors who are short naked strangles or straddles have unlimited potential loss since, if the security trades above the call strike price, investors risk losing the difference between the strike price and the security price (less the value of the premium received) on the short call. In addition, they are obligated to buy the security at the put strike price (less upfront premium received) if the security finishes below the put strike price at expiration.

Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 08/03/2021, 07:09, UTC 12 Important information on mutual funds Risk pertaining to liquidity: Fees and charges, etc. Where there is sudden high volume in a particular investment or when sudden Different types of fees and commissions (subscription fee, amount which changes in the external environment surrounding markets triggers a sudden must be retained in trust assets, repurchase fee, etc.) are charged when downturn in a market or period of market turmoil, etc., investments may not investment trusts/funds are purchased and sold. In addition, apart from these be flexibly traded. In such a case, a decline in the price of the investment fees and commissions, trust and management fees and other fees (audit may impact the base value (or net asset value) of the investment trust, result- fee, trust administrative charges, carried interest, etc.) are charged and borne ing in a loss. Further, the management company may decide to stop calcu- by you through your trust asset. Fees and commissions borne by you will be lation of net asset prices or suspend sell or redemption claims. a sum of these amounts. Such fees and commissions vary depending on the investment trust/fund and depending on the investment status, and In addition, for certain types of investment trust/fund there is a risk that therefore, we cannot provide specific amounts or calculation methods. particular investments may be designated to a separate account (or side pocket) due to a lack of liquidity. When a separate account is utilized by in- For detailed information on fees and commissions, etc. of each re- vestment trusts/funds restrictions may apply as to when such investments spective investment trust/fund, please refer to the pre-contract can be liquidated through a sell or redemption claim and there may be a re- documents (prospectus and other supplementary documents). striction in the timing or form of redemption claim permissible. In particular, for Fund of Fund investments, when an investment trust/fund makes an investment without time limit in another fund, the investment trust/fund may Important information on dividends: be influenced by investment results in the other funds. • Dividends are different to interest on deposits and are paid from the net asset value of investment trusts/funds. Therefore, when dividends are paid, Risk associated with an outflow of money received from the base value (net asset value per unit) will decrease by an amount equivalent to the amount paid. sales orders: When there is a large volume of sale orders in a short period of time, the investment trust/fund may be forced to sell structured securities at a lower

• Dividends may be paid exceeding the profit earned during the calculation rate than the prevailing market price to refund monies to investors and as a period (trading profit including profits of dividends, etc. after expenses). In result you may suffer a loss. Also, alternative investment trusts/funds gen- this case, the base value (net asset value per unit) on the settlement date erally have a limitation in selling or cashing out the investment compared to in this period will decrease compared to that on the settlement date in the traditional investment trusts/funds. Many alternative investment trusts/funds previous period. Also, the level of dividends does not always reflect the rate only accept a sell or redemption order on a monthly or quarterly basis and of return for the investment trust/fund during the calculation period. therefore you may not be able to rapidly exit the investment in, for example, times of economic uncertainty. • A part or all of dividends may be virtually equivalent to some repayment of the principal depending on the purchase price of the investment trust/fund Redemption risk: by an investor. The same can be applied to a case that an increase in the base value (net asset value per unit) is smaller than a dividend amount due Investment trusts/funds may become subject to mandatory redemption due to the investment status after purchase of the investment trust/fund. to a certain reason. For details, please refer to the pre-trade documents (prospectus and other supplementary documents) before subscription.

Please refer to the prospectus for details. Concentration risk: Investment trusts/funds which invest in a certain investment product or Explanation of major risks (description pursuant to Ar- similar investment product group may significantly decrease in value (net ticle 37 (Regulation on Advertising, etc.) of the Financial asset value) under severe market circumstances. Instruments and Exchange Act, etc.) The risks described below are a summary of some general risks of investment Country risk: trusts/funds (risks which have an impact on net asset value) and do not When changes in political, economic and social conditions in investment cover all risks. Please refer to the pre-trade documents (prospectus and destination countries and regions cause a dislocation in financial and security other supplementary documents). markets, security prices may significantly change. Also, investments in emerging markets involve unique risks including small market size and trade Price volatility risk: volume, political and social uncertainties, undeveloped market infrastructure such as a clearing system, undeveloped information disclosure system and Investment trusts/funds invest mainly in equities, bonds and derivative legal system by supervising authorities, large fluctuations in exchange rates, products, etc. The value of the investment trust/fund will go up or down due restrictions on currency remittance to foreign countries and other factors, to increases or decreases in the prices of such investments. Further, the and, therefore, may have larger price fluctuations compared to investments value of such investments will be impacted by political and economic factors, in major developed markets. the financial standing of an issuer, market demand and supply, interest rates and other factors. Important information on non-Japanese stocks Foreign currency risk: Please refer to the issuer information when you purchase non-Japanese stocks. Investment trusts/funds which invest in equities or bonds, etc. denominated in foreign currencies entail a foreign currency risk, and the base value (or net asset value) of investment trusts/funds may change depending on the Disclaimer currency exchange rate. Even when you do not experience a loss of invest- This material is published solely for information purposes and is intended for ment principal when calculated in the base currency, you may suffer a loss the recipient’s sole use. Credit Suisse does not represent or warrant its ac- at conversion into Japanese yen due to fluctuations in exchange rates. Fur- curacy or completeness. The material is not directly or indirectly intended for thermore, investment trusts/funds which utilize currency trading among any investment solicitation, and does not constitute an invitation or offer to multiple currencies may incur costs due to such currency trading depending conclude a transaction contract for financial instruments, etc. Credit Suisse on the difference in short-term interest rates between the currencies, and accepts no liability for loss arising from the use of the information in this you may suffer a loss. material. It is recommended that you consult with the third party professional advisors as to legal or tax issues, etc. This material should not be reproduced Credit risk: or quoted without the prior express written consent of Credit Suisse. The information and opinions expressed in this material were produced by Private For investment trusts/funds which invest in equities or bonds, etc., the prices Banking Division at Credit Suisse as of the date of writing and are subject of these investments may increase and decrease due to changes in the to change without notice. Views expressed in respect of particular investment business or financial standing of the issuer and other factors, and you may products in this material may be different from, or inconsistent with, the ob- suffer a loss.

Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 08/03/2021, 07:09, UTC 13 servations and views of other divisions besides Private Banking due to the ducted on a principal to principal basis, including over the counter derivatives differences in evaluation criteria. This material is solely distributed in Japan transactions, will be quoted as a purchase/bid price or sell/offer price and by Credit Suisse Securities (Japan) Limited. Credit Suisse Securities (Japan) for which a difference or spread may exist. Charges in relation to transactions Limited will not distribute or forward it outside Japan. will be agreed prior to dealing as per our requirements under the Financial Instruments and Exchange Law. You may incur a loss as a result of fluctuations in stock prices if you invest in stocks. In relation to foreign stocks, you may incur a loss in such stocks By purchasing financial instruments, etc., you may incur a loss or a due to foreign exchange rate fluctuations, etc. The market value of bonds loss in excess of the principal as a result of fluctuations in market is affected by interest rate fluctuations or changes in the financial standing prices or other financial indices, etc. Please read carefully the Pre- of any issuer, etc. as such you may incur a loss if you sell such bonds before Contract Documentation provided for an explanation of associated they are redeemed. In relation to foreign bonds, you may incur a loss in such risks and commissions etc. of individual financial instruments, etc. bonds due to foreign exchange rate fluctuations, etc. The net asset value prior to purchase. Please contact your Relationship Manager if you of mutual funds can fall as well as rise due to price changes of underlying have any questions. stocks, bonds, etc. and foreign exchange rate fluctuations, and this may cause you to incur a loss. UNITED STATES: NEITHER THIS REPORT NOR ANY COPY THEREOF MAY BE SENT, TAKEN INTO OR DISTRIBUTED IN THE UNITED STATES Structured securities and derivatives are complex instruments, typically involve OR TO ANY US PERSON (WITHIN THE MEANING OF REGULATION S a high degree of risk and are intended for sale only to sophisticated investors UNDER THE US SECURITIES ACT OF 1933, AS AMENDED). who are capable of understanding and assuming the risks involved. The market value of any structured security or transaction may be affected by changes in financial market conditions, reference indices, volatility and the Credit Suisse Securities (Japan) Limited, Financial Instruments Dealer, Di- credit quality of any issuer or reference issuer. rector-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Furthermore, there are structured securities on which you may incur a loss Firms Association. since the redemption amounts are linked with fluctuations in reference indices, etc. There are also derivatives on which potential losses may exceed the amount of the initial investment. Commission rates for any transactions will Copyright © 2021 Credit Suisse Group AG and/or its affiliates. All rights be as per the rates agreed between Credit Suisse and you. For transactions reserved. conducted on a principal to principal basis between Credit Suisse and you, the purchase or sale price will be the total consideration. Transactions con- 21C013A_IS_J

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Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 08/03/2021, 07:09, UTC 15