Global CIO Office

Rising yields benefit rotation trade

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd. | March 2021

Japan investment strategy Japan asset allocation Global investment strategy Reduce risk for a stable investment Neutral on global equities Paring back some risk portfolio page 3 page 5 page 9

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 dis- semination 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. Singapore: For accredited investors only. Hong Kong: For professional investors only. Australia: For wholesale clients only. Editorial In this issue

Japan investment strategy 3 Reduce risk for a stable investment portfolio

Japan asset allocation 5 Neutral on global equities

Michael Strobaek Burkhard Varnholt Investment solutions 7 Global Chief Investment Officer Chief Investment Officer – Swiss Univer- Japan investment theme 2021: Pushing for a sal Bank carbon-free society

In recent weeks, bond yields have stolen the limelight. In the Economics 8 USA, rapid progress with vaccinations and substantial addi- Much improved US outlook has driven global yields up tional fiscal stimulus led to a sharply improved growth outlook, lifting government bond yields there as well as globally. The resulting spike in market volatility temporarily took the major Global investment strategy 9 indices back down from their highs and especially hurt growth Paring back some risk stocks.

Special topic 10 Rising bond yields and their implications for financial markets From bear to bull were also the subject of discussion in our latest Investment Committee meeting. We continue to believe that markets should be able to digest higher yields in the months ahead, Special topic 11 as they occur against the backdrop of a strong reacceleration How to tackle rising inflation of growth. Yet, in the adjustment process, further setbacks are quite likely. In light of these considerations, we have taken profit on our equity overweight, shifting the asset class back Fixed income 12 to strategic allocations in portfolios. In particular, we have re- EM HC corporates preferred within credit moved our tactical overweight in emerging markets (EM) and especially China. However, our longer-term outlook for overall equities, including EM, remains positive, which is reflected in Equities 13 our increased strategic allocation to the asset class. We retain Rising yields benefit rotation trade a mildly cyclical bias through our continued overweight alloca- tion to the broad commodity index. As we explain in a special topic article this month, the acceleration in demand growth Alternative investments 14 for commodities should offset the negative impact of higher Listed real estate should lag equities bond yields, and supply constraints should remain supportive into the summer. With the USA currently enjoying a growth Foreign exchange 15 and real yield advantage, we also expect the USD to have at More cautious on low yielding currencies least temporary support against a number of currencies. In light of this, we have shifted our view on the broad USD index (DXY) from unattractive to neutral. Forecasts 16 At a glance Enjoy the read!

Editorial deadline: 17 March 2021

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 2 Japan investment strategy Reduce risk for a stable investment portfolio

Global economic growth is likely to accelerate. We expect the market will overcome fears of rising inflation gradually. Investors should seek ways to control investment portfolio risk.

Soichiro Matsumoto Post-pandemic, social and economic changes will Chief Investment Officer Japan continue to accelerate: Rebuilding infrastructure Once the pandemic winds down, the world’s social and eco- Economic recovery and inflation nomic landscape is unlikely to immediately return to the pre- The resumption of economic activity and massive fiscal stim- pandemic “normal.” Even if the COVID-19 outbreak is con- ulus have revived market expectations of a further rise in in- tained, the risk of a new pandemic will always persist. On the flation. We believe an increase in the inflation rate in conjunc- other hand, it will be quite difficult to continue the large-scale tion with the current economic recovery is a sign of economic monetary easing and fiscal spending measures. health. However, rising inflation can negatively affect corpo- rate earnings, which in turn will reflect in valuation of the Therefore, the world will need to adjust socially and econom- market that has so far been supported by monetary easing. ically such that it becomes more resistant to future pandemics. As was the case when our global society and economy under- The recent sharp swings in investor sentiment suggest it went major changes with the advent of the Internet, those would be prudent to avoid excessive portfolio risk until inflation societies and economies that are able to adapt quickly will rate volatility in the early stages of the economic recovery is come out on top. fully factored in. As such, governments have an incentive to rebuild their so- Rising inflation can be a tail risk cioeconomic infrastructure in a way that makes them more A shift toward tighter monetary policy to contain an unexpect- pandemic resistant. In Japan, the promotion of digitalization ed surge in inflation will continue to be a tail risk for the mar- in government and other sectors has started, and this trend ket. This means not only that bond prices will fall and support will eventually spread to the entire economic sphere as work for current equity valuations will recede, but also that there environments and business practices in Japan change drasti- is a greater risk of fiscal pressure from significantly higher cally. interest payments on public debt. However, we believe such a scenario is unlikely and these concerns should be consigned Investment spurred by supply chain retooling to tail risk management. Security concerns related to China seem to be on the rise in the world, including Europe, the USA and Japan. In terms of Corporate earnings recovery geopolitical risk, as the confrontation between the USA and During the pandemic recession, aggressive policy support China intensifies, the major economies will each seek to in- has ensured that corporate bankruptcies and other credit-re- creasingly rely on domestic supply chains. To address current lated issues remain low. This suggests that when the economy problems related to the procurement of semiconductors, reopens, corporate earnings will likely recover quickly. countries will likely accelerate their investment in building se- cured supply chains, including strategic goods. Japanese companies are rapidly increasing their overseas sales, and should be helped by the economic recovery in their This will add to cost pressure for companies, but they are also end markets, particularly the USA and Asia. At March-end, likely to be benefited due to increased new investment. they are likely to make major revisions to their numbers as the fiscal year ends, which should be in investors’ focus. Corporate Japan: The fruits of enhanced governance The Japan market is the only major stock market in the world that has not made a new all-time high recently. Meanwhile, Japanese corporate profits reached record levels last year.

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 3 However, the fact that the Nikkei Stock Average was able to gressive in mergers & acquisitions (M&A) and other invest- recover the 30,000-yen level may dispel potential pessimism ments to reform their business structure, private equity too about Japanese equities. With the enactment of corporate can be an interesting investment option. governance codes and stewardship codes, Japanese compa- nies have become proactive in their treatment of shareholder Accelerating changes related to the pandemic interests and have been increasing share buybacks and divi- Investment opportunities provided by receding globalism: dends. Looking at Japanese stocks in terms of dividend-in- Political commitments designed to address Japan’s social clusive indices, the MSCI Japan (Net Total Return) Index hit fragmentation are expected to provide long-term investment its bubble-era high in February 2021. opportunities. We now focus on strategies including infrastruc- ture investment funds, private equity and the long-term Revisions in corporate governance codes have encouraged themes discussed in a Supertrends series report. management to be conscious of the cost of capital. Through these and similar management changes, foreign investors Investment lesson – increased awareness of risk hedging. A will be able to invest in Japanese companies with increased growing awareness of the importance of risk preparedness confidence. From a long-term perspective, the above factors is expected to lead to greater global asset diversification as are likely to help revitalize the Japan equity market. part of a long-term investment strategy. This is because such a strategy can be expected to effectively stabilize returns Recommended investment strategies without incurring a high additional cost.

Investors have learnt an important lesson from the unprece- Investment themes related to the advent of a new digital so- dented pandemic and are now conscious of hedging their ciety: The pandemic has changed the way people interact risks. We believe the market has rediscovered the importance with each other on a socioeconomic level considerably. This of global asset diversification as part of a strong long-term has accelerated the rate of digitalization across the economy. investment strategy. Our Supertrends series reports explore a number of related investment themes and strategies. Strategies related to prolonged policy support mea- sures Investment opportunities related to full-scale efforts to improve With ultra-loose monetary policy likely to be in place for an sustainability: The world as a whole is now more amenable extended period, investors should look to alternative strategies to accepting the costs of improving sustainability. One of the designed to increase yield. Investors will, without exception, best examples is efforts to create a carbon-free society. The have a greater need to look for investments that convert an adoption of investment metrics that incorporate an awareness acceptable level of risk into yield. This includes range-trading of Environmental, Social, and Governance (ESG) will also in- in currency markets, where interest rate differentials are nar- crease. Additionally, our Supertrend “Climate change” encom- rowing and the risk of large fluctuations is receding. passes pertinent investment ideas.

Strategies for the onset of the economic recovery Reaffirming the appeal of Supertrends As the economy recovers while interest rates remain low, in- After the pandemic, societies are changing at an accelerating vestment in credit (corporate bonds) will become attractive. pace. Our long-term investment themes, called Supertrends, In particular, Asian countries that have been successful in can be a suitable option for the prudent investor in such times. controlling the COVID-19 contagion, and dollar-denominated bonds issued by companies in this region, may constitute an Examining tail risk: Uncontrollable inflation and rising effective strategy for seeking yield. interest rates In response to the pandemic, global debt has ballooned to The economic recovery and changing consumption styles are unprecedented levels. Thanks to historically low interest rates, likely to increase investor interest in economically sensitive the burden of this debt is sustainable. However, investors value stocks, as well as stocks of companies that fit in with should be aware of related risks. Uncontrolled inflation and the new market landscape. As companies become more ag- a sharp rise in interest rates are likely to remain as tail risks for the market. (17/03/2021)

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 4 Japan asset allocation Neutral on global equities

Reduce emerging market equities allocation to neutral. Increase allocation to US dollar-denominated emerging market bonds.

Soichiro Matsumoto Chief Investment Officer Japan

Global equity allocation back to strategic levels With a view to mitigating risks associated with rising interest rates, the global Investment Committee has decided to lower the allocation to emerging market (EM) equities, and thus equities overall, to neutral. As a result, the equities weight in portfolios is now consistent with their long-term, strategic levels.

Increased allocation to USD-denominated EM bonds We maintain an underweight allocation to government bonds and have lowered our allocation to high-yield bonds to neutral. At the same time, we have increased our allocation to USD- denominated emerging market bonds.

Investment map (regions vs asset classes)

Source: Credit Suisse (17/03/2021)

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 5 JPY international tactical asset allocation (TAA; balanced) Balanced TAA Vs. benchmark BenchmarkSAA 2021 February March Change February March Liquidity 4.0% 5.0% 1.0% -1.0% 0.0% 5.0% JPY 4.0% 5.0% 1.0% -1.0% 0.0% 5.0% Fixed income 31.5% 32.0% 0.5% -1.0% -0.5% 32.5% JPY 3.5% 3.5% 0.0% -0.5% -0.5% 4.0% Global corporates 18.0% 18.0% 0.0% -1.5% -1.5% 19.5% Global high yield 3.0% 3.0% 0.0% 0.0% 0.0% 3.0% Emerging markets bond USD 3.0% 3.5% 0.5% 0.0% 0.5% 3.0% Emerging markets corporate 4.0% 4.0% 0.0% 1.0% 1.0% 3.0% USD Equity 52.0% 50.5% -1.5% 2.0% 0.5% 50.0% Japan 18.0% 19.0% 1.0% -1.0% 0.0% 19.0% World (ex. Japan) 34.0% 31.5% -2.5% 3.0% 0.5% 31.0% Switzerland 0.5% 0.5% 0.0% 0.0% 0.0% 0.5% Eurozone 2.5% 2.0% -0.5% 0.0% -0.5% 2.5% North America 15.0% 15.0% 0.0% 0.0% 0.0% 15.0% United Kingdom 2.0% 2.0% 0.0% 1.0% 1.0% 1.0% Australia 0.5% 0.5% 0.0% 0.0% 0.0% 0.5% Emerging markets 6.0% 4.0% -2.0% 2.0% 0.0% 4.0% LatAm 0.5% 0.0% -0.5% 0.0% -0.5% 0.5% APAC 5.0% 4.0% -1.0% 2.0% 1.0% 3.0% EMEA 0.5% 0.0% -0.5% 0.0% -0.5% 0.5% Themes 7.5% 7.5% 0.0% 0.0% 0.0% 7.5% Alternative in- 12.5% 12.5% 0.0% 0.0% 0.0% 12.5% vestments Real estate Japan 2.5% 2.5% 0.0% 0.0% 0.0% 2.5% Hedge fund 2.5% 2.5% 0.0% 0.0% 0.0% 2.5% Private equity 7.5% 7.5% 0.0% 0.0% 0.0% 7.5% Total 100.0% 100.0% 0.0% 0.0% 0.0% 100.0%

Source: Credit Suisse

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 6 Investment solutions Japan investment theme 2021: Pushing for a carbon-free society

This month we focus on the importance of integrating sustainable investments into one’s portfolio and propose corresponding investment solutions in the form of stocks and mutual funds.

Maki Shimizu portfolio that integrates climate change risk into its construc- Investment Strategist - Japan Strategy tion and overall investment process,. Correspondingly, we propose the following related solutions. Moving toward a sustainable future Investors’ interest in sustainable investments is growing with Climate change investment opportunities each passing year. Clearly, awareness about sustainability At the end of last year, our equity research team created a and environmental, social and governance (ESG) issues at new ESG Top 25 Stock Promotion List as a solution for in- the present time is greater than ever. At the World Economic vestors interested in sustainable investing. The list consists Forum in Davos last year, environmental risks were a major of 25 stocks that meet certain ESG criteria in terms of sus- topic of discussion. Not coincidentally, though, one of our tainability among a set of top recommended stocks carefully 2021 investment themes is “Moving toward a carbon-free selected through a bottom-up analysis. Additionally, our “Cli- society.” In the last decade there was considerable growth in mate change – Decarbonizing the economy” Supertrend has sustainable and impact-oriented investing, but options in terms four sub-themes that offer investment opportunities with re- of available investment vehicles had been very limited. How- spect to the sustainability theme. These include investing in ever, with a wider range of asset classes and investment companies which are at the forefront of the development of products now available, integrating investment solutions that renewable energy, as well as companies providing sustainable help mitigate and manage climate change risks into a portfolio fuels and technologies such as hydrogen. with a long-term view should be seen as an important step toward decarbonizing the global economy. Among the mutual funds providing exposure to the sustainable investing theme, we highlight an environment-related In addition, growing investor awareness about sustainable privately-placed fund. The fund focuses on the expansion of investing has increased the associated impact on share prices, markets pertaining to products and services that solve envi- while at the same time increasing pressure on companies to ronmental problems, and seeks to capture changes in social address climate issues. Since climate change is a long-term and economic values with a view toward long-term manage- issue, proper management of carbon-related risk and the ment. The fund seeks to diversify its investments in each re- pursuit of investment opportunities brought about by decar- gion and industry based on four sub-themes. bonization efforts should lead to stable, long-term investment. (17/03/2021) We believe that now is the time for investors to adjust to a

Japan: Key investment views Theme Sub-theme Investment solution 1. The world after the pandemic Extended policy support Yield-securing strategy, Growth stocks, Capital World Equity Fund, Gold ETF Economic recovery Credit, Supertrends, Equity L/S, Private equity, Asian equity and bond, JP Morgan Asean Growth Open Fund, HSBC China Open Fund, World Core Infrastructure Fund Retreating globalism Infrastructure funds, Private Equity, Supertrends Lessons from pandemic Multi-asset management, Hedged investment (low risk), CS Portfolio Fund, Pictet Multi Asset Allocation Fund ("Quatro") 2. Arrival of digital society US-China top stocks from Supertrends, Global Security Fund 3. Push for a carbon-free society Supertrends, Green bond

Source: Credit Suisse

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 7 Economics Much improved US outlook has driven global yields up

The US growth outlook has improved significantly. So the recent rise in yields is a healthy financial tightening to match the improving growth prospects. Yet, for the Eurozone and emerging markets, rising yields are more uncomfortable.

James P Sweeney Chief Economist and Regional CIO Americas The Eurozone aggregate 10-year yield is now as high as it Peter James Foley was in H1 2020 when peripheral bond markets were stressed. Economist Slow progress on vaccinations (albeit recently improving) means a service sector resurgence may have to wait until The US economic outlook has suddenly changed. Aggressive later in the year. We expect Eurozone GDP to grow 4.4% in fiscal stimulus and a rapidly accelerating vaccination program 2021, down from our prior 5% forecast. have significantly improved growth prospects since the start of the year. We expect US GDP to grow 5.7% in 2021. For this reason, higher yields are unwelcome. The European Central Bank (ECB) has said it would significantly increase Meanwhile, inflation is set to rise due to base effects, goods the pace of bond purchases under its pandemic emergency supply shortages, temporary tailwinds from healthcare and purchase program over the next three months. Comments at financial services inflation, and the prospect of service sector the meeting suggested the ECB does not want yields to rise price increases as social distancing declines. The rise in infla- above current levels. For market participants, this approach tion is likely to be temporary, but US core PCE (personal can be interpreted as an implicit form of yield curve control. consumption expenditures) inflation could exceed 2.5% in Q2, a level that has not been sustained since the early 1990s. Most emerging economies comfortable, for now Higher rates could become uncomfortable for some emerging If upside risks to growth and inflation materialize, tighter economies too, as many countries are near the back of the Federal Reserve (Fed) policy will be in play. The Fed’s state- vaccine queue, hampering this year’s recovery. Yet, unlike dependent guidance need not change, although its targets the “taper tantrum,” higher global yields are driven by stimula- should now be met more quickly. We now expect the first tive US policy rather than tightening. In that sense, the positive two interest rate hikes to occur in 2023, but even hikes in spillover to global growth should be supportive. 2022 are possible. However, some countries might become more troubled if In the USA, higher yields represent a healthy, endogenous higher yields are accompanied by worsening risk asset perfor- financial tightening to match improving prospects. mance. Strong capital inflows have reversed recently, although outflows so far are relatively modest. Higher global yields and ECB set to lean against higher yields potential foreign exchange pressure might be most unwel- Other economies have not seen such a sweeping change to come in countries like Brazil and Turkey, where domestic in- the outlook but face higher yields nonetheless. Most countries flationary pressure has already forced a hawkish tilt in policy. are set for a year of strong growth driven by social un-distanc- (12/03/2021) ing, but growth expectations are being tempered down, rather than up. Higher yields are likely to be more uncomfortable.

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 8 Global investment strategy Paring back some risk

We shift equities back to strategic allocations for now, reducing EM equities to neutral. We adopt a neutral view on the broad USD index as the US yield advantage is expected to improve further.

Philipp Lisibach fears that liquidity conditions may tighten on concerns over Chief Global Strategist asset price bubbles, a rotation into value that has hit China’s disproportionately large tech sector, and moderating south- The Investment Committee (IC) decided to reduce emerging bound capital flows between local and international markets. market equities, and thus equities overall, to neutral. Though the mid-term return outlook remains attractive, the risk of a Moderate cyclical bias retained further rise in bond yields suggests some caution in the near The IC keeps a reduced cyclical bias in portfolios with govern- term. We keep a more moderate cyclical bias by staying ment bonds at underweight and the broader commodity index overweight the broad commodity index (BCOM). In credit, (BCOM) at overweight. After a strong performance, the return recent spread widening has made the tactical return outlook outlook for commodities has diminished, but given the refla- for emerging market hard currency sovereign bonds attractive tionary outlook, we still see an overweight allocation as war- again, and we reduce the outlook for our high-yield bond index ranted. Because of their real asset properties, commodities from attractive to neutral. Our view on the broad USD index promise to add protection against inflation while correlating (DXY) shifts from unattractive to neutral. positively with economic growth. Still, where positions have risen strongly during the rally, investors may want to pare Rising bond yields a near-term hurdle back some of the overweight. In recent weeks, rising US bond yields have lifted yields globally, causing bouts of increased market volatility. They Yield differential supportive of USD especially weighed on formerly strongly performing growth The recent yield increases have been strongest in the USA. stocks, while lower valued and more cyclical parts of the As reflation progresses in a front-loaded way in the USA, markets held up better. The IC maintains its view that markets there is a strong likelihood that we could see a further improve- should be able to digest rising yields this year, as they are ment in the yield advantage of the USD versus the EUR and accompanied by a strong growth reacceleration. The USA is the JPY, whose central banks appear more committed than ahead of Continental Europe with regard to vaccinations, with the US Federal Reserve to keep yields depressed. The IC the new USD 1.9 trn fiscal stimulus plan likely to accelerate thus changed its USD views versus the EUR and the JPY as final demand further. Yet, in the near term, markets could well as its view on the broad USD index (DXY), which has continue to consolidate should real bond yields move up more done well since inception in June last year, from unattractive markedly. This is a risk the IC would not want to rule out, as to neutral. inflation risks being pushed up not only by strong base effects but also by supply side bottlenecks and high commodity prices. Therefore, the IC considers it prudent to take profit on our equities overweight, reducing the overall asset class Watch a video featuring the highlights of the to strategic allocations for now by removing our overweight Credit Suisse investment strategy: in emerging markets. In emerging markets, we have closed www.credit-suisse.com/cio/film our overweight in China. We adopted a positive view on China in June 2020 capturing a significant portion of the subsequent (15/03/2021) equity rally. Yet, in recent weeks, the market has sold off on

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 9 Special topic From bear to bull

Commodities have recorded strong gains recently amid an accelerated rebalancing. A near-term pause is likely, but the backdrop should stay supportive as the commodity- intensive recovery phase continues, at least into summer, favoring cyclical sectors.

Stefan Graber expect seasonal price peaks toward the summer followed by Head of Commodity Strategy some moderation in the second half as supply will have more time to respond. Commodities continue to perform strongly this year, with both spot and roll yields contributing to overall returns amid reflation Portfolio considerations expectations. Tightening physical markets, as supply remains Commodities should continue to provide useful diversification, unresponsive and demand gradually recovers, also help to at least tactically. This is because the asset class offers a explain the gains. At the same time, cyclical sub-segments different cyclicality/growth premium than equities and com- have been able to digest rapid US yield rises rather well so modity baskets have some capacity to absorb potential infla- far, with the exception of precious metals, which suffered a tion surprises going forward. We stay overweight in our tactical setback. asset allocation, but taking some profit after the very strong performance of late seems sensible as the path forward may Current growth phase is commodity-intensive be choppier. Where possible, we would consider spreading Precious metals aside (gold may stay vulnerable as long as commodity exposure across maturities to dampen potential nervousness in yield markets persists), we think the broader spot volatility in the near term. backdrop remains supportive, as global industrial activity is set to re-accelerate into the second quarter. That said, recent A super-cycle in the making? spot gains may have pre-empted some of the improvement There has been talk about a potential new commodity super- ahead including upcoming inventory draws (reflected in steeply cycle, which we try to qualify here. We share the sense that backwardated forward curves). Catalysts like the recent recent underinvestment in production capacity, exacerbated OPEC+ surprise or the latest US stimulus bill are behind us. by COVID-19-related cuts in capital expenditure, may have This speaks in favor of slowing spot returns, while roll yields sown the seeds of a longer lasting bull run. This is because continue to support performance. decarbonization efforts require infrastructure upgrades, more batteries, etc., which lifts medium-term demand profiles for In any case, the current manufacturing-driven growth phase several commodities, mostly across the metals space. If the (benefiting metals) and re-opening of economies/resumption announced green stimulus packages are actually implemented of travel (benefiting oil) should ensure a strong demand envi- in the coming years, then we might indeed face shortages, ronment for commodities. This may change once services warranting higher premiums above costs in order to incentivize instead of manufacturing start to drive growth, as the com- the necessary capacity investment. We feel the market has modity intensity would be lower, which is our assumption for already started to entertain such a scenario, which means later this year. A potential US infrastructure bill might alter that actual commitments and spending must follow to confirm this assumption, but it is too early to factor in. For now, we this thesis, and potentially unlock a next leg up. Yet, this scenario is quite uncertain and rather a prospect for 2022/2023+. (12/03/2021)

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 10 Special topic How to tackle rising inflation

In the next 3–6 months, we expect moderately higher US government bond yields, 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 Rising US inflation benefiting cyclicals Chief Global Strategist As for equities, higher inflation should help our positioning in Jessie Gisiger financials and commodity-related sectors such as materials, Head of Credit Strategy and Investment Themes which have historically delivered a solid return amid rising in- flation. In terms of style, growth and large caps tend to underperform value and small caps in an environment of rising In the next 3–6 months, we expect to see higher US core inflation. government bond yields primarily driven by rising US inflation expectations, with the risk of a potential overshoot. In our base scenario, US headline inflation is forecast to trend Regionally, we prefer cyclical markets such as Germany and higher gradually during this period (slightly above 2% and the UK. We also note that we expect South Korea and close to 2.5%, similar to what we witnessed in 2018), driven emerging market (EM) materials equities to outperform given mainly by factors such as supply constraints during the reopen- their cyclical nature and high beta to a global recovery. The ing of economies, rising energy prices and large fiscal stimu- EM materials sector exhibits a more attractive 12-month for- lus. A temporary overshoot could be fueled by factors such ward P/E than the US or European materials sector. Mean- as accelerating global industrial production growth and positive while, South Korea, an export-oriented economy, is likely to vaccine developments. benefit from improving global trade.

Importance of a well-diversified multi-asset portfolio Growth stocks may face re-rating if real yields rise too Investors looking for ways to protect their portfolio against fast the risk of rising and overshooting inflation should ensure A tail risk to our base case is that investors start to position having a well-diversified portfolio, in our view. Real assets prematurely for a tapering of Federal Reserve asset purchas- such as broad-based commodity and selected direct real es- es, leading to a pick-up in real yields. In this scenario, richly tate investments can benefit from factors such as rising input valued growth stocks such as technology and investments prices and thus protect investors’ purchasing power. Similarly, with a focus on environmental, social and governance (ESG) commodity currencies are expected to do well. In fixed in- criteria could be subject to a re-rating. Although a potential come, short-duration/active duration management and diver- drawdown could present opportunities for investors to build sification by adding floating components are key to hedging long-term exposure, options structures that provide some against rising inflation risk. downside protection and upside participation while capitalizing on short-term volatility spikes could be a more conservative alternative. Sophisticated investors looking for a possible macro hedge may selectively go long FX volatility in G7 cur- rencies, which is relatively cheaper than equity and fixed in- come volatility. (12/03/2021)

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 11 Fixed income EM HC corporates preferred within credit

While the recent spike in US government bond yields might slow temporarily, rising global rates suggest that the return potential for treasuries will stay unattractive. We no longer expect global HY credit to deliver an attractive carry return and continue to prefer emerging market hard currency (EM HC) corporate credit.

Luca Bindelli widening pressure in IG credit given elevated supply and lim- Head of Fixed Income and Currency and Commodity Strategy ited fund flows against the backdrop of higher government bond yields. In high yield (HY), we think spreads are tight and Nominal government bond yields have risen further since our expensive. We believe spreads already incorporate improving last update, with the increase largest in the USA. Although economic fundamentals and expect limited spread tightening expectations of a growth rebound and reflation have been going forward. Regionally, we favor selected Asian HY credits. further supported by the latest fiscal stimulus plan, front-end In our opinion, EM HC corporate bonds are most attractive rates have been relatively well behaved and yield curves have within credit. They should prove less sensitive to higher US continued to steepen. While nominal yields in Europe have government bond yields than global IG thanks to their lower been driven up mostly by inflation expectations, US nominal benchmark duration. Moreover, they on average provide yields have been fueled above all by rising real rates, which similar credit fundamentals to developed market credit, but reflect sharply improving US economic conditions. Given the spreads are more attractive. significant move in US 10-year yields, we would not be sur- prised to see a temporary consolidation. Even so, we expect Improving return prospects for EM HC sovereign debt US inflation expectations to move a bit higher yet and be the The outlook for EM HC sovereign bonds has improved after main driver of nominal benchmark yields in the short term. the recent sharp rise in US Treasury yields and spread With other developed regions following the same reflationary widening. Positioning has been lightening rapidly since our theme, albeit with a lag, we anticipate that global government last update and non-resident, retail and institutional flows bonds will remain an unattractive investment. We therefore have all turned negative, suggesting that these factors should keep exposure below benchmark allocations in portfolios. have less of a negative impact on the asset class going for- Furthermore, we keep a relatively short duration stance in ward. Also, fundamental valuations now appear to be back US, Eurozone and Swiss bond markets and prefer US infla- at fair levels after the recent spread widening. Although further tion-linked bonds over comparable nominal government bonds. US yield rises would limit returns, the current spread level is sufficient to provide a significant carry cushion. As a result, Favor EM HC credit expected returns for EM HC sovereign bonds have increased, We argued last month that investment grade (IG) spreads providing an attractive return above cash. For the time being, were already at historical lows and no longer offered enough however, we maintain a benchmark allocation in our portfolios. compensation against a further rise in benchmark yields. (12/03/2021) Going forward, we continue to see some near-term spread

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 12 Equities Rising yields benefit rotation trade

The rotation into equity segments that lagged during the pandemic is supported by rising yields resulting from the improved earnings and growth outlook. We prefer finan- cials, materials, Germany and the UK. We have taken profit on EM equities as we turned less constructive on heavyweight China. Our preferred markets in EM are South Africa, South Korea and Thailand.

Marc Häfliger heavyweight China. In the last few weeks, the Chinese equity Global Equity Strategist market has corrected on fears that liquidity conditions may tighten amid concerns over possible asset price bubbles, and The significant fiscal stimulus in the USA and progress in the rotation into value has impacted China’s disproportionately vaccination campaigns should support global growth in the large tech sector. In addition, we no longer expect the USD months ahead, providing a supportive environment for global index to depreciate, which also played into our EM equities equities, which we believe still offer attractive return potential. view, as EM stocks tend to benefit from a weaker USD. Key risks to our view are COVID-19 (potential new virus mu- tations and vaccine disappointments) and an earlier-than-ex- Latest view changes in equities pected tapering by central banks (in particular the US Federal In sectors, we no longer expect healthcare to outperform and Reserve). In the near term, however, equities could continue take profit on our view on construction materials. For the to consolidate should real bond yields move up more healthcare sector, fundamentals like earnings and valuation markedly, a risk we cannot rule out. as well as long-term drivers like better healthcare access in EM and an aging population remain intact. Yet, as the global Over the last month, the rotation trade out of growth stocks, economy re-accelerates along with potential further upticks the “winners” during the pandemic, into value stocks gained in yields, the quality growth healthcare sector – which normally further speed amid rising yields. Yields moved higher driven underperforms when activity indicators like purchasing man- by bigger-than-expected stimulus in the USA, progress in agers’ indices rise – is at risk. In addition, risks such as terms of vaccinations and rising inflation expectations. We higher corporate taxes or more regulation remain an overhang. continue to expect that a gradual, growth-driven rise in yields Overall, this quality growth sector remains attractive in the will lead to a rotation into segments that benefit from the re- long term, but for now there are more promising market opening of economies. We therefore retain our preference segments (e.g. financials) to gain exposure to. Within EM, for the financials and materials sectors as well as, from a re- we turn neutral on China and underperform on Malaysia. Our gional standpoint, Germany and the UK. view on the Eastern Europe, Middle East and Africa region is now neutral (from underperform) as fundamentals have In a portfolio context, we took profit on our overweight in improved, while valuation remains attractive. emerging market (EM) equities, shifting portfolio allocations (12/03/2021) back to strategic levels as we are less constructive on index

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 13 Alternative investments Listed real estate should lag equities

A reflationary environment and the reopening of economies should create interesting investment opportunities for hedge funds. Our Trading Conditions Barometer suggests a supportive environment for cyclical strategies. We expect listed real estate to continue lagging equities. Rising long-term rates are not reflected in performance and structural headwinds persist.

Sarah Leissner Trading conditions supportive of cyclical strategies Real Estate Strategist Anand Ashok Datar Hedge Fund & Private Equity Strategist

Hedge funds: Reflationary environment is supportive Hedge funds continue to navigate the rising yield environment well. Long/short equity strategies performed best in recent weeks, benefitting from investors’ rotation out of growth into value sectors and regions. In contrast, relative value lagged as higher rates volatility presented a headwind. Despite a re- cent pause, our Trading Conditions Barometer still suggests conducive conditions for cyclical strategies. We remain con- structive on opportunistic long/short equity and discretionary Last data point: 05/03/2021. Historical performance indications and financial market scenarios are not reliable indicators of current or future performance. Source: Bloomberg, macro strategies that focus on the reflation trade and the Credit Suisse ongoing rotation into sectors and regions that benefit from the reopening of economies. As traditional fixed income in- vestments face limited return prospects from a historical Real estate: Expected to lag equities perspective, we highlight private yield alternatives, particularly Listed real estate has lagged global equities since the begin- strategies that focus on consumer loans and mid-market ning of February, but absolute performance has been surpris- companies. These areas of the market are typically inacces- ingly resilient against the backdrop of a significant increase sible to traditional investors and offer a yield pick-up and in- in US long-term bond yields. Structurally robust, but expensive terest rate protection. sub-sectors such as logistics corrected the most, while cyclical sectors such as office and retail benefitted from the anticipat- ed reopening of economies. We continue to expect limited upside potential from listed real estate. The recent yield in- crease is not yet fully reflected in performance, in our view, and should ultimately hurt the rate sensitive sector due to higher financing costs and lower valuations in underlying property markets. Another significant rise in interest rates could exacerbate the pressure. In addition, continued struc- tural headwinds from e-commerce and remote working as well as potential regulatory headwinds in the USA pose further downside risks. (11/03/2021)

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 14 Foreign exchange More cautious on low yielding currencies

We turn neutral on the USD DXY. The Fed is more comfortable with recent rate rises, which should provide support against lower yielding currencies such as the EUR, JPY and CHF. The CAD, GBP and NOK remain our preferred currencies against the USD in G10. In emerging markets, we favor the RUB, KRW and CNY.

Luca Bindelli Further upside likely in EM FX Head of Fixed Income and Currency and Commodity Strategy Although our short-term outlook for the USD DXY is now neutral, we continue to consider the cyclical exposure The USD was supported against other major currencies over emerging market foreign exchange (EM FX) provides to be the last month. Going forward, we maintain that as the Fed- attractive. The fundamental picture in EM remains largely eral Reserve (Fed) keeps policy rates close to zero, there is unchanged: Inflation in most EM economies has bottomed little room for sustained gains in the USD. However, with the out, which has led to a hawkish repricing of monetary policy Fed seemingly more willing to tolerate higher yields, the USD expectations. This should further support the carry advantage may remain supported for some time, as the date of the Fed’s of EM FX against the USD. Additionally, the economic outlook first expected interest rate hike is brought forward and, as a is improving and external positions remain solid. Generally, result, US yields rise faster in the front-end maturities than the fundamental picture and positioning look healthier than in the Eurozone or Switzerland. With this in mind, we think in 2013 in light of the recent rise in US rates. The CNY, KRW that further USD weakness will be delayed and prefer to turn and RUB remain our preferred currencies in EM. However, neutral on the USD against lower yielding currencies such as we neutralize our positive view on the BRL. The currency has the EUR, CHF and JPY. We have thus neutralized our suc- been under severe pressure in recent weeks due to fiscal as cessful short USD DXY view. well as political concerns. Yet, developments on the funda- mental side look supportive. Rising inflation led to a hawkish Keep positive cyclical bias repricing of monetary policy. Terms of trade and the trade While we see more balanced risks for the USD against low balance saw additional improvements, but all failed to support yielding currencies, we are more optimistic on cyclical and the BRL meaningfully. We remain positive on the RUB, with commodity currencies against the USD. A global recovery is our main arguments largely unchanged: Risk-adjusted carry underway, also supported by the spillover effects of US fiscal remains attractive and with inflation rising, a resumption of expansion, which should benefit currencies exposed to global the easing cycle is unlikely. The trade balance and economic growth. Moreover, with global reflation set to continue and momentum are improving further. As for USD/Asia FX, we commodity prices likely to remain supported through an ongo- expect that the downward bias, albeit diminished, will remain. ing rebalancing of supply and demand, we still favor currencies Our preferred currencies are the CNY and KRW. such as the GBP, NZD, CAD and NOK, which we think will (12/03/2021) benefit most in this environment.

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 15 Forecasts At a glance

More information on the forecasts and estimates is available Credit: Selected indices on request. Past performance is not an indicator of future Yield Spread Duration 3M TR 12M TR fore- performance. Performance can be affected by commissions, (%) (bp) (years) forecast* cast* fees or other charges as well as exchange rate fluctuations. BC Global Aggregate 1.11 33 7.31 -0.10% 0.10% BC Global Treasuries 90.73 8.49 -0.30% -0.45% BC Global IG Corp 1.69 98 7.19 0.04% 0.17% Central bank rate/10-year government bonds BC Global HY Corp 4.71 382 4.23 0.45% 1.80% CB rate 10Y JPM EMBI Global Di- 5.15 350 7.43 0.75% 3.00% yield versified HC in % Spot 3M 12M Spot 3M 12M CHF -0.75 -0.75 -0.75 -0.27 -0.20 -0.20 BC = Barclays Capital, IG= Investment Grade, JPM = JP Morgan (EMBI+). Index data as of 16/3/2021. *Forecast as on 16/3/2021 EUR -0.50 -0.50 -0.50 -0.34 -0.20 -0.20 These forecasts are no reliable indicators of future performance. Source: Bloomberg, USD 0.13 0.00-0.25 0.00-0.25 1.62 1.80 2.00 Credit Suisse GBP 0.10 0.10 0.10 0.79 0.70 0.90 AUD 0.10 0.10 0.10 1.72 1.70 1.80 JPY -0.10 -0.10 -0.10 0.10 0.10 0.10 Foreign exchange Spot 3M 12M Spot rates are closing prices as of 16/3/2021. Forecast date 11/3/2021. These EUR/USD 1.19 1.20 1.22 forecasts are no reliable indicators of future performance. Source: Bloomberg, Credit Suisse/IDC USD/CHF 0.93 0.92 0.92 EUR/CHF 1.10 1.10 1.12 USD/JPY 109.11 108.00 106.00 Equities EUR/GBP 0.86 0.84 0.84 Index Spot P/E Div. y. 3M* 12M* GBP/USD 1.39 1.43 1.45 (%) AUD/USD 0.78 0.78 0.79 MSCI AC World** 1,675 19.4 2.2 1,680 1,780 USD/CAD 1.25 1.23 1.20 US S&P 500 3,963 23.0 2.1 3,955 4,135 EUR/SEK 10.16 10.10 10.20 Eurostoxx 50 3,851 18.9 2.5 3,875 4,035 EUR/NOK 10.09 9.80 9.60 UK FTSE 100 6,804 14.6 4.3 6,870 7,160 EUR/PLN 4.59 4.57 4.59 Japan Topix 1,982 18.6 2.1 1,945 2,035 USD/CNY 6.50 6.42 6.38 Australia S&P/ASX 6,827 20.5 3.8 6,800 7,060 USD/SGD 1.34 1.33 1.31 200 USD/KRW 1131.75 1090.00 1080.00 Switzerland SMI 10,944 18.3 2.8 11,055 11,505 USD/INR 72.46 72.50 71.80 MSCI Emerging Mar- 180,260 15.2 2.3 181,500 192,500 USD/BRL 5.63 5.55 5.60 kets** USD/MXN 20.65 20.60 21.00

Prices as of 16/3/2021 . *Forecast as on 11/3/2021 . **Gross return (incl. dividends). Spot rates are as of 17/3/2021 These forecasts are no reliable indicators of future performance. Source: Bloomberg, These forecasts are no reliable indicators of future performance. Source: Bloomberg, Datastream, Credit Suisse/IDC Credit Suisse/IDC

Commodities Real GDP growth and inflation Spot 3M* 12M* GDP Inflation Gold (USD/oz) 1738 1750 1700 growth Silver (USD/oz) 25.9 27 27 in % 2020 2021 2022 2020 2021 2022 Platinum (USD/oz) 1212.6 1300 1250 CH -2.9 3.5 2.0 -0.7 0.3 0.4 Palladium (USD/oz) 2493 2400 2500 EMU -6.8 4.4 3.8 0.3 1.4 1.0 Copper (USD/ton) 8969 9500 8500 USA -3.5 5.7 3.5 1.2 2.2 2.1 WTI Crude Oil (USD/bbl) 64.7 65 60 UK -9.9 5.5 7.5 0.9 1.6 1.8 Bloomberg Commodity index 183.3 187 186 Australia -2.4 4.1 3.0 0.9 1.5 1.5 Japan -4.8 1.7 1.9 -0.2 0.2 0.3 Spot rates are as of 17/3/2021 *forecast as on 11/3/2021 China 2.3 7.1 5.2 2.5 1.7 2.7 These forecasts are no reliable indicators of future performance. Source: Bloomberg, Credit Suisse/IDC Last forecast update 10/03/2021 These forecasts are no reliable indicators of future performance. Source: Bloomberg, Credit Suisse (17/03/2021)

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 16 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 Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 17 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 re- purchase 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 Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 18 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 Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 19 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 fin- ishes below the put strike price at expiration.

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 20 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 in- vestment 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 Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., March 2021 21 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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