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Staying focused on recovery

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

Japan investment strategy Japan asset allocation Global investment strategy Focusing on changes in the Turn neutral on investment grade Equities remain favored post-pandemic world bonds page 3 page 5 page 10

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 Focusing on changes in the post-pandemic world

Japan asset allocation 5 Turn neutral on investment grade bonds

Michael Strobaek Burkhard Varnholt Investment themes and solutions 7 Global Chief Investment Officer Chief Investment Officer – Swiss Univer- sal Bank Silver economy: Investment solutions

Equity markets began the new year much like they had ended Economics 9 the old one, heading higher. Neither the storming of the US Strong growth, easy policy Capitol nor the Democrat sweep in the Georgia Senate elec- tions managed to derail the rally. It seems that equity investors Global investment strategy 10 weighed the improved prospect of further fiscal stimulus more Equities remain favored strongly than worries over possible future tax rises.

In our view, the backdrop for the year ahead remains con- Special topic 11 ducive for risk assets. Although the resurgent COVID-19 Strategic Asset Allocation pandemic and related restrictions are dampening economic growth for now, the vaccine rollout supports our forecast of an acceleration in economic activity beyond the first quarter. Special topic 12 At the same time, recent worries over a potential rise in infla- Democratic sweep lowers risk of gridlock tion and a premature tightening of Fed policy seem exagger- ated. Thus, we retain an overweight allocation to equities in a portfolio context, expressed through an overweight in Fixed income 13 emerging market equities. We also keep an overweight allo- Eyes on yield curve steepening cation to commodities. Taking a more nuanced position for an eventual economic recovery, we now add cyclical and value Equities 14 positions to portfolios. Specifically, we favor the UK equity Adding value and cyclicality market, which is attractively valued and geared strongly to commodities and pharmaceuticals. Moreover, we add finan- cials to our preferred sectors, as they should benefit from Alternative investments 15 higher bond yields. At the same time, return expectations in Expect real estate to underperform equities various credit segments have diminished. Also, we still expect the USD to eventually continue weakening. Foreign exchange 16 As part of our robust investment process, we fine-tune our USD consolidation unlikely to alter downtrend tactical views at least once a month. Once a year, we also subject our Strategic Asset Allocation (SAA) to a thorough Forecasts 17 review to ensure that client portfolios remain on a strong At a glance foundation. In the pages ahead, we look at this year’s SAA adjustments. Editorial deadline: 21 January 2021 Enjoy the read!

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 2 Japan investment strategy Focusing on changes in the post-pandemic world

Policy support is expected to be prolonged as the global economy enters a phase of full-fledged recovery. Long-term trends and investment themes are likely to attract considerable investor at- tention in the post-pandemic landscape.

Soichiro Matsumoto Focus turns to social cohesion and addressing widening Chief Investment Officer Japan domestic wealth disparities In the post-pandemic world, the spread of globalism, which Monetary and fiscal policy support set to be prolonged has traditionally prioritized economic efficiency, will slow down, The suppression of economic activity in light of the spread of while efforts to heal the wounds of widening inequalities are the COVID-19 outbreak has triggered a deflationary shock likely to receive further impetus. The reason for this is that emanating from the significant demand slump and, conse- as inequality begets and solidifies social stratification and so- quently, the widened supply-demand gap. Should the restric- cial dynamism withers, the economy loses its ability to achieve tions put in place to prevent the spread of infections extend growth in the long term. further, there are concerns that it could potentially lead to a build up of deflationary expectations in the economy. In such We believe that the middle class, which has not been blessed an eventuality, individuals would in general refrain from invest- with the benefits of the growth precipitated by globalization, ing and consume even if they have sufficient assets and funds requires some succor. In addition to social infrastructure de- at their disposal. velopment, policymakers are likely to consider minimum wage increases, expansion of social security programs, and low- One of the most important lessons the world has learned from cost access to higher education. By implementing such pro- Japan’s “lost decade“ is that it is difficult to escape a defla- grams, society will be able to once again achieve a stable tionary mindset once it becomes widespread. How do we level of cohesion. avert such a long-term risk? Arguably, a key prescription would be to prolong the supportive monetary and fiscal poli- Japan’s slow-paced economic recovery cies. The year 2021 will likely be a year of recovery for the Japanese economy. However, the speed of such growth will Global economic recovery rolls in remain relatively slow. This is because, in addition to the Apart from monetary easing, aggressive fiscal stimulus mea- country’s low potential growth rate due to demographic fac- sures will play their part in boosting the global economic re- tors, Japanese consumers retain a strong deflationary mind- covery into the second half of 2021 and beyond. Given the set, even if deflation itself has yet to rear its head. Even constraints of COVID-19 related restrictions, consumer though these consumers have money on hand, they are not preferences seem to have shifted from services to goods confident enough about the future to be aggressive in their consumption. As a result, business sentiment in manufacturing spending and investing. is showing signs of recovery, and ordering activity trend seems to be improving too. In addition, the expansion of the medical facilities to deal with the spread of infectious diseases may not be sufficient. As Widespread vaccinations and expansion of medical facilities a result, stepping on the gas pedal of economic stimulus may are expected to bolster economic activity further. We reckon prove difficult. the pace of economic recovery will, in particular, accelerate in Asia and elsewhere considering the countries’ more effec- Expected returns back to average tive management of the health crisis. In major developed regions, share price growth has outpaced economic and corporate earnings growth for the past several years. A significant portion of this growth may be explained by rising valuations. Excess stock yields relative to interest

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 3 rates have remained at a steady level, so it would not be ap- Accelerating changes related to the pandemic propriate to say that valuations are currently in bubble territory 1. Investment opportunities provided by a receding (overvaluation). globalism Political commitments designed to deal with Japan’s social However, real interest rates have already fallen to record lows, fragmentation are expected to provide long-term investment and potential further upside to stock valuations has diminished. opportunities. Strategies on which we are currently focusing Expected returns in 2021 are likely to show a greater regres- include infrastructure investment funds, private equity and sion to the mean compared to the previous year. the long-term themes discussed in the our “Angry societies – Multipolar world” Supertrend. Recommended investment strategies 2. Investment lessons: Increased awareness of risk The experience of having lived through an entirely unpre- hedging dictable pandemic has provided an important lesson for in- A growing awareness of the importance of risk preparedness vestors. Investors who are now accustomed to the “great is expected to lead to greater global asset diversification as moderation” have become more conscious of hedging their part of long-term investments. This is because such a strategy risks. We believe that the market has rediscovered the signif- can be expected to effectively stabilize returns without incur- icance of global asset diversification as part of a strong long- ring a high additional cost. term investment strategy. 3. Investment themes related to the advent of a new Strategies related to prolongation of policy support digital society measures We believe the experience of the pandemic will cause a sig- As monetary policy is prolonged, investors should look toward nificant change in the way people interact with each other on alternative strategies designed to secure yield. Every investor a socio-economic level. The inexorable march of digitalization will have a greater need to look for investments that convert is one such change. Our Supertrends investment framework an acceptable level of risk into yield. This includes range- covers a number of investment themes and strategies related trading in currency markets, where interest rate differentials to this topic. are narrowing and the risk of large fluctuations is receding. 4. Investment opportunities linked to full-scale efforts Equity investing that fits within the framework of long-term to improve sustainability themes – ones that are expected to benefit from the transition Having experienced a pandemic, the global community will to a new economic system after the COVID-19 crisis – re- be more amenable to accepting the burdens imposed by mains attractive. Gold is also likely to continue to attract atten- sustainability measures. One of the best examples of the tion as a risk hedge. above corresponds to the efforts to create a carbon-free so- ciety. The adoption of investment metrics that incorporate an Strategies to capitalize on the kick-start of economic awareness of environmental, social, and governance (ESG) recovery criteria will also gain prominence. Additionally, our “Climate change – Decarbonizing the world“ Supertrend provides inter- As the economy recovers while interest rates remain low, in- esting investment ideas related to this theme. vestment in credit (i.e. corporate bonds) will become more attractive. In particular, there are several countries in Asia that have been more successful in controlling the spread of Reaffirming the appeal of our Supertrends long-term infections, and US dollar-denominated bonds issued by the investment themes companies in this region may constitute an effective strategy Having experienced a pandemic, our society appears to be for yield-seeking investors. changing at an accelerating pace. This provides an opportu- nity to reaffirm the appeal of our Supertrends, the long-term investment themes advocated by Credit Suisse. The economic recovery and changing consumption styles are expected to increase investor interest in economically sensitive value stocks, as well as equities that fit the themes based on Examining tail risks: Unbridled inflation and rising inter- new values. Provided companies become more aggressive est rates in M&A and other investments designed to reform their busi- In the wake of the pandemic, global debt has ballooned to ness structure, the attractiveness of private equity as an in- unprecedented levels. Thanks to historically low interest rates, vestment will likely improve. the burden of this debt looks manageable. However, investors should be aware of the associated risks. Unbridled inflation and a sharp rise in interest rates will continue to be tail risks for the market. (20/01/2021)

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 4 Japan asset allocation Turn neutral on investment grade bonds

We remain overweight equities

Soichiro Matsumoto Investment map [regions vs. asset classes] Chief Investment Officer Japan

Investment grade bonds moved to neutral Investment grade bonds have shown steady performance due to expectations of an ongoing economic recovery. We believe that current credit spreads have largely priced in market ex- pectations, and thus lower our allocation to investment grade bonds to neutral.

Maintain overweight in equities Equity markets have delivered strong returns, factoring in expectations of an economic recovery. However, as the re- covery is expected to accelerate in the second half of 2021, Source: Credit Suisse we retain an overweight allocation to equities in a portfolio (20/01/2021) context, expressed through an overweight in emerging market equities.

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 5 JPY international TAA (balanced) Balanced TAA Vs. benchmark Benchmark SAA November January Change November January Liquidity 1.5% 2.0% 0.5% -3.5% -3.0% 5.0% JPY 1.5% 2.0% 0.5% -3.5% -3.0% 5.0% Fixed income 47.5% 46.5% -1.0% 0.0% -1.0% 47.5% JPY 2.5% 2.5% 0.0% -1.5% -1.5% 4.0% Global Corporates 34.0% 33.0% -1.0% -0.5% -1.5% 34.5% Global High Yield 3.0% 3.0% 0.0% 0.0% 0.0% 3.0% Emerging Markets USD 4.0% 4.0% 0.0% 1.0% 1.0% 3.0% Emerging Markets LC 4.0% 4.0% 0.0% 1.0% 1.0% 3.0% Global Convertibles 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity 44.0% 44.5% 0.5% 1.5% 2.0% 42.5% Japan 15.5% 15.5% 0.0% -1.0% -1.0% 16.5% World (ex. Japan) 28.5% 29.0% 0.5% 2.5% 3.0% 26.0% Switzerland 1.5% 0.5% -1.0% 1.0% 0.0% 0.5% Euro Zone 2.5% 2.5% 0.0% 0.0% 0.0% 2.5% North America 12.5% 12.5% 0.0% 0.0% 0.0% 12.5% United Kingdom 1.0% 2.0% 1.0% 0.0% 1.0% 1.0% Australia 0.5% 0.5% 0.0% 0.0% 0.0% 0.5% Emerging Markets 4.5% 5.0% 0.5% 1.5% 2.0% 3.0% LatAm 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% APAC 4.5% 4.5% 0.0% 2.0% 2.0% 2.5% EMEA 0.0% 0.5% 0.5% -0.5% 0.0% 0.5% Supertrends 6.0% 6.0% 0.0% 0.0% 0.0% 6.0% Silver Economy 2.5% 2.5% 0.0% 0.0% 0.0% 2.5% Anxious Societies 2.0% 2.0% 0.0% 0.0% 0.0% 2.0% Millennials' Values 1.5% 1.5% 0.0% 0.0% 0.0% 1.5% Alternative investments 7.0% 7.0% 0.0% 2.0% 2.0% 5.0% Real Estate 2.5% 2.5% 0.0% 0.0% 0.0% 2.5% Commodities 4.5% 4.5% 0.0% 2.0% 2.0% 2.5% Gold 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 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., January 2021 6 Investment themes and solutions Silver economy: Investment solutions

In this Supertrends report, we propose investment solutions for structural changes brought about by the aging of society, based on four sub-themes. The unique demands and high purchasing power of the elderly generation suggest there is room for market growth in a wide range of fields.

Maki Shimizu Individual stock picks Investment Strategist - Japan Strategy From the standpoint of an expanding healthcare market in response to a growing elderly population, we are exploring Demand unique to the elderly opportunities for investment in pharmaceutical companies, As part of our “Silver economy” Supertrend, we propose var- biotechnology companies, the dental industry, and medical ious investment opportunities falling under four sub-themes service companies, especially in major developed Western (healthcare, consumption, housing and pensions) pertaining countries. Within the healthcare sector, we have selected to structural changes brought about by the greying of the companies that demonstrate pricing power and an ability to population, which are expected to persist regardless of the provide comprehensive healthcare services in an increasingly prevailing global economic situation and political trends. cost-conscious environment. Individual stocks pertaining to the elderly consumption worthy of recommendation include First, medical infrastructure has become a strong focal point personal care product companies, as well as top companies for investors in the wake of the spread of COVID-19, and, in the e-commerce field and companies capable of responding over the long term, changes designed to provide more stable to the unique needs of the elderly, which are expected to in- medical services as the population ages will lead to increased creasingly benefit from the substantial spending power of el- demand across various industries. Next-generation technolo- derly consumers. gies are expected to play a major role in achieving both value and efficiency in the healthcare field. In terms of consumption, As demand for retirement funds and real estate is also unique we focus on the high purchasing power and unique demands to the current aging population, we are also examining com- of the elderly. The market for personal care and personal panies that operate senior housing and care facilities, as well medical devices is expected to grow along with the elderly as life insurance companies and asset management compa- population, and the digitalization of the elderly generation nies. For investors looking for fund-based solutions, we also which has occurred in the wake of COVID-19 will benefit e- recommend exchange-traded funds (ETFs) such as the Select commerce companies that capture this demand. In addition, Sector SPDR (Standard & Poor’s Depositary Receipt) funds if a COVID-19 vaccine becomes widely available and travel (healthcare, daily necessities and consumer goods). restrictions are eased, seniors with high purchasing power (19/01/2021) and large amounts of free time are expected to turn their at- tention to leisure and travel.

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 7 Supertrends Theme Detail Recommended solution Anxious societies – Inclusive AM One Global Security Stock capitalism Fund, CS Beneficiaries of Anxious Societies Selection Affordability Basis goods such as housing, healthcare and pension have become unaffordable for many people Employment Skilling, reskilling and upskilling are crucial steps as technical progress radically changes required skill set Personal security Everyday challenges such as the pandemic outbreak or cybersecurity are the most important pain points for people Infrastructure – Closing the Global Core Infrastructure Stock gap Fund, CS Infrastructure List Transport Developed markets have to invest in project replacements while emerging markets continue to spend on growth Energy & water Energy transition toward renewables to limit global carbon emission; Middle East faces an acute water shortage Smart cities As 68% of the world’s population will live in urban areas by 2050, cities must become smarter to handle this strong growth Telecom infrastructure As 5G will be the next major investment cycle for the mobile industry, mobile traffic may grow almost five- fold Technology at the service of AM One Global Security Stock humans Fund, CS Technology Selection Digitalization The number of connected devices is surging and thus edge computing is expected to gain traction in order to capture even more value from data Virtual reality Growing to the size of today’s smartphone market in the years ahead Artificial intelligence (AI) Material growth potential for home, industries and cities, digitalization, and healthtech and fintech markets Industry 4.0 Robots and automation are entering various non-industry sectors; demand for industry robots is rising Healthtech Digitalization solution, biotechnology and AI in product development and healthcare research Silver economy – Investing for Select Sector SPDR ETFs (Health- population aging care, Consumer Staples, Consumer Discretionary), CS Silver Economy Stocks Therapeutics & devices Biopharma and medical device companies to innovate around senior conditions such as heart disease & cancer Care & facilities Managed care organizations; hospitals and dedicated facilities to face increasing demand Health & life insurance Private pension gap in emerging markets and growing importance of private pension fund & insurance solutions Senior consumer choices High spending power of seniors to benefit consumer companies with senior-centric offerings Millennials' values AM One Global Security Fund, CS Millennials Favorites Sustainable business and invest- ESG overlay across the entire millennials stock universe to underpin the importance of sustainability ments Digital natives Being connected 24/7, having a strong preference for technology brands, driving an education technology revolution Fun, health & leisure A new way of living and spending with substantial growth potential in emerging markets Climate Change AM One Global Security Fund, CS Climate Change Choice Carbon-free electricity CO2-neutral electricity production and the replacement of coal-fired electricity as a key component of CO2 reduction Oil & gas transition pioneers Demand for fossil fuel remains high for now, while the transition pioneers will be leading the sector Sustainable transport Sustainable fuels, a switch to electric vehicles, more efficient engines and railroads will reduce greenhouse gas (GHG) emissions Agriculture & food A growing population and a high CO2 emission from the agriculture sector require efficiency gains

Source: Credit Suisse

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 8 Economics Strong growth, easy policy

Global GDP is set to grow 5.1% in 2021 after slumping in 2020. The composition of the services rebound will be highly consequential for investors and may fuel concerns of an inflation resurgence.

James P Sweeney Inflation likely to rise temporarily in H1 Chief Economist and Regional CIO Americas A persistent overshoot in inflation is a risk worth considering, Peter James Foley but not our base-case forecast. We expect US inflation to Economist briefly overshoot 2% in core and headline terms in the second quarter, before dropping below 2% in the second half. Euro- pean inflation will do something similar but at lower levels. The world economy is emerging from a deep pit. In 2021, Yet, some investors might observe rising growth, successful we foresee strong growth and easy policy. The output gap in vaccinations, and overshooting inflation this spring, and make industrial production is large but the one in services-heavy the argument about possible inflation risks for the second GDP is larger. Given little precedent for this, uncertainty is half, driving an inflation scare that could be consequential for largely about how much services can recover. The latest financial markets. vaccine news suggests constraints on services could be gone in major economies by year-end, lifting GDP and employment sharply. Central banks are likely to remain obdurate under such con- ditions. We expect a steady hand from the Federal Reserve and other major central banks in 2021. They are far more A more nuanced question is whether the supply of services likely to ease more, should rising long-term interest rates can rebound alongside demand without notable price pres- jeopardize the recovery, than become more hawkish in re- sures. As the year progresses, consumers – now with strong sponse to short-term developments. cash balances – will demand restaurant meals, tourist experi- ences, and other services. Yet, not all services will resume normal availability quickly. Many businesses have closed and Divergence in fiscal policy new ones might take time to set up. Surviving businesses Supportive monetary policy should be uniform, but there are may not resume full operations soon. Thus, some sectors differences in fiscal policies. In the USA, new pandemic relief may see excess demand relative to supply, resulting in price was passed late in 2020, addressing several important risks. pressures. Democratic control of both houses means the Biden adminis- tration can pursue further fiscal support. Fiscal policy will also remain supportive in Europe, with short-time and furlough Another important question is how fast workers can return. schemes continuing to support corporate incomes while Historically labor has returned quickly following recessions in keeping workers attached to their employers. In contrast, we cyclical sectors such as manufacturing and construction. But expect China to tighten fiscal policy this year, though it should services businesses take longer to rebuild. If demand for not deliver much of a headwind. In Latin America, those services picks up faster than supply can expand and workers economies willing or able to sustain fiscal support – Brazil, can be rehired, wage pressures on services might rise Chile, and Peru – should outperform those with more con- quickly, even amid high unemployment. strained policy, such as Mexico. (15/01/2021)

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 9 Global investment strategy Equities remain favored

We retain an overweight allocation to equities in a portfolio context, driven by emerging market equities. To further position for an eventual reacceleration of growth, we add exposure to UK equites and financials.

Walter Edelmann We increase portfolio allocations to the UK market to over- Chief Global Strategist weight. We expect the market to outperform the global equity index, as it is attractively valued and includes a relatively high The Credit Suisse Investment Committee (IC) maintains an share of cyclical sectors. Within sectors, global financials has overweight allocation to equities in a portfolio context, keeping been added to the sectors we consider attractive and expect emerging markets (EM) at overweight and developed market to outperform the global equity benchmark over our tactical equities at strategic allocations. The broad commodity index horizon. Yet, we now see listed real estate (REITs) as trailing (BCOM) is kept at overweight as well. EM equities and the overall equity market returns. Attractively valued financials BCOM have outperformed lately, and the IC expects invest- should benefit from higher bond yields, while the opposite ment conditions for these cyclical assets to remain favorable should be the case for REITs. as the vaccine rollout and additional fiscal stimulus in the USA should continue to help alleviate investor concerns about the Reduction in IG bonds new wave of virus infections. In fixed income, we still expect negative returns for govern- ment bonds, as recovery expectations are likely to push yields Cyclical recovery expectations justified higher. In credit, both investment grade (IG) bonds and EM In recent weeks, the dominating market themes have been hard currency (HC) bonds have performed strongly since the the Senate run-off elections in Georgia and the storming of surge in spreads at the start of the pandemic last year. As a the US Capitol. Though the latter was dramatic, markets re- result, their return outlook is reduced now. We still expect IG acted much more to the Democrats gaining a slim majority bonds to deliver a positive return, but now have a neutral ab- in the Senate, which raises the prospect of another large fiscal solute view on EM HC bonds due to their long duration. In stimulus package. Equity markets reacted with price actions portfolios, we keep our underweight allocation to government reflective of rising reflationary expectations, with cyclical bonds and reduce investment grade (IG) bonds from over- markets and sectors outperforming and value stocks outper- weight to the benchmark weight. EM HC bonds remain at an forming growth stocks. We expect more such price action overweight allocation for their diversification benefits. We this year. continue to view the USD as unattractive compared to other major currencies, including the EUR. Adding tactical position in UK equities The IC believes that the best way to position for a reacceler- ation of growth is by adding cyclical and value positions in Watch a video featuring the highlights of the portfolios, while retaining overweight positions in EM equities Credit Suisse investment strategy: and commodities. However, we also acknowledge that the www.credit-suisse.com/cio/film near-term macro outlook remains challenging, as the new coronavirus strains necessitate new lockdown measures. (18/01/2021) Therefore, instead of raising aggregate equity positioning further, we prefer accentuating tactical positions at the market and sector level.

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 10 Special topic Strategic Asset Allocation

Unprecedented fiscal and monetary stimulus following the COVID-19 pandemic-induced recession are expected to support real assets, particularly equities. On the other hand, stretched bond valuations imply very meager return potential for high-quality developed market debt. For our strategic asset allocation, both considerations lead us to increase equities, in turn reducing the fixed income allocation.

Walter Edelmann Introduction of emerging market corporate bonds Chief Global Strategist Contrary to developed market debt, we still see good return potential in the non-core bond allocation, as credit risk contin- Once a year following the update of our Capital Market As- ues to command a fair risk premium. However, we diversify sumptions (CMAs), we thoroughly review our Strategic Asset part of our emerging market (EM) bond allocation into EM Allocation (SAA). The COVID-19 pandemic shapes our corporate bonds, at the cost of reducing EM local currency macroeconomic outlook and thus has strong implications for debt. EM local currency bonds entail currency risks that may the SAA. Following the pandemic-induced recession, we ex- not be rewarded. pect the economic recovery to gain traction in coming years as economies catch up to their potential output and govern- Structural adjustments within equities ments continue to aid the recovery with strong fiscal mea- On the equity side, we make a number of structural adjust- sures. Monetary policy should remain extremely accommoda- ments. We identify long-term trends and themes as an impor- tive for a prolonged period, as rising government debt needs tant way to enhance return prospects, thus we make room to be financed and central banks, in particular the US Federal for a dedicated allocation to thematic equities. We also move Reserve, have signaled a greater tolerance for inflation. away from regional markets whose allocations across the different investment profiles have been too insignificant to Increased allocation to equities have a meaningful impact on the risk and return characteristics Equities and other real assets should benefit from the refla- of the SAA. We adjust downward the home bias in EUR and tionary process set in motion by the fiscal and monetary GBP currency profiles to enhance the SAA through more in- stimulus measures. As a result, we increase our allocation to ternational diversification. equities. The increase is partly financed by decreasing the allocation to core bonds, i.e. developed market government Finally, we remove the foreign exchange hedge for US equi- and investment grade corporate debt. The low interest rate ties. The hedge benefited non-USD portfolios last year as environment, combined with an elevated risk for an inflation the USD weakened. Our CMAs suggest that the USD should pick-up in the long run, suggests a rather unfavorable long- continue to soften, but not enough to warrant a permanent term return outlook for such high-quality bonds. Another part hedge. We thus prefer to implement our currency view tacti- of financing comes from a reduction in commodities: While cally rather than having a structural hedge in place. our view on commodities remains positive, we expect equities (15/01/2021) to deliver higher risk-adjusted returns.

With yields near zero, the potential of high-quality bonds to provide diversification in times of market stress has significant- ly diminished. In the SAA, we thus increase the allocation to protection-enhancing strategies within the hedge fund asset class, further reducing the core bond allocation.

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 11 Special topic Democratic sweep lowers risk of gridlock

The Senate run-off elections in Georgia significantly reduce the risk of policy gridlock in 2021. The current resurgence in virus infections will continue to weigh on GDP, but growth will be boosted by fiscal stimulus and should rebound strongly once the public health situation improves.

James P Sweeney and state and local governments. This would be the third Chief Economist and Regional CIO Americas substantial fiscal stimulus in the past 12 months, following Jeremy H Schwartz the USD 2.2 trn CARES act last year and the USD 900 bn US Economist bipartisan relief bill passed a few weeks ago. Xiao Cui US Economist The spending details are likely to change during negotiations, and we expect some of the more ambitious proposals to be The recent Senate run-off elections in Georgia delivered a scaled back. Much attention has been paid to potential USD blue sweep for the Democrats, who now control the presiden- 1400 direct payments to households, but we see this as an cy and both houses of Congress. Their majorities in Congress overly blunt policy in the current environment, with most are slim: in the House of Representatives, they have just an households in good shape financially and only a small portion 11-vote margin (out of 435), and the Senate is split 50–50, struggling. Joe Biden proposed tax hikes during the campaign, with the vice-president casting the tie-breaking vote. but we do not expect this to be a priority. Given elevated un- employment and uncertainty over the path of COVID-19, any Yet simply controlling the Senate opens some legislative tax changes are likely to be considered later in his term. possibilities for the Democrats. Importantly, the Senate ma- jority leader sets the agenda for debates and votes, increasing The new administration would still be able to implement poli- the chances for the Democrats to push initiatives that may cies on financial regulation, environmental rules, immigration have bipartisan support. and trade through executive orders.

The Democrats can also pursue policies through budget rec- Stronger growth trajectory onciliation, a procedure that can circumvent the Senate’s fili- After the Georgia run-off elections, fiscal policy has quickly buster rules, only requiring a simple 51-vote majority. Recon- shifted from gridlock to generous stimulus. This removes a ciliation can only apply to taxation and spending (no regulatory key downside risk to growth this year and is likely to lead to changes), and the legislation must be deficit-neutral beyond even greater strength once the COVID-19 outbreak is under a 10-year time horizon. control. Higher household income will help offset some of the near-term growth weakness due to the resurgence of Much improved prospects of fiscal stimulus COVID-19. This will also lead to a higher savings rate and Incoming President Joe Biden has announced a fiscal stimulus even healthier household balance sheets, which should further package that he will pursue soon after inauguration. It includes fuel a reacceleration in services spending later this year. USD 1.9 trn of spending on aid to households, businesses, (18/01/2021)

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 12 Fixed income Eyes on yield curve steepening

Further yield curve steepening will likely hamper government bond performance. Therefore, we stay underweight in portfolios. We reduce investment grade credits to a benchmark allocation as their risk-reward profile has become less convincing.

Luca Bindelli compensation for risk amid the steeper US yield curve. We Head of Fixed Income and Currency and Commodity Strategy retain our positive outlook for high yield (HY) bonds, favoring cyclical sectors, especially energy and metals & mining, as Benchmark yields have moved higher over the last month, well as consumer discretionary amid the prospect of further with the 10-year US Treasury yield climbing above 1%. A fiscal support and economic recovery. The Democrat majority fiscal stimulus package was announced at the end of last in the Senate will likely help support the market and thus a year, but in light of the future Democrat majority in the Sen- further moderate spread tightening of the HY segment. De- ate, the discussion about further fiscal stimulus has fueled spite the recent surge in leverage and tightening in bank expectations of more government bond supply and potentially lending standards, the realized default rate is showing signs higher inflation. Thus, the recent rise in 10-year yields came of normalizing, a trend we expect to continue. In Europe, we mostly from higher inflation expectations, while real yields prefer capital structure risks over credit risks. US lower risk continue to trade sideways. We think that government bond segments and selected emerging market (EM) corporates yields have further upside potential, but since short-term yields with BB-B rating are also preferred. For investors looking to remain anchored by the US Federal Reserve’s interest rate enhance yield, selected HY bonds that meet environmental, policy, any mover higher will likely occur mostly in long-term social and governance criteria offer an interesting option. yields, which would lead to a further moderate steepening of the yield curve. Overall, we consider government bonds to More cautious on EM HC be unattractive and remain underweight in a portfolio context. While global financial conditions remain very loose, we think We maintain a short-duration stance in the USA, the Eurozone emerging market hard currency (EM HC) bonds will be more and Switzerland and continue to favor US inflation-linked vulnerable to US yield rises going forward. Indeed, with EM bonds relative to nominal US government bonds. spreads not far from their lows following the great financial crisis, EM HC valuations are stretched and duration is at a Reduce IG to benchmark allocation historical high. As market positioning is at record highs and We still expect positive returns in global investment grade (IG) investor flows are continuing to accelerate, further strong credit amid policy support and the prospect of economic re- performance is less likely. Positive momentum may continue covery. However, after a strong performance since last March, in the short run, but the risk-reward on EM HC has deterio- we reduce our IG position to a benchmark allocation in a rated and we no longer expect significant positive returns. portfolio context as spreads are at record lows and offer less (15/01/2021)

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 13 Equities Adding value and cyclicality

Equity markets are benefiting from the improved growth outlook, with EM responding particularly strongly. We now expect UK and financial equities to outperform.

Philipp Lisibach base again. Last but not least, an economic reacceleration Head of Global Equity Strategy over the course of 2021 should support cyclical market ele- ments, as potentially higher yields are a major tailwind for Equity markets are off to a strong start in 2021. Emerging value segments, particularly financials. markets (EM), driven by EM Asia in particular, are continuing their upward path. Their gains have been fueled by an improv- France and real estate sector set to underperform ing economic growth outlook as investors expect further US We expect French equities to underperform global equities fiscal stimulus. Though the pandemic still clouds the near- due to a weak earnings picture and elevated valuation. term outlook, economic recovery becomes more tangible as Moreover, slow progress in the vaccine rollout could become the vaccine rollout gains speed. a headwind. A high number of new COVID-19 cases and extended government restrictions will further weigh on the The improved growth outlook has lifted inflation expectations country’s economic recovery. In addition, the luxury/consump- and yields. While higher long-term yields could eventually tion-oriented French equity market faces more downside risks dent the relative attractiveness of equities, the strong econom- in the near term, especially after its strong rally in recent ic outlook necessary to trigger this scenario should initially months. benefit the asset class, especially cyclical and value segments. We believe that the short-term outlook for listed real estate UK and financial equities to outperform has deteriorated and expect the sector to underperform We have tweaked our global equity strategy and believe that global equities. The negative impact from the pandemic is UK equities are best placed to take advantage of the current beginning to be gradually reflected in underlying real estate value rotation. Positioning is low, price momentum has im- markets, with increasing pressure on vacancy rates and rents. proved and, with the Brexit deal reached, a major overhang Rising interest rates pose further downside risks amid expec- has been lifted. The UK market’s sector composition is tations that the Joe Biden administration will introduce further skewed toward more mature value-oriented sectors that stimulus measures to bolster economic growth. should benefit once the pandemic eases. Thus, we expect UK equities to outperform. The coming weeks will see the release of earnings reports for Q4, which should mark the last negative quarter in this Financials lagged behind global equities in recent years, par- series. Expectations for the global equity aggregate are at ticularly in 2020. We believe that the recent rebound from –2.6% YoY, positively influenced by EM, where earnings are very depressed levels is justified and that the sector has fur- expected to rise by 16.9%, while US earnings are expected ther catch-up potential. First, the sector remains attractively to be down about 6%. European markets and Japan are ex- valued even after the most recent outperformance. Second, pected to show double-digit earnings declines due to further structural headwinds could ease, broadening the investor strict lockdowns in Q4. (15/01/2021)

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 14 Alternative investments Expect real estate to underperform equities

We expect the real estate sector to underperform given several risks, including rising rates. Meanwhile, the investment environment for hedge funds remains conducive, leading to gains across styles. Commodities recorded strong gains lately except for precious metals. We retain a positive view, favoring diversified exposure with a slight cyclical tilt.

Jelena Kucenko allies ensures inventory draws. At the same time, potentially Head of Alternative Investments tighter regulation in the energy industry could lift production Stefan Graber costs. Meanwhile, the altered political landscape in the USA Head of Commodity Strategy proved an initial obstacle for gold, as nominal yields shifted higher. That said, we still think inflation expectations should Hedge funds: Gains across the board follow suit, capping real yields if not push them lower again, Hedge funds extended their gains in December, with all major attracting fresh investor flows. As such, we believe the pre- styles delivering positive returns. Notably, long/short strategies cious metals bull run still has legs, but the cycle is maturing. benefitted from a conducive environment for security selection. Further supply downgrades amid unfavorable weather have As we look toward an eventual easing of the pandemic, our lifted agricultural prices lately. Trading Conditions Barometer highlights favorable investment conditions for cyclical strategies, supported by improving liq- Real estate: Expected to underperform equities uidity conditions. Fundamental managers can exploit both Listed real estate delivered a small positive return in Decem- long and short opportunities given the combination of elevated ber, but lagged global equities. As long-term interest rates in equity valuations and diverging regional paths to a post-pan- the USA rose on an expectation of new stimulus measures, demic world. We also highlight the relative value style, which the sector continued to underperform equities this year. We should navigate the rise in long-term government bond yields believe that the short-term outlook has deteriorated and successfully and provide a viable alternative to long-only fixed therefore now expect real estate to underperform global eq- income investments. uities. Vaccine news have triggered a recovery in cyclical sub- sectors such as retail and office, but further upside is limited Commodities: Reflation theme gathers steam given less attractive valuations and continued structural Commodities continued to recover into year-end and started headwinds related to e-commerce and work-from-home ar- 2021 with fresh gains, led by cyclical segments. The prospect rangements. Real estate companies’ earnings growth contin- of more US stimulus boosted prices and sentiment despite ues to weaken as the negative impact from the pandemic is near-term concerns over the pandemic. Although the recent gradually reflected in underlying markets, with signs of rents pace of gains feels slightly excessive, we continue to see an falling. Rising interest rates and a higher likelihood of stricter attractive outlook for the asset class. Energy/oil in particular regulation of the real estate industry in the USA pose further should have some further medium-term upside as proactive downside risks. (15/01/2021) supply management by Saudi Arabia as well as OPEC and

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 15 Foreign exchange USD consolidation unlikely to alter downtrend

Hopes of further US fiscal stimulus have temporarily led to a consolidation in the USD. Yet, we maintain our negative USD view over 3–6 months. In emerging markets, we prefer Asian currencies, in particular the CNY and KRW. We are more cautious on the MXN.

Luca Bindelli More constructive on CAD and GBP Head of Fixed Income and Currency and Commodity Strategy The Brexit deal of December 2020 leaves room for a senti- ment shift that could allow GBP/USD to reach its early 2018 The surprise Senate sweep by the Democrats in early January peak at around 1.43 in the next three months. Separately, has fueled hopes of larger fiscal stimulus, which has support- the fact that Saudi Arabia announced a surprise cut in oil ed long-dated US yields. While this has led to a short-term production should support oil prices and hence the CAD. consolidation of the USD index (DXY) in January after a 2% Moreover, with Canada a close trading partner of the USA, depreciation in December, we think that the USD is unlikely the prospects of greater US fiscal stimulus should help bolster to find much further support. Even in the face of stronger Canadian exports and the overall economy in the next few fiscal stimulus, the new policy framework of the Federal Re- months. Given the supportive backdrop, we turn negative on serve (Fed) increases the prospects of stable to lower US USD/CAD, with forecasts of 1.23 in 3M and 1.20 in 12M. real yields. Our economists do not anticipate a sustained rise in US inflation beyond the short term in 2021. As such, the Prefer Asia within positive EM FX view Fed should keep US short-term rates anchored, limiting the We continue to see further scope for a broad appreciation of scope for USD yield support. In the absence of higher relative emerging market (EM) currencies versus the USD. Even real rates, we do not think the USD will benefit. Also, the though the EM economic recovery has peaked, economic case for a broad global recovery remains, and any US stimulus activity still looks solid relative to developed markets. External should also benefit the global economy through improved positions remain in good shape and non-resident flows are sentiment and trade in 2021. This should favor more cyclical still supportive. In addition, with inflation bottoming and food currencies to the expense of the USD. Having said this, short- prices increasing, EM central banks seem to have less scope term risks related to new COVID-19 variants and extended for dovish surprises going forward. This should be favorable USD short positioning remain and could still support the USD for EM currencies’ interest-rate advantage (carry) against the in coming weeks. USD. Additionally, fundamental valuation and technical mo- mentum remain supportive. We turn negative on the MXN as Renewed lockdowns have created short-term risks to the EU economic activity in Mexico is rolling over faster than else- economy, which might limit the scope for EUR appreciation. where. The trade balance as well as terms of trade are dete- However, with the EU recovery fund now ready and vaccines riorating, and the government’s reluctance to increase public being rolled out, we think possible bouts of weakness should spending will further slow the speed of recovery. The RUB, be temporary. We maintain our EUR/USD target of 1.24 in BRL, CNY and KRW remain our preferred currencies. 3M. (15/01/2021)

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 16 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 0.87 34 7.30 -0.10% 0.30% BC Global Treasuries 0.54 10 8.67 -0.30% -0.50% BC Global IG Corp 1.39 96 7.37 0.50% 2.00% Central bank rate/10-year government bonds BC Global HY Corp 4.50 405 4.12 0.75% 3.00% CB rate 10Y JPM EMBI Global Di- 4.76 359 7.65 0.30% 1.25% yield versified HC in % Spot 3M 12M Spot 3M 12M CHF -0.75 -0.75 -0.75 -0.45 -0.40 -0.30 BC = Barclays Capital, IG= Investment Grade, JPM = JP Morgan (EMBI+). Index data as of 19/1/2021. *Forecast as on 14/1/2021 EUR -0.50 -0.50 -0.50 -0.53 -0.40 -0.30 These forecasts are no reliable indicators of future performance. Source: Bloomberg, USD 0.13 0.00-0.25 0.00-0.25 1.09 1.30 1.40 Credit Suisse GBP 0.10 0.10 0.10 0.29 0.40 0.50 AUD 0.10 0.10 0.10 1.08 1.10 1.20 JPY -0.10 -0.10 -0.10 0.04 0.00 0.00 Foreign exchange Spot 3M 12M Spot rates are closing prices as of 18/1/2021. Forecast date 14/1/2021. These EUR/USD 1.21 1.24 1.25 forecasts are no reliable indicators of future performance. Source: Bloomberg, Credit Suisse/IDC USD/CHF 0.89 0.87 0.88 EUR/CHF 1.08 1.08 1.10 USD/JPY 103.75 102.00 100.00 Equities EUR/GBP 0.89 0.87 0.86 Index Spot P/E Div. y. 3M* 12M* GBP/USD 1.37 1.43 1.45 (%) AUD/USD 0.77 0.78 0.79 MSCI AC World** 1,619 20.1 2.2 1,650 1,740 USD/CAD 1.27 1.23 1.20 US S&P 500 3,799 23.4 2.2 3,855 4,015 EUR/SEK 10.13 10.10 10.20 Eurostoxx 50 3,595 18.1 2.7 3,660 3,800 EUR/NOK 10.35 10.40 10.30 UK FTSE 100 6,713 15.2 4.4 6,925 7,130 EUR/PLN 4.53 4.57 4.59 Japan Topix 1,856 17.5 2.3 1,880 1,950 USD/CNY 6.49 6.42 6.25 Australia S&P/ASX 6,743 20.2 3.9 6,770 7,015 USD/SGD 1.33 1.31 1.28 200 USD/KRW 1101.26 1060.00 1010.00 Switzerland SMI 10,877 18.9 2.8 10,985 11,380 USD/INR 73.17 73.00 72.00 MSCI Emerging Mar- 182,704 16.2 2.2 186,000 196,000 USD/BRL 5.35 5.00 4.80 kets** USD/MXN 19.68 20.50 21.50

Prices as of 19/1/2021 . *Forecast as on 14/1/2021 . **Gross return (incl. dividends). Spot rates are as of 20/1/2021 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) 1850 1900 2200 growth Silver (USD/oz) 25.5 27 30 in % 2020 2021 2022 2020 2021 2022 Platinum (USD/oz) 1099.9 1100 1200 CH -3.2 3.5 2.0 -0.7 0.3 0.2 Palladium (USD/oz) 2372 2400 2500 EMU -7.2 4.9 4.2 0.3 0.6 1.0 Copper (USD/ton) 7955 8100 7900 USA -3.6 4.8 3.5 1.2 2.0 2.1 WTI Crude Oil (USD/bbl) 53.4 54 56 UK -10.7 3.2 8.5 0.9 1.4 1.8 Bloomberg Commodity index 170.9 176 180 Australia -2.9 3.5 3.2 0.8 1.5 1.5 Japan -5.0 1.7 1.9 -0.1 0.1 0.3 Spot rates are as of 20/1/2021 *forecast as on 14/1/2021 China 2.3 7.1 5.2 2.5 1.1 1.7 These forecasts are no reliable indicators of future performance. Source: Bloomberg, Credit Suisse/IDC Last forecast update 13/01/2021 These forecasts are no reliable indicators of future performance. Source: Bloomberg, Credit Suisse (20/01/2021)

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., January 2021 17 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, 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. BC IG Corporate USD The IG Financials Index tracks the fixed-rate, investment-grade, dollar-denominated financials 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., January 2021 18 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., January 2021 19 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., January 2021 20 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., January 2021 21 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., January 2021 22 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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