Global CIO Office Weekly focus | page 3 Invest in the rise of a touchless economy Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd. | 16/07/2021, 14:02, UTC Greater confidence, fewer surprises on recovery Major economies are looking to exit the COVID-19 pandemic on the back of a successful mass vaccination program. Growing confidence in the ongoing economic recovery has led to higher growth expectations. This implies fewer surprises await us on the growth front. Many would like to believe that more surprises offer the poten- tial to make higher returns on risky assets. That said, it is a bit difficult to spot sources of major surprises on fundamentals and policies for now. Meanwhile, historical high valuations of risky assets are set to be normalized, in our view. Hence, on Soichiro Matsumoto a portfolio level, it is prudent to balance expectations on risk Chief Investment Officer Japan and growth. For equity investors, it might be an opportunity to consider our long-term thematic solutions such as the Supertrends and environmental, social and governance (ESG) oriented invest- ments in order to avoid the cyclical trap of portfolio manage- ment. Important Information: This report represents the views of the Investment Strategy Department of CS and has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. It is not a product of the Credit Suisse Research Department even if it contains published research recommendations. CS has policies in place to manage conflicts of interest including policies relating to dealing ahead of the dissemination of investment research. These policies do not apply to the views of Investment Strategists contained in this report. Please find further important information at the end of this material. Japan Q2 2021 earnings season preview Earnings optimism remains high as the market’s focus shifts back to corporate results. We expect emerging markets (EM) and the Eurozone to lead the earnings growth, alongside the energy, consumer discretionary, industrials, financials and materials sectors. Laura Smith for consumer discretionary, a beneficiary of the ongoing Global Equity Strategist economic reopening amid higher retail sales and disposable income. The sub-industries to watch are automobile manufac- This year has shaped up to be stellar for earnings, aided by turers and luxury goods. Industrials are poised to make an the ongoing global economic recovery and favorable base earnings comeback amid growing industrial output and recov- effects. Earnings have also been a key driver of total returns ering demand, in addition to a positive outlook in light of US this year. Earnings optimism remains high as the market’s President Joe Biden’s infrastructure plan. Real estate and focus shifts back to corporate results. In Q2, most sectors utilities are still on track to deliver single-digit YoY growth for (in developed markets) are expected to deliver positive results, the quarter. We also expect technology companies to post and we expect cyclicals to drive most of the earnings growth. robust results. According to Factset, as of 14 July 2021, the MSCI World’s earnings per share (EPS) for Q2 2021 is projected to grow During the Q1 earnings period, share price reactions were by over 90% year on-year (YoY). relatively muted despite positive surprises as strong expecta- tions were likely already priced in. There were even declines We expect EM and the Eurozone to lead the earnings growth, in some cases, though this was likely profit-taking after ex- while Switzerland will likely lag given its defensive profile. pectations were met and the shares typically recovered Solid growth in EM will likely come from higher commodity quickly. In our view, this pattern could be repeated again in prices. In terms of YoY EPS growth, the energy, consumer Q2 in light of the robust positive expectations for overall discretionary, industrials, materials and financial sectors are earnings. Moreover, given that earnings optimism is high, expected to be the bright spots in the Q2 earnings season. companies that surprise negatively could see added volatility and more sharp downward adjustments in price. In Q1, financials emerged as the clear winners in terms of earnings. Although it is still early in the reporting season, our Discussions regarding higher input costs and pricing power initial expectation that this trend would likely continue in Q2 will likely feature heavily in Q2 earnings calls. Additionally, has started to play out, as US banks posted solid results on corporate guidance will take center stage as the Q2 earnings improved revenues, robust investment banking activity and season unfolds, as companies move past the beginning of higher loan loss reserve releases. We currently have an out- the post-COVID-19 recovery period and into an earnings perform view on financials, and the sector remains one of our normalization phase for the rest of the year. Earnings expec- preferred ways to participate in the re-opening trade. tations for Q2 2021 are positive, and have been revised considerably upward, alongside the overall calendar year 2021 estimates. (15/07/2021) Energy has the highest YoY growth expectations for Q2, led by oil and gas companies, primarily due to base effects (negative EPS in Q2 2020). We also expect high EPS growth Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 16/07/2021, 14:02, UTC 2 Weekly focus Invest in the rise of a touchless economy The “touchless” economy is a new part of our Technology at the service of humans Supertrend. Uwe Neumann systems; and last but not least the internet giants, which may Equity Research Analyst - Telecom / Information Technology drive the technology to become the new normal. The first market (sensor and gesture technology) is probably the purest During the pandemic, people operated more or less in a way to invest in the trend. The gesture recognition market is “contactless economy,“ which led to new behaviors in various expected to grow at a compound annual growth rate (CAGR) areas. Online food delivery and doctor visits, contactless of 27% over 2020–25 to reach USD 32.3 bn in 2025 from payment services and the increasing adoption of smart home USD 9.8 bn in 2020, according to MarketsandMarkets hubs are just a few examples where consumers are increas- research. In addition, the touchless sensing market is expect- ingly adopting contactless services. The rise of the touchless ed to grow 17.5% during the same period to reach USD 15.3 economy has been driven by both the supply side (e.g. growth bn in 2025 from USD 6.8 bn in 2020. You can read more in digital technologies such as 5G, cloud platforms, artificial on this topic in our Research Alert, “Invest in the rise of a intelligence (AI) and data analytics) and demand-side factors touchless economy,” published on 13 July 2021. (e.g. the need for convenience and heightened awareness for health and safety). While those needs previously existed, Attractive growth in gesture recognition and touchless the pandemic has accelerated the adoption of touchless user sensing markets interfaces. Due to greater consumer awareness regarding (in USD bn) health and safety, for example, companies are increasingly 40 investing in the “human touch” in digital channels to improve 35 CAGR '20-25E 27% the experiences of their remote services. Consumers are now 30 32.3 spending more time than ever before at home and are looking 25 CAGR '20-25E for ways to make it as comfortable, frictionless (and touchless) 20 17.5% 15 as possible. In our view, this trend is here to stay as demand 15.3 for touchless services will only accelerate. 10 9.8 5 6.8 0 Sensor and gesture recognition market probably the Gesture recognition market Touchless sensing market purest way to invest in the trend 2020E 2025E We see five end markets as interesting areas of growth for Source: MarketsandMarkets, Credit Suisse the “touchless” economy: the sensor and gesture technology (15/07/2021) market; AI software enabling contactless services; semicon- ductors that provide the processing power; digital payment Investment Weekly | This material is for distribution in Japan only. Japan edition / Credit Suisse Securities (Japan) Ltd., 16/07/2021, 14:02, UTC 3 Special topic What would it take to turn positive on China equities? Are we approaching – or have we passed – peak pessimism toward China equities? We examine and explain why we are becoming less bearish toward China equities, though we are still some some time away from becoming fully constructive. John William Huia Woods 2-year average, suggesting that this could be a good time Chief Investment Officer - APAC for contrarians to start accumulating Chinese equities. How- ever, as a prerequisite for a rally, this is an unreliable measure There have been five instances over the past 12 years where with negative readings evident in only three of our five China equities have rallied by 20% or more. As such, the scorecard events. In any case, analysts have revised China’s “scorecard” approach can be useful in analyzing growth, liq- 2021 earnings estimates 7% lower in the year-to-date, uidity, earnings, and valuations as a way of assessing differ- compared with 8% upgrades for broader Asia equities. ences and/or commonalities in relation to current market conditions. Valuations Investors naturally prefer to buy China risk at its cheapest, Growth specifically when valuations are at their lowest. This is one of Forward-looking growth expectations – as represented by the most consistent indicators on the rally scorecard, with our Purchasing Managers’ Indices (PMIs) – appear to be an influ- absolute composite valuation series (comprising price to- ential component of equity market rallies in China.