GlobalCIOOffice - Credit Suisse · Japaninvestmentstrategy Equitiesofferattractiveyields, too Theprobabilityofarecessionremainslow. Recentquarterlyresultsvalidatecompanies’abilitytogeneratecashflows

Investing in resilient marketsInvestment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd. | Investment horizon: 3-6 months |

October 2019

Global investment strategyExpect further upside in equities

Japan asset allocationMaintain equity overweight

Japan investment strategyEquities offer attractive yields, too

page 10page 5page 3

Global CIO Office

Important Information This report represents the views of the Investment Strategy Department of CS and has not been prepared in accordance with thelegal requirements designed to promote the independence of investment research. It is not a product of the Credit Suisse Research Department even if itcontains 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 importantinformation at the end of this material. Singapore: For accredited investors only. Hong Kong: For professional investors only. Australia: For wholesale clientsonly.

Editorial

Burkhard VarnholtChief Investment Officer – Swiss Univer-sal Bank

Michael StrobaekGlobal Chief Investment Officer

Unlike a year ago, financial markets have been rather wellbehaved of late. While global manufacturing remains in aslump and late-cycle recession worries persist, central banks’policy easing has provided an important support. Yes, theeconomic cycle is fairly advanced, but we maintain that theglobal expansion has not run out of breath. In fact, we expectmanufacturing activity to recover into 2020.

This is why our views, above all our positive assessment ofequities, remain largely unchanged. Equities remain attractive,particularly as bond yields are low while global equities’ divi-dend and earnings yields are relatively high and valuation isundemanding. Further, at the time of writing, there are tenta-tive signs that the US-China trade war as well as Brexit couldbe heading for a benign outcome, as has been our base case.We thus believe that investors should stay invested, with theUSA still our preferred market. One of our special topic arti-cles this month explains our rationale in detail. Yet we under-weight government and investment-grade bonds in a portfoliocontext, but acknowledge that the asset class provides valu-able diversification benefits. Our favored currency is still theUSD, which should benefit from the resilient US economyand its interest rate advantage for some time yet. Our stanceon commodities remains neutral, but, as we explain in oursecond special topic article, we expect a period of oil priceweakness ahead.

With populist rhetoric never far from the headlines, our Su-pertrend “Angry societies – Multipolar world” is as relevant aswhen we introduced it over two years ago. Read on to learnwhy there is value in national brands and why cyber securityshould see strong growth going forward.

In this issue

3Japan investment strategyEquities offer attractive yields, too

5Japan asset allocationMaintain equity overweight

6SupertrendsAngry societies – Continued relevance

7Investment solutions for a multipolar world

9EconomicsManufacturing weakness persists

10Global investment strategyExpect further upside in equities

11Special topicPeriod of oil weakness ahead

12Special topicFavor equities over bonds as manufacturingtrough nears

13Fixed incomeFocus on inflation and credit quality

14EquitiesMaintain positive stance on equities

16Alternative investmentsHeadwinds for growth-sensitive hedge funds

17Foreign exchangeUSD remains preferred

18ForecastsAt a glance

Editorial deadline: 16 October 2019

Investment Monthly | Japan edition / Credit Suisse Securities (Japan) Ltd., October 2019 2

Japan investment strategy

Equities offer attractive yields,tooThe probability of a recession remains low.

Recent quarterly results validate companies’ ability to generate cash flows.

Equity investment ideas in focus: family-owned businesses, and women inmanagement.

Soichiro MatsumotoChief Investment Officer Japan

Asmanufacturing stagnates, consumption and servicesstill look to be on solid footingThe uncertainty over US-China trade ties have weighed onglobal industrial production, which is beginning to show signsof a slowdown. China, popularly known as the factory of theworld, occupies an important position in the global supplychain (the various routes by which industrial products move).On the other hand, the USA remains the world’s largesteconomy and one of the largest consumer bases. As thetrade conflict between these two giants deepens, the compa-nies connected to the corresponding supply chains aresounding a note of caution when it comes to expanding pro-duction and investing fresh capital.

On the other hand, developed market employment conditionslook sturdy and unemployment rates have declined to theirlowest levels in history. Demand for consumption and servicesis strong and are showing steady growth.

The USA and Japan both have consumption-driven economieswhere consumption and services account for more than 70%of the overall economy (in terms of GDP). Thus, while a de-cline in production and investment momentum within themanufacturing sector may lead to a decrease in the overalleconomic growth rate, it is unlikely to lead to a so-called re-cession (negative growth).

In the USA, in particular, the Christmas season is when con-sumption has historically been the most pronounced. We donot think the USA will enter a recession as yet, given a favor-able climate for employment is in place.

Robust surplus capital: Corporate efforts and assetmanagementIn view of the escalating trade war, companies have resortedto production cuts and have taken a cautious approach tonew capital investment, while at the same time accumulatingsurplus funds for the future. On the other hand, investors

have become more circumspect about investing in risky as-sets, such as stocks, due to persistent uncertainty over theoutcome of the US-China trade talks.

If the trade confrontation prolongs beyond a threshold, it islikely that companies would resolve to transfer some of theirsurplus capital to shareholders in the form of dividends andshare buybacks, and equity investors would find yields attrac-tive enough to invest in stocks. Conversely, if the trade warbetween the USA and China subsides, companies are likelyto ramp up production and investment, and yet again investorscould pour more money into equities. However, as the stocksthat will potentially benefit from the above two scenariospossess differing characteristics, we reckon investors wouldrefrain from increasing equity exposure for now.

Spotlight on the corporate reporting seasonAs the corporate earnings season gets underway, investorattention should now turn to companies’ profit and cash flows,but recession worries still loom. Equity yields (based on 12-month forecasts) are approximately 6% in the USA and morethan 7% in the Eurozone and Japan. If companies candemonstrate that they have the ability to provide stable andhigh yields as market interest rates decline and the majorityof global government bonds offer negative interest rates,equities will once again prove their worth to investors.

In Japan, corporate governance efforts are also likely to getmuch attention. The preferences of long-term investors arealso likely to shift favorably if capital costs are specified andemployed as a basis for assessing business strategy.

Starting points for achieving individual targets in equityinvestmentsAs developed market labor force touches its peak, a gradualdecline in economic growth rate is apparent. From a long-term investment perspective, it will be even more difficult forstock markets to sustain their growth rates. Thus, to identifyviable long-term investments, it will be increasingly importantfor investors to zero in on themes based on long-term struc-tural changes as well as effective starting points.


In this context, our Supertrends should serve clients well inachieving their goals given that these are enduring longer-term investment themes. Additionally, we are focused on twopotential effective starting points for identifying individualstocks. The first is investing in owner-operated companies,i.e. companies in which the founder and/or their familymembers are involved in management. The second is investingin companies where women are active participants, i.e. com-panies in which women members of the board of directorsexceed a certain percentage. Our studies indicate that suchcompanies earn returns in excess of the market average.

Recommended investment strategies

Investors should engage in comprehensive planning from alonger-term perspective and invest based on an allocationstrategy designed to achieve their asset management targetsover the medium to long term and to limit benchmark devia-tions. Thus, if the market becomes overextended, investorswill need to work to maintain their assumed risk at a suitablelevel by making adjustments to their positions (i.e., takingprofits, cutting losses, etc.)

Currently, we recommend that investors reduce exposure tobonds (especially long-term government bonds and invest-ment-grade bonds). At the same time, we believe now is thetime to further increase equity investment (especially in USand technology stocks).

In an investment environment such as the one faced by in-vestors in 2019, where market trends can be difficult tonavigate due to concerns about the future, an allocation-basedstrategy is likely to be more effective.

1. Asset allocation strategyWhile the growth rate of the global economy remains lockedin a long-term downward trend, there also remain potentialflashpoints of political risk throughout the world. Negative in-terest rates continue to spread and it is becoming increasinglydifficult to earn stable returns. It is important for investors toadopt an efficient allocation strategy in which capital is widelydispersed over various risk assets around the world in orderto achieve long-term asset management goals.

For Japanese yen-based investors, an asset allocation strat-egy using the JPY International TAA/SAA as a benchmarkmay serve as an effective guide for asset management. Inaddition, strategies based on the Global TAA/SAA as abenchmark may fit well for liquidity-rich USD investors whohave access to relatively high low-risk yields.

2. Global stocks and US stocksEven for yield-oriented investment strategies, we believe thatstocks are more attractive than bonds. Looking at the USmarket, the earnings yield of the S&P 500 stock index re-mains highly stable at 6%. On the other hand, the yield of

US 10-year government bonds is approximately 1.5%–1.7%,which is lower than the US core inflation rate, and the interestrate premium of investment-grade class (BBB) corporatebonds over government bonds remains in the low 1% range.

A strong domestic labor market and the US Federal Reserve’smonetary easing policy are serving to support the US econo-my. The proportion of the US market consisting of technologystocks with high growth potential is high, making it relativelyattractive compared to other regions. Additionally, a largenumber of US companies are mentioned as part of our Su-pertrends, the long-term investment framework.

It is currently possible to invest by leveraging solutions suitedto various styles of investment (risk-limited, balanced, active,growth-oriented, etc.) in accordance with each individual in-vestor’s risk tolerance profile.

3. Long-term equity investment themes: SupertrendsBuy-and-hold investment based on investment themes, whichstand to benefit from long-term structural changes, may betterserve investors seeking to avoid potential volatility due to shortterm event risk.

We continue recommending our Supertrends, which are aset of long-term equity investment themes. We believe thatcurrent market uncertainty caused by a deterioration in in-vestor sentiment and political events represents an ideal entrypoint for such long-term investment themes.

4. Equity long-short and hedged investment strategiesIn an environment where volatility is likely to increase and in-vestors remain skittish over declining prices, a long-short eq-uity strategy may serve as an effective investment approach.This strategy is likely to be effective when investing in stockswith the goal of acquiring alpha in a way that suppressesdownward pricing risk, and we believe that strategies focusingon US equities are particularly attractive. Additionally, we be-lieve that utilizing instruments such as options to build an eq-uities position with a hedge against price declines to seekmore stable returns is also an effective strategy.

5. Yield-oriented investment strategiesLow interest rates have progressed further within the world’smajor economies, with most markets showing negative indexrates. However, it is very likely that government bond yieldshave fallen excessively, so investors must prepare for thepotential risk of rising interest rates. We recommended estab-lishing a portfolio that leverages dollar-denominated credit,with a focus on short- and medium-term bonds.

However, since low interest rates represent a low bufferagainst losses, bond investors will likely also be well servedby adopting investment services that allow flexible portfoliomanagement, in order to further improve efficiency.

(17/10/2019)


Japan asset allocation

Maintain equity overweightUS equities and technology stocks look particularly attractive.

We maintain a cautious stance on bonds.

Soichiro MatsumotoChief Investment Officer Japan

Maintain overweight in US stocks and technology sectorWe advise investors to keep overweight positions in US stockswhile deploying active strategies, hedging strategies, etc.

Remain underweight in investment grade corporatebondsInvestment in government and investment grade corporatebonds is not attractive due to lower interest rates and de-creased spreads. Hence, we advise investors to considerswitching from a bond portfolio to a multi-asset strategy.

Investment map (regions vs. asset classes)

Source: Credit Suisse

(16/10/2019)

JPY international TAA (balanced)Benchmark SAAversus bench-

markBalanced TAA

Mid-OctoberMid-SepChangeMid-OctoberMid-Sep

5.0%0.5%0.5%0.0%5.5%5.5%Liquidity

5.0%0.5%0.5%0.0%5.5%5.5%JPY47.5%-1.5%-1.5%0.0%46.0%46.0%Fixed income

4.0%0.0%0.0%0.0%4.0%4.0%JPY34.5%-3.0%-3.0%0.0%31.5%31.5%Global Corporates3.0%1.5%1.5%0.0%4.5%4.5%Global High Yield3.0%0.0%0.0%0.0%3.0%3.0%Emerging Markets

USD3.0%0.0%0.0%0.0%3.0%3.0%Emerging Markets

LC0.0%0.0%0.0%0.0%0.0%0.0%Global Convertibles42.5%1.0%1.0%0.0%43.5%43.5%Equity

11.0%0.0%0.0%0.0%11.0%11.0%Japan31.5%1.0%1.0%0.0%32.5%32.5%World (ex. Japan)1.0%-0.5%-0.5%0.0%0.5%0.5%Switzerland3.5%0.0%0.0%0.0%3.5%3.5%Euro Zone19.5%1.5%1.5%0.0%21.0%21.0%North America2.0%0.0%0.0%0.0%2.0%2.0%United Kingdom1.0%0.0%0.0%0.0%1.0%1.0%Australia4.5%0.0%0.0%0.0%4.5%4.5%Emerging Markets0.5%0.0%0.0%0.0%0.5%0.5%LatAm3.5%0.0%0.0%0.0%3.5%3.5%APAC0.5%0.0%0.0%0.0%0.5%0.5%EMEA5.0%0.0%0.0%0.0%5.0%5.0%Alternative investments

2.5%0.0%0.0%0.0%2.5%2.5%Real Estate2.5%0.0%0.0%0.0%2.5%2.5%Commodities0.0%0.0%0.0%0.0%0.0%0.0%Gold100.0%0.0%0.0%0.0%100.0%100.0%Total



Supertrends

Angry societies – ContinuedrelevanceThe uncertainty over global trade relations, the heated debate over Brexit and the im-peachment proceedings against US President Donald Trump show that our “Angrysocieties – Multipolar world” Supertrend remains highly relevant.

Looking at the sub-themes we cover, security and defense remains very topical, withcyber security an area of particular concern.

Reto HessHead of Single Security Research Equity

In early October, the World Trade Organization (WTO) allowedthe USA to impose tariffs on USD 7.5 bn worth of EU goodsdue to European government support for aircraft maker Air-bus. While the dispute goes back to 2004 and the timing ofthe ruling was accidental, it fits in with continued worries overtariffs and their impact on economies. Next year, the EUshould have the legal possibility to retaliate once the WTOapproves tariffs against the USA for similar subsidies toBoeing. Separately, the USA has yet to decide if it wants toimpose tariffs on automobile imports by December.

In light of the continuing trade disputes, the WTO recentlydowngraded its forecast for trade growth and expects worldmerchandise trade volume to rise only 1.2% YoY in 2019,down from +2.6% in April. In response, companies are be-coming more cautious. Delivery giant FedEx, for example,significantly cut its 2020 earnings forecast citing trade ten-sions and worsening economic conditions. We believe thatnational brands in particular are better placed to weather thecurrent uncertainties, as their strength and customer loyaltyshould support sales growth.

Cyber security remains keyConcurrently, concerns over security and defense remainhigh. The September attack on Saudi oil facilities remindedinvestors how vulnerable the global economy is. Such eventsare likely keep defense spending high.

What worries the world

0% 5% 10% 15% 20% 25% 30% 35% 40%

Unemployment

Poverty & social inequality

Crime & violence

Financial/political corruption

Healthcare

Education

Taxes

Immigration control

Climate change

Moral decline

Environment

Terrorism

July 2019 July 2018 July 2017

Source: Ipsos Public Affairs, “What worries the world,” July 2019 (interviews conducted

between 21 June and 5 July 2019, international sample of 19,520 adults, Ipsos Online

Panel system), July 2018, July 2017; Credit Suisse

Yet security also remains key on an individual level. As thelatest “What worries the world” survey by Ipsos showed, crimeand violence is a significant worry for many people. From aninvestment point of view, cyber security is the most appealingarea in this context. New technologies such as 5G increasedemand for network, endpoint and identity and access man-agement security solutions. These markets are expected togrow by 17%, 34% and 7%, respectively, according to Inter-national Data Corporation, but companies are struggling evenwith the current technologies. As a result, further investmentsin data security will be needed. (11/10/2019)


Investment solutions fora multipolar worldThis month, as part of our Supertrends focus, we exam-ine investment opportunities presented by the “Angrysocieties – multipolar world” Supertrend. The invest-ment solutions we highlight should help monetizemarket movements and trends associated with thisequity theme.

Maki ShimizuInvestment Strategist - Japan Strategy

Shifting balance of power brings new opportunitiesJapan and the USA officially signed a trade pact on 7 Octo-ber, a year after the two sides agreed to commence negotia-tions. Undeniably, an impression has gone out that the twogovernments rushed to conclude the bilateral agreement viaabbreviated negotiations after the USA pulled out of theTrans-Pacific Partnership Agreement (TPP). Nonetheless,as the era of the USA’s unipolar domination draws to a closeand as the world takes a turn toward multipolarity, a morepronounced trend emerges by which each state aspires tosecure its own trade interests via specific, relevant markets– rather than approaching the whole world as one singlemarket. That being said, months of intense and repeatedtrade talks between the USA and China underscore the factthat economic interdependence is indispensable, while onecould in fact argue the negotiations are a mechanism to ex-plore new relationships in view of the shifting balance ofpower. Through the prism of our Supertrend of the month,Angry societies – multipolar world, we seek to identify invest-ment opportunities from themes such as “national championsand brands,” “consumers in emerging countries” and “nationalsecurity/defense.”

Ways to benefit from the “Angry societies – multipolarworld” SupertrendInvestment solutions linked to the aforementioned themesoffer exposure to companies from diverse sectors. A focuson building brand power to generate stable revenues, regard-less of the state of the financial market, allows companies tonurture multiple global brands (for instance, retailers withstrong, established business channels can provide an optimalproduct mix in different regions). As consumers prefer com-panies with stable customer bases in their respective locales,consumer purchases in emerging economies are expectedto show a certain level of resilience even in an increasinglyvolatile market beset by global risks and uncertainties. As faras national security and defense is concerned, we prefercompanies in the industrial sector that are expected to capturedemand generated by the changing balance of power andgeopolitical risks, and that are endowed with overwhelmingcompetitiveness in businesses with high barriers to entry. Inrelation to security, we also recommend that investors lookat technology companies as demand for cyber security is ex-pected to keep growing. As far as mutual funds are con-cerned, sectors and themes covered by our Global SecurityFund are largely consistent with the themes covered in thisreport. (17/10/2019)


SupertrendsRecommended solutionDetailTheme

AM One Global Security Stock Fund, CSBeneficiaries of Angry Societies Selection

Angry societies - Multipolar world

Domestic economy first with large household brands benefiting the mostNational champions and brandsIncreasing concerns on cyber crime and record high terrorist attacksSecurity & defenseOnline spending combined with strong upside potentialEM consumers

Global Core Infrastructure Stock Fund, CSInfrastructure List

Infrastructure – Closing the gap

Developed markets to invest in replacement while emerging markets spendon expansion

Transport

Renewable energies to reduce CO2 emission and water distribution to be aglobal topic

Energy & water

Affordable housing is not a big city but a global phenomenonAffordable housingInstallation of 5G network to meet high demand for connectivityTelecom infrastructure

AM One Global Security Stock Fund, CSTechnology Selection

Technology at the service of humans

Blockchain to become a part of digitalization to add further diversificationDigitalizationGrowing to the size of today’s smartphone market in the years aheadVirtual reality/Augmented realityMaterial growth potential for digitalization of homes, industries, and citiesArtificial intelligenceRobots and automation are entering various sectors; demand for industrycobots is rising

Industry 4.0

Digitalization solution, biotechnology, and AI in product development andhealthcare research

Health tech

Select Sector SPDR ETFs (Healthcare, Con-sumer Staples, Consumer Discretionary), CSSilver Economy Stocks

Silver Economy - Investing for popu-lation aging

Pharmas to strengthen their arthritis, heart disease, cancer and Alzheimer'sportfolio

Old-age diseases

Private pension gap in emerging markets and growing importance of privatepension fund solutions

Health & life insurance/Assetmanagement

Spending power of seniors will increase steeply boosting the consumer industrySenior lifestyleIncreasing demand for independent living solutions combined with longer lifeexpectancy

Senior housing and care facilities

AM One Global Security Fund, CS MillennialsFavorites

Millennials' values

ESG overlay across the entire millennials' stock universe to underpin the im-portance of sustainability

Sustainable business and invest-ments

Millennials care about tomorrow's world and favor renewable energies andelectric vehicles

Clean energy

Being connected 24/7 by having a strong preference for technology brandsDigital nativesA new way of living and spending with substantial growth potential in emergingmarkets

Fun, health & leisure

Millennials have urban preferences but not the financial means to afford largehousing solutions

Millennials’ housing



Economics

ManufacturingweaknesspersistsWeakness in global manufacturing is likely to persist for at least another three monthsbut then recover.

Labor markets continue to hold up, above all in the USA. Germany is an exception,with recent signs of labor market weakness emerging.

Peter James FoleyEconomist

The most recent US-China trade negotiations produced afragile truce in which imminent tariff increases are put onhold. A lot is at stake. Our chart shows the average tariff rateon all US imports from China if announced future tariffs takeeffect. Recent acute global manufacturing weakness isclosely related to the trade uncertainty, so an avoidance ofsome tariff hikes is tentative good news.

Trade uncertainty is not the only thing weighing on globalmanufacturing, but it is the most important. Global industrialproduction has slumped for twelve months and the weakeststretches within that have come just after tariff escalations.Other sources of uncertainty include Brexit, the Japan-Koreatrade dispute, and the WTO authorization of US tariffs onUSD 7.5 bn of EU goods. We currently expect manufacturingweakness to last three more months even in the best-casescenario.

Some labor markets are more resilient than othersA persistent slowdown in global consumer demand could seeweakness spread beyond manufacturing and increase reces-sion risks. Global consumption is driven by labor income inmajor economies and tends to be stable over long periods.During recessions, unemployment rises sharply and householdincome is undermined. Fortunately, labor markets in mostdeveloped economies, particularly the USA, are not signalingtrouble.

Germany is an exception. Recently, there have been signsthat output weakness has spread to the labor market, andthe employment slowdown could broaden beyond manufac-turing. A continuation of this trend would sound louder alarms.

In China, labor demand is more sensitive to output fluctuationsthan in developed economies. Successive trade shocks anddomestic economic reforms mean labor income and consumerdemand are likely to slow meaningfully in the remainder ofthe year.

Gradual rebound in 2020Widespread recession fears are inevitable during a manufac-turing slump, and our instinct is to overlook them unless wehave clear evidence of a serious and broad shock. We contin-ue to watch the tariff headlines, the labor data and creditmarket stresses closely. But for now, we expect manufactur-ing to continue to slump in the next few months and then re-bound gradually in the first half of 2020.

Announced average tariff rate on Chinese exports to USA

3% 4% 4%6%

9%

15%

26%

0%

5%

10%

15%

20%

25%

30%

Baseline Jan 22,2018

Mar 8,2018

Jun 15,2018

Sept 24,2018

May 5,2019

August2019

Source: Haver Analytics / Average tariff rate on US imports from China weighted by

value of imports assuming announced tariffs take effect. X-axis shows date of tariff

announcement.

(14/10/2019)


Global investment strategy

Expect further upside in equitiesEquities offer an attractive return outlook, especially compared with low yielding gov-ernment and investment grade bonds. We retain allocations in equities above strategiclevels.

Should the growth outlook start to brighten over the next 3 to 6 months, as we expect,high grade bond markets look set to perform poorly.

Walter EdelmannChief Global Strategist

Over the past three months, equity markets have been tradingin a range. The US S&P 500, for example, has fluctuated byabout 5% from bottom to top and top to bottom. Markets arestill dominated by late-cycle recession concerns given contin-ued weakness in global manufacturing on the one hand andby monetary policy easing on the other. Despite recent tenta-tive progress, the trade war has been a main driver of cyclicalworries, as has uncertainty over Brexit.

Late-cycle but not end-cycleAlthough the economic cycle is already fairly advanced, wecontinue to expect that this global expansion has further togo. After all, central banks have moved to provide easier fi-nancial conditions, with the US Federal Reserve expected toimplement a third rate cut soon. Also, corporate cash flowdoes not signal any stress despite sluggish earnings growth.In Western economies, manufacturing is a minor part of theeconomy, accounting for only about 12% in the USA, for in-stance. Consumption and thus most of the services sectorremain supported by rising labor incomes.

On the trade front, recent negotiations between the USA andChina have led to a partial trade deal, though a comprehensiveresolution remains unlikely for now. With regard to Brexit, ahard exit from the EU appears very unlikely in the near term,as Prime Minister Boris Johnson is required by law to ask foran extension of the 31 October deadline in case no deal isagreed by 19 October.

Equities offer attractive yieldWeighing cyclical weakness against the compensation equityinvestors get for the risk they take, we think equities remainattractive. For example, the US earnings yield (on 12M for-ward earnings) is close to 6%, which compares favorably witha real 10-year bond yield of below zero. In the Eurozone, theforward earnings yield is above 7% even. We thus believethat investors should look through the current phase ofheightened volatility, which is partly driven by political riskfactors, and stay invested in equities. Our view is furthercorroborated by bearish investor sentiment indicators and in-vestor positioning data, which suggest room for upside sur-prises.

High grade bonds set to underperform equitiesIn contrast, we think that yields in government and investmentgrade bonds are extremely low and that these levels are un-likely to be sustained should the manufacturing weakness beovercome. Our allocations therefore remain below strategiclevels, but we do note the diversification benefits of highquality bonds in multi-asset portfolios, which speaks in favorof keeping sufficient exposure in line with investors’ risk pro-files. In currencies, we continue to expect the JPY, USD andCHF to remain firm and offer appreciation potential againstthe EUR.

Watch a video featuring the highlights of theCredit Suisse investment strategy:www.credit-suisse.com/cio/film

(14/10/2019)


Special topic

Period of oil weakness aheadOversupply concerns have resurfaced after recent disruptions proved short-lived.Geopolitical tensions remain high, but are not in focus currently.

A temporary period of oil price weakness is likely needed to rebalance the market.

Stefan GraberHead of Commodity Strategy

Oil markets look back on a volatile few weeks. After spikingbriefly in response to a major attack on Saudi oil infrastructurein early September, prices were quick to retrace as outputwas restored faster than expected. At the same time, ampledomestic stocks ensured that export commitments were ful-filled at all times. These stocks are now being replenished.

Geopolitical tensions high but not in focusWe are surprised that oil markets do not appear to be pricinga larger geopolitical risk premium in the wake of the attack,which exposed the fragility of the global energy supply chainand again highlighted heightened regional tensions. That said,from a pure barrel perspective, these outages should leaveno major gaps in global balances, shifting the focus back todemand concerns and potential oversupply in 2020.

US shale must slow and/or OPEC+ extends cutsRobust non-OPEC supply growth – in the USA and other re-gions including Brazil, Norway, Canada – in combination withweak demand points to excess supply to the tune of 0.5 mil-lion barrels per day next year. This is an assessment sharedby the major oil agencies. To prevent such an outcome,OPEC+ must extend and deepen current supply cuts beyondQ1 2020 and/or US shale production must slow more. Foreither to happen, we think a period of price weakness – withWTI potentially below USD 50 – will be required. The nextOPEC meeting takes place in December, while shale budget-ing considerations follow in January and February, which

creates some downside risks near-term. Other non-OPECsupply ex-USA is not price sensitive and set to come onlineas planned.

Temporary weakness should rebalance marketThat said, the price weakness we anticipate should be tem-porary. Once supply adjustments are visible (or announced,in OPEC’s case), oil prices should have room to recover,perhaps into mid-2020. Supply/demand revisions by the oilagencies would then likely follow. Equilibrium levels might beslightly lower than previously thought given the more protract-ed nature of recent demand weakness (USD 55 WTI, USD60 Brent). WTI above USD 60 spurs too much supply, whichthe market currently would struggle to digest. We have adjust-ed our price targets accordingly. Of course, uncertainty aroundthis view is high, with any further incident in the Middle Eastperhaps the biggest upside risk since the supply chain isparticularly vulnerable as long as restoration efforts continue.

What to doFrom an investor perspective, outright exposure appears tohave unfavorable risk/reward, in our view. Instead, we wouldposition for the scenario described above, for example throughput spreads (i.e. we buy a near-the-money put and sell anout-of-the-money [OTM] put). This would provide partialparticipation in eventual downside toward the strike of theOTM option. If prices overshoot on the downside and thestrike is hit, the option would convert to a long position, whichwe would be comfortable with since we expect some recoverylater on. For existing long positions, adding bearish risks re-versals, i.e. giving up some upside to protect the downside,could be considered. (11/10/2019)


Special topic

Favor equities over bonds asmanufacturing trough nearsThe extended drop in manufacturing surveys is well priced in bond markets, in ourview, and risks are growing asymmetrically.

Going into 2020, investors should remain overweight equities and underweight bondsin a portfolio context.

Luca BindelliHead of Fixed Income and Currency and Commodity Strategy

Philipp LisibachHead of Global Equity Strategy

The decline in manufacturing activity, as reflected in the latestUS ISM manufacturing survey, for example, has investorsworried over their equity and bond allocations. We argue thatthe manufacturing slowdown is already extensively priced in,particularly considering US government bond yields. Goinginto 2020, we would therefore stay overweight equities andunderweight bonds in a portfolio context.

Rates risks are asymmetricGovernment bond markets have continued to perform wellon the back of pervasive geopolitical risks. Growth concernshave also weighed. While we acknowledge that risks to theoutlook remain in the short term, we believe that labor marketswill stay resilient and support consumption. The 12-monthchange in US 10-year rates has now outpaced the annualrate of decline in the US ISM (see chart), suggesting that USyields are already pricing in a significant slowdown in manu-facturing and possibly the overall economy. Yet, we believethat the risks to interest rates are growing asymmetrically aswe do not anticipate a recessionary environment. Indeed, oureconomists expect a moderate recovery in global industrialproduction momentum in the first quarter of 2020, with growthin global gross domestic product stable at 2.6% in 2020. Inthe USA, we expect 10-year rates to reach 1.80% in 3months. Moreover, yields in Europe and Japan are already innegative territory and do not offer a viable alternative to equi-ties either, particularly considering the current sizeable globalequity risk premium (6.7%).

Equity payout yields attractive versus low bond yieldsGiven our view that most of the slowdown is already reflectedin prices and a stabilization is likely, we expect that the bearishpositioning in equities, as expressed in negative sentimentindicators, should at least partially reverse, leading to an at-tractive return potential in equities. Fundamentals are support-ive, as the dividend and earnings yield for global equities areappealing and valuation is not demanding.

In sum, we believe that the risk-reward suggests favoringequities over bonds, as the weak manufacturing environmentis well priced in.

US rates already pricing a recessionary manufacturingscenario

Last data point: 30/09/2019. Source: Bloomberg, Credit Suisse

(11/10/2019)


Fixed income

Focus on inflation and creditqualityGovernment bonds have been supported by loose central bank policies, but their totalreturn outlook is weak.

Credit markets also have limited return potential, but we see selected opportunities inhigher credit quality and certain emerging markets.

Karsten LinowskyHead of Currencies and G10 Interest Rate Strategy

Bond yields remain very low, especially in Europe where yieldsare negative in government bond markets as well as in largeparts of the corporate bond market. Unless the global eco-nomic or political environment deteriorates sharply, the returnoutlook for high quality bonds thus remains weak as valuationslook stretched. Political and economic risks are keeping yieldslow and the US Federal Reserve is likely to cut interest ratesfurther. We maintain a neutral view in absolute terms, but ina portfolio context, we remain underweight global treasuries.

Prefer US inflation-linked bondsIn relative terms, we consider US inflation-linked bonds (ILB)attractive. Market expectations for inflation do not reflect risksaccurately, in our view, especially on longer time horizonssuch as ten years. But even on a shorter horizon, our econom-ic forecast projects US inflation to inch up over the course ofnext year, as it corrects from a temporary shortfall due toweakness in a small number of components. To focus on thenormalization of the inflation expectations component, wesuggest implementing this view on a relative basis againstnominal government bonds and keeping duration neutral.

ESG an additional criterion for credit qualityWe continue to expect limited positive returns in global highyield bonds over the next 3–6 months given expensive valua-tions and deteriorating fundamentals. Defaults in the USA

have been spurred by the energy sector, while retail, hotelsand media have been the main driver in Europe. We preferto move up in credit quality and expect defaults to continueto go up as the distressed portion of the high yield market, agood lead indicator of future defaults, has recently surged.Alongside our preference for capital structure risks, i.e. sub-ordinated financials and non-cyclical corporate bonds, wenow prefer Asian investment grade (IG) bonds and selectedcorporate bonds with high environmental, social, and gover-nance (ESG) scores. This metric can facilitate the assessmentof corporate issuers’ creditworthiness and help to improvethe trade-off between value and quality from a fundamentalperspective.

Remain neutral on emerging market bondsWith regard to emerging market (EM) hard currency bonds,we believe that the asset class can still outperform other liquidfixed income segments on the back of stable/low core ratesand signs of stabilization in macro fundamentals. From anabsolute valuation perspective, however, we see limited scopefor any further significant spread tightening ahead of year-end given tight fundamental valuations, a less supportivetechnical position and higher volatility in US Treasury rates.So without a valuation cushion, EM hard currency bonds ap-pear more exposed to global drivers and technical factors,which reduces their diversification benefits. We adopt a neutralview on Indonesia after the market outperformed, in line withour view. We keep a positive view on both Turkey and Russia.

(11/10/2019)


Equities

Maintain positive stance onequitiesEquities continue to offer attractive return potential, driven by appealing dividend andearnings yields.

The USA is our preferred equity market, while IT and financials are our favored sectors.

Philipp LisibachHead of Global Equity Strategy

Geopolitics continues to be a dominant factor driving investorsentiment. The trade dispute and Brexit, to name just two,are leading to considerable economic uncertainty and influenc-ing corporations to be very selective and guarded when itcomes to capital expenditures. Yet, the consumer remains astrong support, driven by solid labor markets and healthywage growth.

Equities offer attractive yieldDespite the challenging backdrop, the underlying fundamen-tals for equities continue to look favorable. Valuations are notdemanding, with global equities trading at 16.6x trailingearnings compared to a 20-year average of 17.1. More rele-vant, perhaps, is the relative attractiveness of equity payoutyields compared to low bond yields. A dividend yield of 2.5%for the global equity aggregate (some individual countries aremeaningfully higher) looks quite attractive for investors lookingfor income. Also, an earnings yield of about 6% for globalequities is appealing, especially compared to low yields andtight spreads in bonds. We continue to forecast an attractivereturn potential for equities and maintain our overweight ofdeveloped market equities in a portfolio context.

US domestic politics coming into focusThe impeachment proceedings against US President DonaldTrump have injected election-driven volatility into US equitymarkets at an early stage. The risk of a successful impeach-ment trial appears low, as finding a two-thirds majority in theRepublican-controlled Senate is likely to be challenging. WhilePresident Trump’s approval rating is largely unchanged, therehave been interesting shifts in the Democratic race.

According to some polls, the probability of Elizabeth Warrenwinning the Democratic presidential nomination has risen re-cently, but she lags Joe Biden in national polls. Ms. Warrenis not seen as the most market-friendly candidate, and sectorsthat could be targeted under her presidency include financials,healthcare and energy, among others. Yet as many of herpolicies are rather pointed, they would be difficult to getthrough Congress. However, the energy sector could besubject to non-legislative policies and looks most vulnerable.At this point, however, it is too early to make any conclusivestatements.

Global equity risk premium is attractiveRisk premium: Earnings yield minus 10Y real bond yield

Last data point: 09/10/2019. Source: Datastream, Credit Suisse

(10/10/2019)


Global equity sector strategy and top picks from Research (3-6 months)APAC (N)USA (O)Switzerland (U)Eurozone (N)/ UK (N)Sector view

Pioneer Natural Resources, WilliamsCompanies, Chevron, Cheniere Energy

BP, Galp Energia, Repsol, Total,Equinor+

Energy (N)

United Company Rusal+DuPont de, Air Products & Chemicals,Newmont Goldcorp

Johnson Matthey, Glencore, Vic-trex, Anglo American, Air Liq-uide+, Arkema+, Smurfit KappaGroup+, Symrise+

Materials (N)

China State Construction In-ternational, GuangzhouBaiyun

Honeywell, Sunrun, Union PacificGeorg Fischer, SchindlerSchneider Electric, Smiths Group,Vinci, Siemens, Experian

Industrials (U)

GrubHub, Target Corp, RestaurantBrands International

LVMH Moet Hennessy LouisVuitton

Consumer discretionary(N)

China Resources Beer, InnerMongolia Yili Industrial, Kwei-chow Moutai

Coca-ColaDiageo, Pernod Ricard, DanoneConsumer staples (N)

Alexion, Mylan, Biomarin Pharmaceuti-cal

Straumann Holding, Novar-tis

Royal Philips, Fresenius SE & Co,Novo Nordisk

Healthcare (N)

Bank of China, Ping An Insur-ance

JPMorgan Chase, Bank of America,The Blackstone Group

Zurich Insurance Group,Swiss Life, Cembra MoneyBank+

AXA, Barclays, Crédit Agricole,KBC, Prudential, HSBC Hold-ings, RSA Insurance, BancoSantander+

Financials (O)

Taiwan Semiconductor Manu-facturing, Samsung Electron-ics

Microsoft, Visa, Salesforce.com, IBMSAP, Nokia, ASML HoldingIT (O)

China Unicom Hong Kong,PCCW, China Tower Corpo-ration, HKBN, China Mobile,PT XL Axiata

AlphabetVodafone, Koninklijke KPNCommunication ser-vices (U)

Power AssetsExelonRWE, IberdrolaUtilities (N)UOL Group, CapitaLand MallTrust, Frasers CentrepointTrust

Equinix, American TowerSegro, Vonovia, Grand CityProperties,

Real Estate (N)

These are our sector strategy and top picks as of 15 October 2019 recommended by Credit Suisse, International Wealth Management division. Our sector/industry strategy showsour sector/industry preferences with recommendations relative to regional benchmarks: Global: (MSCI World in USD), Europe (MSCI Europe in EUR), Switzerland (Swiss MarketIndex in CHF), USA (S&P 500 in USD), Asia-Pacific (MSCI AC Asia-Pacific in USD). An outperform (underperform) view is a recommendation to invest more (less) than in a neutralposition indicated by the market-cap weights of the respective benchmarks. The sector/industry weights as well as the neutral positions in figures are available upon request; pleasecontact your relationship manager. Top Picks is a selection of our favorite stocks within our coverage. The selection was made to reflect the sector/industry and regional preferences.Regular full updates are provided via our Investment Monthly publications as well as in our Equity Research reports. Additionally, we publish our additions and drops in our InvestmentDaily publication. Legend: (O) = Outperform, (N) = Neutral, (U) = Underperform. Changes are marked as follows: (+) = additions to the Top Picks, (#) = changes to sector/indus-try/country weightings. For further information, including disclosures with respect to any other issuers, please refer to the Credit Suisse Global Research Disclosure site at:http://www.credit-suisse.com/research/disclaimer. Please note that trading facilities in certain securities may be limited.Source: Credit Suisse


Alternative investments

Headwinds for growth-sensitivehedge fundsOur Hedge Fund Barometer reading has weakened. We favor hedge fund strategieswith limited net long exposure and Swiss real estate funds. Our view on Eurozone realestate is now neutral.

Slowing industrial production caps commodities. While oil might face further weakness,gold should stay supported.

Jelena KucenkoHead Alternative Investment Strategy

Fabian DeriazCommodity Strategist

Hedge funds: Barometer reading weakensHedge funds saw a flat performance in September. Funda-mental and relative value styles outperformed tactical tradingones, which retraced due to a reversal in most safe-havenassets. Going forward, we see more challenging marketconditions as our Hedge Fund Barometer reading deterioratedfurther. Higher volatility forecasts, persistently weak businessactivity and lower liquidity indicate an adverse environmentfor growth sensitive strategies. At this stage, we continue tofavor a balanced investment approach, selecting strategieswith limited net long exposure such as diversified macro andopportunistic long/short equity. Moreover, investments thatseek exposure to alternative risk premiums such as dealspreads and momentum can also provide uncorrelated returns.We continue to believe that selecting specialized managersand strategies remains key to successful hedge fund invest-ing.

Commodities: Challenging macro backdropCommodity indices rose marginally in September amid atentative stabilization in risk appetite and some hopes forprogress in US-China trade talks. Macro data was mixed andprospects for commodities will remain muted as long as indus-trial production struggles. Precious metals gave up some oftheir recent gains as US yields bounced. Looking ahead, a

period of consolidation appears likely as gold is a crowdedtrade, but price dips are likely to lead to buying in the currentfragile environment. Energy had a volatile month after attackstemporarily removed 50% of Saudi oil production capacity.However, the damage was quickly repaired and the pricespike proved short-lived. Focus is back on inventories, whichare at risk of deteriorating amid weakening demand and risingnon-OPEC supply. Temporary price weakness appears nec-essary to slow US output and/or increase pressure on OPEC+to deepen or extend production cuts. Some underperformanceis thus possible. Base metals were little changed and arelikely to stay sensitive to economic data.

Real estate: Now neutral view on EurozoneGlobal listed real estate underperformed the broader equitymarkets in September as US long-term interest rates rose.But weaker economic data and recession fears caused thistrend to reverse, supporting real estate returns in early Octo-ber. Regionally, real estate equities in Europe performedstrongly, helped by reduced risks of a hard Brexit and im-proved sentiment toward retail landlords. We now expectEurozone real estate equities to perform in line with theglobal benchmark. Valuation remains attractive, but theweaker economic outlook and regulatory risks in the Germanresidential sector weigh on sentiment and the earnings out-look. We maintain a negative view on Swiss real estate stocksgiven unattractive valuation amid a weaker earnings outlook.We favor Swiss real estate funds as they offer a defensivecomponent in a volatile investment environment.

(11/10/2019)


Foreign exchange

USD remains preferredWe continue to prefer the USD over the EUR and believe the CADwill depreciate againstthe USD.

In emerging markets, we think the BRL has room to make further gains.

Luca BindelliHead of Fixed Income and Currency and Commodity Strategy

The USD shrugged off the recent slowdown in US leadingindicators and the further 25 bp rate cut by the Federal Re-serve (Fed) last month, posting further gains. We think theUSD should remain supported as the US economy continuesto prove relatively resilient and retains the highest interestrate advantage among the major currencies. Admittedly, theextended long USD positioning and the accompanying broadovervaluation of the USD might resurface as a concern formarket participants, but this is more likely to happen in 2020.

Negative on CAD, neutral on SEKIn Europe, we believe that the EUR will remain under pressuredue to lackluster macro data, Brexit uncertainties and expan-sive European Central Bank policy. The GBP has remainedvolatile, as the UK prime minister has been unsuccessful sofar in securing a new deal with the EU. The EU Octobersummit is likely the date around which a further extension ofArticle 50 will be decided. Even if an extension is granted, aswe expect, the GBP could remain volatile. In the longer term,we believe the GBP has appreciation potential given its signif-icant undervaluation and as political risks may well decline.We expect GBP/USD at 1.22 in 3M and 1.25 in 12M.

Recent economic data in Sweden has been disappointing,with leading indicators falling sharply. We believe that thismay put into question the Swedish central bank’s hawkishbias and limit the potential for the SEK to appreciate. As a

result, we have moved our positive bias on the SEK to neutral.Separately, we now believe that the CAD will weaken againstthe USD as we anticipate the Bank of Canada will turn moredovish as trade tensions persist and the economy starts toweaken. Moreover, oil prices risk weakening in the near termwe think. Finally, and contrary to other commodity currencies,positioning is still broadly neutral against the USD, leavingscope for wider downside positioning.

Move to neutral view on CNYEmerging market (EM) currencies rebounded in early Octoberon rising expectations that the Fed will cut rates further afterrecent disappointing data releases in the USA. The fundamen-tal valuation of EM currencies remains attractive. The globalgrowth outlook remains fragile on the back of persistent tradetensions, but the likelihood of a global recession appearslimited given policy stimulus. All in all, we are comfortablekeeping our neutral view on EM currencies. We favor theBRL, as Brazil’s pension reform is almost complete, economicactivity has stabilized and fundamental valuations have im-proved significantly following the recent underperformanceof the currency. We keep our USD/CNY targets at 7.27 bothover 3M and 12M, but USD/CNY forwards have movedhigher and closer to our forecast. We therefore see little scopefor more meaningful gains and thus turn neutral on the cur-rency pair. We have also shifted to a neutral stance onUSD/KRW but retain our 3M and 12M forecasts of 1215and 1200, respectively. Projected gains in the KRW are nowrelatively unattractive compared to USD/SGD and USD/TWD,on which we remain positive. (11/10/2019)


Forecasts

At a glanceMore information on the forecasts and estimates is availableon request. Past performance is not an indicator of futureperformance. Performance can be affected by commissions,fees or other charges as well as exchange rate fluctuations.

Short interest rates 3M Libor / 10-year governmentbonds

10Y3M Libor

12M3MSpot12M3MSpotin %

-0.7 to-0.5

-0.8 to-0.6

-0.62-0.9 to -0.7-0.9 to -0.7-0.78CHF

-0.3 to-0.1

-0.5 to-0.3

-0.42-0.5 to -0.3-0.5 to -0.3-0.42EUR*

1.9 to2.1

1.7 to1.9

1.751.7 to 1.91.7 to 1.92.00USD

0.6 to0.8

0.5 to0.7

0.690.7 to 0.90.7 to 0.90.79GBP

1.2 to1.4

1.0 to1.2

1.040.5 to 0.70.5 to 0.70.85AUD**

-0.2 to0.0

-0.3 to-0.1

-0.17-0.4 to -0.2-0.4 to -0.2-0.10JPY

Spot rates are closing prices as of 15/10/2019. Forecast date 10/10/2019. *3MEuribor, **3M bank bill rates. These forecasts are no reliable indicators of future perfor-mance.Source: Bloomberg, Credit Suisse/IDC

Equities12M*3M*Div. y. (%)P/ESpotIndex

1,3501,3002.815.11,283MSCI AC World**3,1053,0402.417.02,996US S&P 5003,5853,5553.413.73,599Eurostoxx 507,3807,3554.612.07,212UK FTSE 1001,6501,6052.413.11,620Japan Topix6,6506,6404.116.56,652Australia S&P/ASX

2009,7559,7653.116.510,049Switzerland SMI138,000133,0003.112.0131,736MSCI Emerging

Markets**

Prices as of 15/10/2019 . *Forecast as on 10/10/2019 . **Gross return (incl. divi-dends).Source: Bloomberg, Datastream, Credit Suisse/IDC

Commodities12M*3M*Spot

150015501483Gold (USD/oz)171817.45Silver (USD/oz)850900886Platinum (USD/oz)150016001735.5Palladium (USD/oz)600058005804Copper (USD/ton)554852.98WTI Crude Oil (USD/bbl)168163166.2Bloomberg Commodity index

Spot rates are closing prices as of 16/10/2019 *forecast as on 10/10/2019Source: Bloomberg, Credit Suisse/IDC

Credit: Selected indices12M fore-cast*

3M fore-cast*

Duration(years)

Spread(bp)

Yield(%)

0.4%0.1%7.2431.4BC Global Aggre-gate

0.2%-0.1%8.5120.8BC Global Trea-suries

2.8%-0.3%6.91162.3BC Global IG Corp0.6%0.2%3.84686.2BC Global HY Corp2.5%0.6%7.23315.2JPM EMBI Global

Diversified HC

BC = Barclays Capital, IG= Investment Grade, JPM = JP Morgan (EMBI+). Index dataas 14/10/2019 . *Forecast as on 10/10/2019Source: Bloomberg, Credit Suisse/IDC

Foreign exchange12M3MSpot

1.101.081.1031EUR/USD1.000.980.9979USD/CHF1.101.061.1008EUR/CHF100103108.67USD/JPY0.880.900.8649EUR/GBP1.251.201.2753GBP/USD0.710.680.6776AUD/USD1.351.381.3232USD/CAD10.8010.8010.8298EUR/SEK9.509.7010.0466EUR/NOK4.184.214.2963EUR/PLN7.277.277.0711USD/CNY1.381.421.3689USD/SGD120012151183.9USD/KRW73.072.071.544USD/INR3.603.904.1799USD/BRL21.019.419.273USD/MXN

Spot rates are closing prices as of 16/10/2019Source: Bloomberg/IDC

Real GDP growth and inflationInflationGDP growth

2020*2019*20182020*2019*2018in %

0.50.50.91.41.12.8CH1.21.21.81.01.11.9EMU2.01.82.41.92.32.9USA2.11.92.51.31.21.4UK1.91.82.02.82.02.7Australia0.10.50.90.40.80.8Japan2.22.51.96.06.26.6China

*Forecast date: 16/10/2019. These forecasts are no reliable indicators of future per-formance.Source: Credit Suisse

(16/10/2019)


Glossary

Risk warnings

Emerging markets are located in countries that possess one or more of the following characteristics: a certaindegree of political instability, relatively unpredictable financial markets and economic growth patterns, a financialmarket that is still at the development stage or a weak economy. Emerging market investments usually resultin higher risks as a result of political, economic, credit, exchange rate, market liquidity, legal, settlement, market,shareholder and creditor risks.

Emerging markets

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 investmentstrategies that may increase the risk of investment loss.

Hedge funds

Commodity transactions carry a high degree of risk and may not be suitable for many private investors. Theextent of loss due to market movements can be substantial or even result in a total loss.

Commodity investments

Investors in real estate are exposed to liquidity, foreign currency and other risks, including cyclical risk, rentaland local market risk as well as environmental risk, and changes to the legal situation.

Real estate

Investments in foreign currencies involve the additional risk that the foreign currency might lose value againstthe investor’s reference currency.

Currency risks

Equities are subject to market forces and hence fluctuations in value, which are not entirely predictable.Equity riskFinancial 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 marketand individual stocks. This variability puts stock investments at risk of losing value.

Market risk

High Yield Bonds are typically rated below investment grade or are unrated and as such are often subject to ahigher risk of issuer default.

High Yield bond risk

Perpetual Bonds have no maturity date and therefore the Interest pay-out depends on the viability of the issuerin the very long term.

Perpetual Bond risk

In case of liquidation of the issuer, investors can only get back the principal after other senior creditors are paid.Subordinated Bond riskInvestors would face uncertainty over the amount and time of the interest payments to be received.Risk of Bonds with variable/ deferral of interest

termsInvestors face reinvestment risk when the issuer exercises its right to redeem the bond before it matures.Callable bond riskInvestors would not have a definite schedule of principal repayment.Risk of Bonds with extendable maturity dateInvestors are subject to both equity and bond investment risk.Convertible or exchangeable bond riskThe bond may be written-off fully or partially or converted to common stock on the occurrence of a trigger event.Cocos risk

Explanation of indices frequently used in reports

CommentIndexS&P/ASX 200 is an Australian market-capitalization-weighted and float-adjusted stock index calculated byStandard and Poor's.

Australia S&P/ASX 200

The US Corporate High Yield Index measures USD-denominated, non-investment grade, fixed-rate and taxablecorporate bonds. The index is calculated by Barclays.

BC High Yield Corp USD

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 calculatedby Barclays.

BC High Yield Pan 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 EUR

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.

BC IG Corporate USD

The S&P/TSX composite index is the Canadian equivalent of the S&P 500 Index in the USA. The index containsthe largest stocks traded on the Toronto Stock Exchange.

Canada S&P/TSX comp

Consumer Confidence Indices (CCIs) are based on surveys of consumers' spending intentions and economicsituations, as well as their concerns and expectations for the immediate future.

Consumer Confidence Indices

The Credit Suisse Hedge Fund Index is compiled by Credit Suisse Hedge Index LLC. It is an asset-weightedhedge fund index and includes only funds, as opposed to separate accounts. The index reflects performancenet of all hedge fund component performance fees and expenses.

CS Hedge Fund Index

The Liquid Swiss Index ex govt CHF is a market-capitalized bond index representing the most liquid and tradableportion of the Swiss bond market excluding Swiss government bonds. The index is calculated by Credit Suisse.

CS LSI ex govt CHF

The German Stock Index stock represents 30 of the largest and most liquid German companies that trade onthe Frankfurt Exchange.

DAX

A measure of the value of the US dollar relative to the majority of its most important trading partners. The USDollar Index is similar to other trade-weighted indices, which also use the exchange rates from the same majorcurrencies.

DXY

Eurostoxx 50 is a market-capitalization-weighted stock index of 50 leading blue-chip companies in the Eurozone.Eurostoxx 50The FTSE EPRA/NAREIT Global Real Estate Index Series is designed to represent general trends in eligiblereal estate equities worldwide.

FTSE EPRA/NAREIT Global Real Estate IndexSeries

The Hedge Fund Barometer is a proprietary Credit Suisse scoring tool that measures market conditions forhedge fund strategies. It comprises four components: liquidity, volatility; systemic risks and business cycle.

Hedge Fund Barometer

TOPIX, also known as the Tokyo Stock Price Index, tracks all large Japanese companies listed in the stockexchange's "first section." The index calculation excludes temporary issues and preferred stocks.

Japan Topix


The Emerging Market Bond Index Plus tracks the total return of hard-currency sovereign bonds across the mostliquid emerging markets. The index encompasses US-denominated Brady bonds (dollar-denominated bondsissued by Latin American countries), loans and Eurobonds.

JPM EM hard curr. USD

The JPMorgan Government Bond Index tracks local currency bonds issued by emerging market governmentsacross the most accessible markets for international investors.

JPM EM local curr. hedg. USD

The MSCI All Country Asia Pacific Index captures large and mid cap representation across 5 developed marketcountries and 8 emerging markets countries in the Asia Pacific region. With 1,000 constituents, the indexcovers approximately 85% of the free float-adjusted market capitalization in each country.

MSCI AC Asia/Pacific

The MSCI All Country World Index captures large and mid cap representation across 23 developed marketsand 23 emerging market countries. With roughly 2480 constituents, the index covers around 85% of theglobal investable equity opportunity set.

MSCI AC World

MSCI Emerging Markets is a free-float-weighted Index designed to measure equity market performance inglobal emerging markets. The index is developed and calculated by Morgan Stanley Capital International.

MSCI Emerging Markets

The MSCI EMU Index (European Economic and Monetary Union) captures large and mid cap representationacross the 10 Developed Markets countries in the EMU. With 237 constituents, the index covers approximately85% of the free float-adjusted market capitalization of the EMU.

MSCI EMU

The MSCI Europe Index captures large and mid cap representation across 15 developed markets countries inEurope. With 442 constituents, the index covers approximately 85% of the free float-adjusted market capital-ization across the European developed markets equity universe.

MSCI Europe

The MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segmentsof the UK market. With 111 constituents, the index covers approximately 85% of the free float-adjusted marketcapitalization in the UK.

MSCI UK

MSCI World is an index of global equity markets developed and calculated by Morgan Stanley Capital Interna-tional. Calculations are based on closing prices with dividends reinvested.

MSCI World

OECD Composite Leading Indicators (CLIs) are designed to provide early signals of turning points in businesscycles with components that measure early stages of production, respond to changes in economic activity, andare sensitive to expectations of future activity.

OECD Composite Leading Indicators

Purchasing Managers' Indices (PMIs) are economic indicators derived from monthly surveys of private-sectorcompanies. The two principal producers of PMIs are Markit Group, which conducts PMIs for over 30 countriesworldwide, and the Institute for Supply Management (ISM), which conducts PMIs for the United States. Theindices include additional sub-indices for manufacturing surveys such as new orders, employment, exports,stocks of raw materials and finished goods, prices of inputs and finished goods, and services.

Purchasing Managers' Indices

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the US equityuniverse based on 1000 large-cap companies with higher price-to-book ratios and higher forecast growth values.

Russell 1000 Growth Index

he Russell 1000 Index is a stock market index that represents the highest-ranking 1,000 stocks in the Russell3000 Index (encompassing the 3,000 largest US-traded stocks, with the underlying companies all incorporatedin the USA), and representing about 90% of the total market capitalization of that index. The Russell 1000 Indexhas a weighted average market capitalization of USD 81 billion and the median market capitalization is approx-imately USD 4.6 billion.

Russell 1000 Index

The Russell 1000 Value Index measures the performance of the large-cap value segment of the US equityuniverse based on 1000 large-cap companies with lower price-to-book ratios and lower expected growth values.

Russell 1000 Value Index

The Swiss Market Index is made up of 20 of the largest companies listed of the Swiss Performance Index uni-verse. It represents 85% of the free-float capitalization of the Swiss equity market. As a price index, the SMIis not adjusted for dividends.

Switzerland SMI

FTSE 100 is a market-capitalization-weighted stock index that represents 100 of the most highly capitalizedcompanies traded on the London Stock exchange. The equities have an investibility weighting in the index cal-culation.

UK FTSE 100

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.

US S&P 500

Abbreviations frequently used in reports

DescriptionAbb.DescriptionAbb.International Monetary FundIMF3/6/12 month moving average3/6/12 MMALatin AmericaLatAmAlternative investmentsAILondon interbank offered rateLiborAsia PacificAPACMillion barrels per daym b/dbarrelbblA measure of the money supply that includes all physicalmoney, such as coins and currency, as well as demanddeposits, checking accounts and negotiable order ofwithdrawal accounts.

M1Bank IndonesiaBI

A measure of money supply that includes cash andchecking deposits (M1) as well as savings deposits,money market mutual funds and other time deposits.

M2Bank of CanadaBoC

A measure of money supply that includes M2 as well aslarge time deposits, institutional money market funds,short-term repurchase agreements and other larger liquidassets.

M3Bank of EnglandBoE

Mergers and acquisitionsM&ABank of JapanBoJMonetary Authority of SingaporeMASBasis pointsbpMaster Limited PartnershipMLPBrazil, Russia, China, IndiaBRICMonth-on-monthMoMCompound annual growth rateCAGRMonetary Policy CommitteeMPCChicago Board Options ExchangeCBOE


Option-adjusted spreadOASCash from operationsCFOOrganisation for Economic Co-operation and Develop-ment

OECDCash flow return on investmentCFROI

Overnight indexed swapOISDiscounted cash flowDCFOrganization of Petroleum Exporting CountriesOPECDeveloped MarketDMPrice-to-book valueP/BDeveloped MarketsDMsPrice-earnings ratioP/EEarnings before interest, taxes, depreciation and

amortizationEBITDA

People's Bank of ChinaPBoCEuropean Central BankECBP/E ratio divided by growth in EPSPEGEastern Europe, Middle East and AfricaEEMEAPurchasing Managers' IndexPMIEmerging MarketEMPurchasing power parityPPPEurope, Middle East and AfricaEMEAQuantitative easingQEEmerging MarketsEMsQuarter-on-quarterQoQEuropean Monetary UnionEMUright-hand side (for charts)r.h.s.Earnings per shareEPSReserve Bank of AustraliaRBAExchange traded fundsETFReserve Bank of IndiaRBIEnterprise valueEVReserve Bank of New ZealandRBNZFree cash flowFCFReal estate investment trustREITUS Federal ReserveFedReturn on equityROEFunds from operationsFFOReturn on invested capitalROICFederal Open Market CommitteeFOMCReserve requirement ratioRRRForeign exchangeFXStrategic asset allocationSAAGroup of TenG10Special drawing rightsSDRGroup of ThreeG3Swiss National BankSNBGross domestic productGDPTactical asset allocationTAAGovernment Pension Investment FundGPIFTrade-Weighted IndexTWIHard currencyHCVolatility IndexVIXHigh yieldHYWest Texas IntermediateWTIInterest-bearing debtIBDYear-on-yearYoYCredit Suisse Investment CommitteeICYear-to-dateYTDInvestment gradeIGAn indicator of the average increase in prices for all do-mestic personal consumption.

Personal ConsumptionExpenditure (PCE de-flator)

Inflation-linked bondILB

Currency codes frequently used in reports

CurrencyCodeCurrencyCodeSouth Korean wonKRWArgentine pesoARSMexican pesoMXNAustralian dollarAUDMalaysian ringgitMYRBrazilian realBRLNorwegian kroneNOKCanadian dollarCADNew Zealand dollarNZDSwiss francCHFPeruvian nuevo solPENChilean pesoCLPPhilippine pesoPHPChinese yuanCNYPolish złotyPLNColombian pesoCOPRussian rubleRUBCzech korunaCZKSwedish krona/kronorSEKEuroEURSingapore dollarSGDPound sterlingGBPThai bahtTHBHong Kong dollarHKDTurkish liraTRYHungarian forintHUFNew Taiwan dollarTWDIndonesian rupiahIDRUnited States dollarUSDIsraeli new shekelILSSouth African randZARIndian rupeeINR

Japanese yenJPY

Important information on derivatives

Option premiums and prices mentioned are indicative only. Option premiums and prices can be subject to veryrapid changes: The prices and premiums mentioned are as of the time indicated in the text and might havechanged substantially in the meantime.

Pricing

Derivatives are complex instruments and are intended for sale only to investors who are capable of understandingand assuming all the risks involved. Investors must be aware that adding option positions to an existing portfoliomay change the characteristics and behavior of that portfolio substantially. A portfolio’s sensitivity to certainmarket moves can be heavily impacted by the leverage effect of options.

Risks

Investors who buy call options risk the loss of the entire premium paid if the underlying security trades belowthe strike price at expiration.

Buying calls


Investors who buy put options risk loss of the entire premium paid if the underlying security finishes above thestrike price at expiration.

Buying puts

Investors who sell calls commit themselves to sell the underlying for the strike price, even if the market priceof the underlying is substantially higher. Investors who sell covered calls (own the underlying security and sella call) risk limiting their upside to the strike price plus the upfront premium received and may have their securitycalled away if the security price exceeds the strike price of the short call. Additionally, the investor has fulldownside participation that is only partially offset by the premium received upfront. If investors are forced to sellthe underlying they might be subject to taxing. Investors shorting naked calls (i.e. selling calls but without holdingthe underlying security) risk unlimited losses of security price less strike price.

Selling calls

Put sellers commit to buying the underlying security at the strike price in the event the security falls below thestrike price. The maximum loss is the full strike price less the premium received for selling the put.

Selling puts

Investors who buy call spreads (buy a call and sell a call with a higher strike) risk the loss of the entire premiumpaid if the underlying trades below the lower strike price at expiration. The maximum gain from buying callspreads is the difference between the strike prices, less the upfront premium paid.

Buying 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 theupfront premium taken in, if the underlying security finishes above the long call strike at expiration. The maximumgain is the upfront premium taken in, if the security finishes below the short call strike at expiration.

Selling naked call spreads

Investors who buy put spreads (buy a put and sell a put with a lower strike price) also have a maximum loss ofthe upfront premium paid. The maximum gain from buying put spreads is the difference between the strikeprices, less the upfront premium paid.

Buying put spreads

Buying strangles (buy put and buy call): The maximum loss is the entire premium paid for both options, if theunderlying trades between the put strike and the call strike at expiration.

Buying strangles

Investors who are long a security and short a strangle or straddle risk capping their upside in the security to thestrike price of the call that is sold plus the upfront premium received. Additionally, if the security trades belowthe strike price of the short put, investors risk losing the difference between the strike price and the securityprice (less the value of the premium received) on the short put and will also experience losses in the securityposition if they owns shares. The maximum potential loss is the full value of the strike price (less the value ofthe premium received) plus losses on the long security position. Investors who are short naked strangles orstraddles have unlimited potential loss since, if the security trades above the call strike price, investors risk losingthe difference between the strike price and the security price (less the value of the premium received) on theshort call. In addition, they are obligated to buy the security at the put strike price (less upfront premium received)if the security finishes below the put strike price at expiration.

Selling strangles or straddles


Important information on mutual fundsFees and charges, etc.Different types of fees and commissions (subscription fee, amount whichmust be retained in trust assets, repurchase fee, etc.) are charged wheninvestment trusts/funds are purchased and sold. In addition, apart from thesefees and commissions, trust and management fees and other fees (auditfee, trust administrative charges, carried interest, etc.) are charged and borneby you through your trust asset. Fees and commissions borne by you will bea sum of these amounts. Such fees and commissions vary depending onthe investment trust/fund and depending on the investment status, andtherefore, we cannot provide specific amounts or calculation methods.

For detailed information on fees and commissions, etc. of each re-spective investment trust/fund, please refer to the pre-contractdocuments (prospectus and other supplementary documents).

Important information on dividends:• Dividends are different to interest on deposits and are paid from the netasset value of investment trusts/funds. Therefore, when dividends are paid,the base value (net asset value per unit) will decrease by an amount equivalentto the amount paid.

• Dividends may be paid exceeding the profit earned during the calculationperiod (trading profit including profits of dividends, etc. after expenses). Inthis case, the base value (net asset value per unit) on the settlement datein this period will decrease compared to that on the settlement date in theprevious period. Also, the level of dividends does not always reflect the rateof return for the investment trust/fund during the calculation period.

• A part or all of dividends may be virtually equivalent to some repayment ofthe principal depending on the purchase price of the investment trust/fundby an investor. The same can be applied to a case that an increase in thebase value (net asset value per unit) is smaller than a dividend amount dueto the investment status after purchase of the investment trust/fund.

Please refer to the prospectus for details.

Explanation of major risks (description pursuant to Ar-ticle 37 (Regulation on Advertising, etc.) of the FinancialInstruments and Exchange Act, etc.)The risks described below are a summary of some general risks of investmenttrusts/funds (risks which have an impact on net asset value) and do notcover all risks. Please refer to the pre-trade documents (prospectus andother supplementary documents).

Price volatility risk:Investment trusts/funds invest mainly in equities, bonds and derivativeproducts, etc. The value of the investment trust/fund will go up or down dueto increases or decreases in the prices of such investments. Further, thevalue of such investments will be impacted by political and economic factors,the financial standing of an issuer, market demand and supply, interest ratesand other factors.

Foreign currency risk:Investment trusts/funds which invest in equities or bonds, etc. denominatedin foreign currencies entail a foreign currency risk, and the base value (ornet asset value) of investment trusts/funds may change depending on thecurrency exchange rate. Even when you do not experience a loss of invest-ment principal when calculated in the base currency, you may suffer a lossat conversion into Japanese yen due to fluctuations in exchange rates. Fur-thermore, investment trusts/funds which utilize currency trading amongmultiple currencies may incur costs due to such currency trading dependingon the difference in short-term interest rates between the currencies, andyou may suffer a loss.

Credit risk:For investment trusts/funds which invest in equities or bonds, etc., the pricesof these investments may increase and decrease due to changes in thebusiness or financial standing of the issuer and other factors, and you maysuffer a loss.

Risk pertaining to liquidity:Where there is sudden high volume in a particular investment or when suddenchanges in the external environment surrounding markets triggers a suddendownturn in a market or period of market turmoil, etc., investments may notbe flexibly traded. In such a case, a decline in the price of the investmentmay impact the base value (or net asset value) of the investment trust, result-ing in a loss. Further, the management company may decide to stop calcu-lation of net asset prices or suspend sell or redemption claims.

In addition, for certain types of investment trust/fund there is a risk thatparticular investments may be designated to a separate account (or sidepocket) due to a lack of liquidity. When a separate account is utilized by in-vestment trusts/funds restrictions may apply as to when such investmentscan be liquidated through a sell or redemption claim and there may be a re-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 maybe influenced by investment results in the other funds.

Risk associated with an outflow of money received fromsales orders:When there is a large volume of sale orders in a short period of time, theinvestment trust/fund may be forced to sell structured securities at a lowerrate than the prevailing market price to refund monies to investors and as aresult you may suffer a loss. Also, alternative investment trusts/funds gen-erally have a limitation in selling or cashing out the investment compared totraditional investment trusts/funds. Many alternative investment trusts/fundsonly accept a sell or redemption order on a monthly or quarterly basis andtherefore you may not be able to rapidly exit the investment in, for example,times of economic uncertainty.

Redemption risk:Investment trusts/funds may become subject to mandatory redemption dueto a certain reason. For details, please refer to the pre-trade documents(prospectus and other supplementary documents) before subscription.

Concentration risk:Investment trusts/funds which invest in a certain investment product orsimilar investment product group may significantly decrease in value (netasset value) under severe market circumstances.

Country risk:When changes in political, economic and social conditions in investmentdestination countries and regions cause a dislocation in financial and securitymarkets, security prices may significantly change. Also, investments inemerging markets involve unique risks including small market size and tradevolume, political and social uncertainties, undeveloped market infrastructuresuch as a clearing system, undeveloped information disclosure system andlegal system by supervising authorities, large fluctuations in exchange rates,restrictions on currency remittance to foreign countries and other factors,and, therefore, may have larger price fluctuations compared to investmentsin major developed markets.

Important information on non-Japanese stocksPlease refer to the issuer information when you purchase non-Japanesestocks.

DisclaimerThis material is published solely for information purposes and is intended forthe recipient’s sole use. Credit Suisse does not represent or warrant its ac-curacy or completeness. The material is not directly or indirectly intended forany investment solicitation, and does not constitute an invitation or offer toconclude a transaction contract for financial instruments, etc. Credit Suisseaccepts no liability for loss arising from the use of the information in thismaterial. It is recommended that you consult with the third party professionaladvisors as to legal or tax issues, etc. This material should not be reproducedor quoted without the prior express written consent of Credit Suisse. Theinformation and opinions expressed in this material were produced by PrivateBanking Division at Credit Suisse as of the date of writing and are subjectto change without notice. Views expressed in respect of particular investmentproducts in this material may be different from, or inconsistent with, the ob-


servations and views of other divisions besides Private Banking due to thedifferences in evaluation criteria. This material is solely distributed in Japanby Credit Suisse Securities (Japan) Limited. Credit Suisse Securities (Japan)Limited will not distribute or forward it outside Japan.

You may incur a loss as a result of fluctuations in stock prices if you investin stocks. In relation to foreign stocks, you may incur a loss in such stocksdue to foreign exchange rate fluctuations, etc. The market value of bondsis affected by interest rate fluctuations or changes in the financial standingof any issuer, etc. as such you may incur a loss if you sell such bonds beforethey are redeemed. In relation to foreign bonds, you may incur a loss in suchbonds due to foreign exchange rate fluctuations, etc. The net asset valueof mutual funds can fall as well as rise due to price changes of underlyingstocks, bonds, etc. and foreign exchange rate fluctuations, and this maycause you to incur a loss.

Structured securities and derivatives are complex instruments, typically involvea high degree of risk and are intended for sale only to sophisticated investorswho are capable of understanding and assuming the risks involved. Themarket value of any structured security or transaction may be affected bychanges in financial market conditions, reference indices, volatility and thecredit quality of any issuer or reference issuer.

Furthermore, there are structured securities on which you may incur a losssince the redemption amounts are linked with fluctuations in reference indices,etc. There are also derivatives on which potential losses may exceed theamount of the initial investment. Commission rates for any transactions willbe as per the rates agreed between Credit Suisse and you. For transactionsconducted on a principal to principal basis between Credit Suisse and you,the purchase or sale price will be the total consideration. Transactions con-

ducted on a principal to principal basis, including over the counter derivativestransactions, will be quoted as a purchase/bid price or sell/offer price andfor which a difference or spread may exist. Charges in relation to transactionswill be agreed prior to dealing as per our requirements under the FinancialInstruments and Exchange Law.

By purchasing financial instruments, etc., you may incur a loss or aloss in excess of the principal as a result of fluctuations in marketprices or other financial indices, etc. Please read carefully the Pre-Contract Documentation provided for an explanation of associatedrisks and commissions etc. of individual financial instruments, etc.prior to purchase. Please contact your Relationship Manager if youhave any questions.

UNITED STATES: NEITHER THIS REPORT NOR ANY COPY THEREOFMAY BE SENT, TAKEN INTO OR DISTRIBUTED IN THE UNITED STATESOR TO ANY US PERSON (WITHIN THE MEANING OF REGULATION SUNDER THE US SECURITIES ACT OF 1933, AS AMENDED).

Credit Suisse Securities (Japan) Limited, Financial Instruments Dealer, Di-rector-General of Kanto Local Finance Bureau (Kinsho) No. 66, a memberof Japan Securities Dealers Association, Financial Futures Association ofJapan, Japan Investment Advisers Association, Type II Financial InstrumentsFirms Association.

Copyright © 2019 Credit Suisse Group AG and/or its affiliates. All rightsreserved.

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