Lori Calvasina Chief US Equity Strategist / Managing Director

Transcription

1 US Equity Strategy Equity Research Americas/United States Energy Outlook Still Market Weight, Looking For An Opportunity To Get More Constructive March 10th, 2017 RESEARCH ANALYSTS Lori Calvasina Chief US Equity Strategist / Managing Director lori.calvasina@credit-suisse.com Sara Mahaffy, CFA US Equity Strategist / Vice President sara.mahaffy@credit-suisse.com Joseph Eddy US Equity Strategy Team/ Research Associate joseph.eddy@credit-suisse.com DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. March 10, 2017

2 Still Market Weight, Looking For An Opportunity To Get More Constructive Energy Trade Rallied Through The Election, But Has Sharply Reversed In 2017: Both Equipment & Services and Oil, Gas & Consumable Fuels outperformed strongly in the months leading up to and immediately after the election, but returns relative to the broader equity market took a sharp turn negative as 2017 got off to a start. This reversal has contributed to the faltering performance of value vs. growth so far this year, as Energy is a far bigger weight in value indices than in growth indices. Underperformance has been pronounced in early March, alongside the softening in oil prices. Why We Remain Market Weight Energy: Although we suspect that the Energy trade will continue to be choppy, we confess to getting more intrigued due to (1) resilient retail inflows to Energy sector funds, (2) a strong earnings profile, and (3) the lack of red flags on our sentiment/ownership work, and our sense that a re-engagement within the sector is still unfolding. That being said, elevated valuations vs. the broader market, especially in large cap, still keep us on the sidelines. Concerns about the implications of coming changes in this year s Russell Reconstitution also keep us neutral for now (Energy underperformed in 2011 and 2014 after going up in growth and down in value). Valuations: Despite the sharp underperformance in Energy seen so far this year, it still screens as one of the most overvalued groups n large cap and still appears slightly overvalued in small cap on our 13 year models which are based on NTM forward P/E (ex negative EPS) relative to the broader market. This overvaluation is also seen in our models for a number of other non-consumer cyclicals and commodity sectors such as Capital Goods, Semis, and small cap Materials all counted among the most expensive groups. Ownership: We don t see any red flags on our ownership work, but also don t see anything that gets us particularly excited at the moment. The sector is middle of the pack on our ownership rankings in both small cap and large cap. On large cap ownership, we have seen evidence of broadbased re-engagement with the sector among sell-side analysts, mutual funds, and hedge funds, but it appears to be middle innings to us, as all 3 of the indicators we track have plenty of room to run before reaching past highs. Within small cap, re-engagement has also appeared to be in the middle innings on sell-side net buy ratings, while the percent of mutual funds overweight has been extremely low, and hedge fund net exposure a risk factor in late 2016 came down sharply in early Earnings: The 4Q16 reporting season was generally good for Energy. We saw a strong level of EPS beats for the second consecutive season along with an accelerating pace of revenue beats. Our main gauge of EPS momentum (the percent of analysts EPS estimate revisions to the upside) has also been high for Energy, ranking alongside Financials and Tech as the strongest sectors in the market on this metric. However, we do note that revisions momentum has flattened out a bit after returning to recent highs. We are watching closely for signs of a reversal. Flows: Retail money flows to Energy sector funds have stayed remarkably resilient, as have flows to Energy MLP funds. Monthly inflows to broader Energy sector funds have persisted since August, though we do note that they have recently been losing steam (getting less positive). Digging Deeper To The Industry Level, We Prefer Equipment & Services to Oil, Gas & Consumable Fuels: We examined the two industries (GICS level 3) within the Energy sector on our revisions, valuations, and ownership stats (sell-side net buys and the percent of mutual funds overweight), as well as their relative performance sensitivities to rising interest rates. At the margin we prefer Equipment & Services to Oil & Gas as our revisions indicator is in a stronger uptrend and ownership levels are also a bit more depressed for the former. Both industries look overvalued on our work, though valuations for the Oil Gas & Consumable Fuels have improved slightly over the past week. Neither group has seen a close tie to interest rate shifts in recent years in recent years. Russell Reconstitution: Growth managers have been asking whether the Energy sector will go up weight in the growth benchmarks this year. According to the CS Index Analytics team, their March 6 th forecast indicates that this will indeed occur within mid and large cap, along with commensurate declines in weightings for the sector in the mid and large cap value indices. Across sectors, style shifts are not consistently predictive of future performance, but it is worth noting that the last two times Energy has gone up weight in growth while going down weight in value (summers of 2011 and 2014), the sector went on to significantly underperform the broader market. To be fair, underperformance was not seen after the recons of 2005 and 2007, the other two times in recent memory when Energy also moved up in growth and down in value. 2

3 Energy Led Through The Election, But Has Lagged In 2017 Both Equipment & Services and Oil, Gas & Consumable Fuels outperformed heading into 2016 year end, including after the election, but have sharply reversed course so far in The recent underperformance of these industries has contributed to the faltering performance of value vs. growth seen in As of February 2017, Energy was a far bigger weight in value than growth within both large cap (12.1% in the R1V vs. 0.5% in the R1V) and small cap (5.5% in the R2V vs. 1.3% in the R2G). All Cap Energy Industries Index Relative Performance, Growth/Value Relative Performance, Before & After Election Day R3000, R3 Growth & Value Energy Equipment & Services Oil, Gas & Consumable Fuels Value/Growth Source: CS US Equity Strategy, Russell, S&P Capital IQ Clarifi, as of 3/9/2017 3

4 Energy, Like Value, Was Aligned With Trump s Favorability In the first few months following the election, the Energy trade, and the Value/Growth trade, mostly moved in tandem with shifts in Trump s favorability in the public opinion polls. Correlations Between Trump's Favorability & All Cap Sectors Relative Performance Post Election R3000, Total Returns Large Value/Large Growth Relative Performance vs. Trump's Favorability Post Election Russell 1000 Value vs. Russell 1000 Growth, Price Returns Financials ex REITs Telecom Services Energy Materials Industrials REITs Consumer Discretionary Utilities Technology Consumer Staples Health Care R1000 Value/R1000 Growth Trump's Favorability Source: CS US Equity Strategy, S&P Capital IQ/ClariFi, Russell, RCP, as of 3/6/2017 4

5 Industry Group Valuations Relative to Benchmark Groups at the top of each list (like large cap Energy) look risky, while those at the bottom look intriguing. Energy, like other parts of the global growth trade (Capital Goods, Semis & Semi Equipment, and small cap Materials) has looked highly overvalued in large cap; small cap Energy had also looked expensive, but valuations have recently pulled back and now look only slightly elevated. Banks and Diversified Financials have become less attractive on our models since the election, but valuations are not yet onerous Diversified Financials still looks undervalued in large, and Banks only appear slightly elevated in small. Insurance looks attractively valued in both small and large. Several defensive and yield oriented groups still appear at least slightly expensive including Utilities, large cap HC Equipment & Svcs, large cap Food Beverage & Tobacco, and small cap Telecom. Valuations for these groups have generally improved, but they do not yet look washed out on our models. Other areas that jump out as attractive include Retail and Consumer Durables & Apparel. Small Cap Industry Group Valuation Model Rankings Russell 2000 Proxy, Relative to Benchmark, Z Score vs. Post 2004 Average Semis & Semi Equipment Materials Capital Goods Autos & Components Telecom Svcs Utilities Tech HW & Equipment Banks Energy Pharma, Biotech & Life Sci Diversified Financials Media Food Beverage & Tobacco Real Estate Software & Services Consumer Services Transportation HC Equipment & Svcs Commercial & Professional Svcs HH & Personal Products Insurance Consumer Durables & Apparel Food & Staples Retailing Retailing Large Cap Industry Group Valuation Model Rankings Russell 1000 Proxy, Relative to Benchmark, Z Score vs. Post 2004 Average Capital Goods Energy HC Equipment & Svcs Semis & Semi Equipment Utilities Food Beverage & Tobacco Commercial & Professional Svcs Materials HH & Personal Products Food & Staples Retailing Banks Autos & Components Pharma, Biotech & Life Sci Diversified Financials Media Real Estate Telecom Svcs Software & Services Transportation Consumer Services Tech HW & Equipment Consumer Durables & Apparel Insurance Retailing Source: CS US Equity Strategy, Russell, S&P Capital IQ/ClariFi, ThomsonReuters/IBES, Compustat; updated as of March 9 th,

6 Stock Pickers Ownership Overview as of Early 2017 Energy has been in the middle of the pack on our ownership rankings, neither overowned nor underowned. Our positioning indicators point to the highest ownership levels relative to history in the three Tech industry groups and Food & Staples Retail, in both small and large cap. On the flipside, Capital Goods, Consumer Durables & Apparel, and Household & Personal Products ownership levels have been relatively low versus history in small and large. Large cap Diversified Financials, small cap Insurance, large cap Transports, and small cap Retail have also been deeply out of favor. Small Cap Consensus Views (Z Scores) Large Cap Consensus Views (Z Scores) Industry Groups Composite Crowding Score Sell Side Ratings Relative to Market Mutual Fund Overweights Hedge Fund Net Exposure Industry Groups Composite Crowding Score Sell Side Ratings Relative to Market Mutual Fund Overweights Hedge Fund Net Exposure Software & Services Real Estate NA 1.8 Semis & Semi Equipment Food & Staples Retailing Automobiles & Components Software & Services Food & Staples Retailing Tech Hardware & Equipment Tech Hardware & Equipment Retailing Real Estate NA 0.4 Semis & Semi Equipment Banks Media Health Care Equipment & Svcs Utilities Pharma & Biotech Banks Transportation Food Beverage & Tobacco Telecom Services Pharma & Biotech Energy Commercial & Prof Svcs Media Materials Consumer Services Health Care Equipment & Svcs Diversified Financials Energy Food Beverage & Tobacco Insurance Commercial & Prof Svcs Telecom Services Materials Consumer Services Utilities Capital Goods Household & Personal Products Household & Personal Products Consumer Durables & Apparel Consumer Durables & Apparel Insurance Automobiles & Components Capital Goods Diversified Financials Retailing Transportation Source: CS US Equity Strategy, Morningstar, CS Prime Services, Russell, S&P Capital IQ/Clarifi; as of 1/31/2017 (SS & HF), 4Q16 (MF) 6

7 Financials & Energy Now The Leaders on EPS Momentum The rate of upward EPS estimate revisions is now stronger for Financials and Energy than Tech. Energy is now the 4 th highest industry group in terms of the rate of upward revisions, just behind Tech Hardware & Equipment, where the rate of upward revisions recently fell off peaks, but regained a bit of ground last month. Energy revisions momentum has also flattened out a bit after returning to its recent peaks. On balance the earnings momentum story is still one of the strongest within the US equity market, but its strength has faded a bit of late. Sector % Of Revisions to the Upside in Previous 13 Weeks Change Over Past 6 Months Change Over Past Month Our View On Revisions Trends Financials 6 21% -4% = Energy 57% -1% Info Tech 51% -5% 1% Utilities 51% 6% 2% Industrials 49% 13% 3% Materials 4-7% -3% = Health Care 37% -18% -1% = Consumer Discretionary 35% -7% -2% = Consumer Staples 32% -14% 2% Telecom 18% -21% -13% Industry Group % Of Revisions to the Upside in Change Over Past Change Over Past Our View On Previous 13 Weeks 6 Months Month Revisions Trends Semis & Semi Equip 71% 2% = Banks 7 33% -4% = Tech HW & Equip 58% 5% 3% Energy 57% -1% = Diversified Financials 55% 13% -1% Capital Goods 52% 11% 6% Utilities 51% 6% 2% Media 48% 17% 6% Transportation 46% 21% -2% Insurance 44% 14% -2% Comm & Prof Svcs 42% 2% = Autos & Components 41% -5% 5% Materials 4-7% -3% = Software & Services 38% -15% HC Equipment & Svcs 37% -19% -2% = Real Estate 37% -1-1% = Pharma/Biotech & LS 36% -17% = Retailing 35% -12% -4% = Food Beverage & Tobacco 34% -2 3% Consumer Services 34% -5% -8% = HH & Personal Products 3-14% 1% Food & Staples Retailing 29% -3% 1% = Consumer Durables & Apparel 28% -15% -2% = Telecom Services 18% -2-13% Change calculated as the difference between % of revisions to the upside in previous 13 weeks as of the latest data and as of the data from 1, 6 months prior Source: CS US Equity Strategy, Russell, ThomsonReuters/IBES, as of early March

8 Strong Earnings Recovery Already Anticipated for Energy The rate of EPS beats for Energy has been at the high end of its historical range the past two reporting seasons. The rate of sales beats has also improved strongly off its lows, and is well below past highs pointing to ongoing potential for improvement. Large cap consensus EPS estimates indicate that a sharp EPS growth recovery is already anticipated for the Energy sector. All Cap Energy: % Beating EPS & Sales R Large Cap Energy: Yr/Yr Growth Weighted Median, Quarterly EPS Growth, R % Beating EPS % Beating Sales Actual Estimates Source: CS US Equity Strategy, Russell, S&P Capital IQ/ClariFi, CIQ Estimates, as of 3/6/2017 8

9 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Energy & MLP Flows Have Been Resilient Inflows to Energy sector funds have lost some steam in recent months, but remain in positive territory. Meanwhile, inflows to Energy MLP funds have stayed positive as well, gaining strength. In both categories, inflows have been below their 2014 highs. Energy Flows Bn $, Active & Passive w/etf 4 Energy MLPs Bn $, Active & Passive w/etf (1) - (2) (0.5) Source: CS US Equity Strategy, Morningstar; through February

10 Key Charts & Takeaways For The Energy Sector Staying Market Weight Expensive Valuations Keep Us on the Sidelines Earnings revisions have flattened out a bit after climbing back to recent highs. Still expensive in large, and slightly pricey in small using our primary model for the sector. Relative performance has been positively correlated with interest rates in small cap. Energy sector inflows took a step back in January and February, but stayed positive. Our ownership/positioning indicators point to broad-based reengagement with large cap Energy (no signs of crowding yet), and more mixed views/trends in small cap All Cap Revisions Energy Upward EPS Est Revisions NTM, Upward as a % of total, S&P 1500 Rolling 13-week Revisions Small Cap Valuation Model Large Cap Valuation Model Small Cap Energy Relative Valuation Median NTM P/E Ex Neg EPS (Z score); Metrics & returns relative to Russell 2000 proxy 3 6 Large Cap Energy Relative Valuation Median NTM P/E Ex Neg EPS (Z score); Metrics & returns relative to Russell 1000 proxy Mo. Fwd Return (shading, right axis) Model (line, left axis) 12 Mo. Fwd Return (shading, right axis) Model (line, left axis) Source: CS US Equity Strategy, Russell, S&P Capital IQ/ClariFi, Compustat, Thomson Reuters/IBES, Capital IQ estimates 10

11 Small Cap (R2000) Large Cap (R1000) Energy Sector Ownership Profile Broad based re-engagement with large cap Energy seen, more mixed views/trends in small cap. In large cap, our sell-side, mutual fund, and hedge fund positioning indicators have been climbing off of deep lows, and still have plenty of room to run. In small cap, hedge fund net exposure has been slipping off extreme highs, while mutual fund overweights are slipping back toward recent lows. However, sell-side net buy ratings have risen sharply off of historical lows, now back in line with their historical average. Note that in large cap, hedge fund net exposure has had a robust correlation with relative performance, especially in recent years. Sell-Side Ratings Mutual Fund Overweights Hedge Fund Net Exposure Large Cap Energy Sell Side Bullishness % of Buy Ratings vs. R1000, monthly 18% 16% 14% 12% 1 8% 6% 4% 2% -2% -4% Moving up off historical lows Large Cap Energy % Overweight Long only R1000, R1000G, R1000V and S&P 500 funds, quarterly Climbing back toward high end of range Large Cap Energy Net Exposure by Long/Short Hedge Funds HF exposure = single stocks & ETFs, daily Moving up off historical lows Small Cap Energy Sell Side Bullishness % of Buy Ratings vs. R2000, monthly 12% 1 8% 6% 4% 2% -2% -4% -6% -8% -1 Moving up off historical lows Small Cap Energy % Overweight Long only R2000, R2000G and R2000V funds, quarterly Slipping back toward lows 1 Small Cap Energy Net Exposure by Long/Short Hedge Funds HF exposure = single stocks & ETFs, daily Slipping from past peaks Source: CS US Equity Strategy, Morningstar, CS Prime Services, Russell, S&P Capital IQ/Clarifi; as of 2/28(sell-side), 1/31 (mutual fund & hedge fund) 11

12 Longer-Term Valuation Profile For Energy On our long term relative valuation models (data going back to 1985), Energy looks attractive vs. history in small cap, and has inched down to neutral in large cap, after having been elevated in late 2016/early Valuations have risen well above their 2014/2015 lows in both small and large cap. Small Cap Energy Relative Valuation Model vs. 12 Month Forward Relative Return Equal weighted median LTM P/E ex neg EPS, P/B, P/S,NTM P/E ex neg EPS; relative to Russell 2000 Large Cap Energy Relative Valuation Model vs. 12 Month Forward Relative Return Equal weighted median LTM P/E ex neg EPS, P/B, P/S,NTM P/E ex neg EPS; relative to Russell Forward Return (shading, right axis) Valuation Model (line, left axis) Forward Return (shading, right axis) Valuation Model (line, left axis) Source: CS US Equity Strategy, Russell, S&P Capital IQ/ClariFi, as of 3/9/

13 Energy Industry Scorecard Within the Energy sector, we have a slight preference for Equipment & Services over Oil Gas & Consumable Fuels. Industry Group Industry Revisions Investor Sentiment Valuation Economics Overall Score Composite Trend Score Composite of sellside net buy and mutual fund % OW Z Scores valuation model, rel to broad mkt Correlation w/ 10 yr yield since 2003 Average, valuation is weighted twice Energy Equipment & Services Energy Oil, Gas & Consumable Fuels Revisions/Earnings Momentum: Revisions momentum has been on the rise for Equipment & Services, though it has started to decelerate a bit after nearing past highs. and bears watching. Momentum has stalled near post financial crisis highs for Oil, Gas & Consumable Fuels. Valuations: Valuations appear elevated for both industries, but are more onerous for Equipment & Services; Oil, Gas & Consumable Fuels valuations have gotten a bit less onerous after early March s pullback. Investor Sentiment & Positioning: Equipment & Services appears more out of favor than Oil, Gas & Consumable Fuels where a more meaningful re-engagement has already been underway. Economy/Interest Rates: Neither industry within Energy has shown significant sensitivity to interest rate trends (correlations between performance relative to the broader market and moves in 10 year Treasury yields have been close to 0). Scoring: Higher & positive is better than lower & negative. Source: CS US Equity Strategy, S&P Capital IQ Clarifi, Compustat; Morningstar, IBES; z scores are based on time series built on all cap universes of the specified groups, valuation time series are NTM P/E vs. the broader equity market for both industries 13

14 Oil & Gas Equipment & Svcs Energy Industries Key Charts Our indicators suggest that Equipment & Services has a bit more appeal than Oil, Gas & Consumable Fuels. On positioning, Equipment & Services still appears out of favor, though sell-side net buys and mutual fund overweights are starting to rise off 13 year lows. Meanwhile, the sell-side and mutual funds have already re-engaged in Oil, Gas & Consumable Fuels in a more meaningful way. On revisions, momentum has been on the rise for Equipment & Services, though it has started to decelerate a bit after nearing past highs and bears watching. Oil, Gas & Consumable Fuels revisions have stalled. Sell-Side Ratings Mutual Fund Overweights Earnings Revisions All Cap Energy Equip & Svcs Sell Side Bullishness Buy Ratings as a % of Total Ratings vs. Benchmark 25% 2 15% 1 5% -5% -1-15% % of Funds Overweight Energy Eq & Svcs All fund categories vs. respective benchmarks All Cap Energy Equip & Svcs EPS Revisions Momentum % of next 4 qtrs EPS estimate revisions to the upside, 3 month average % Overweight Average Since 2003 All Cap Oil, Gas & Cons Fuels Sell Side Bullishness Buy Ratings as a % of Total Ratings vs. Benchmark 15% 1 5% -5% -1 % of Funds Overweight Oil, Gas & Cons All fund categories vs. respective benchmarks All Cap Oil, Gas & Cons Fuels EPS Revisions Momentum % of next 4 qtrs EPS estimate revisions to the upside, 3 month average % Overweight Average Since 2003 Source: CS US Equity Strategy, Capital IQ/ClariFi, Morningstar, IBES, Russell; as of 2/28 (sell-side and revisions), 1/31 (mutual funds) 14

15 Energy Getting Growthier In Mid & Large After this year s Russell Reconstitution, Energy is expected to remain a bigger weight in value, but the gap with growth is expected to narrow. The anticipated style shift within mid and large is mainly being driven by Oil Gas & Consumable Fuels. In small cap, Energy is increasing in weight in core and value (and growth, but to a lesser extent). The up weight in the 2000 core and value is largely being driven by names being demoted from the Russell 1000 to Russell 2000 and new additions to the Russell 2000 index. Forecasted GICS Energy Weight Shifts: Russell 2000 Indices R2 Current R2 Proj R2 Change R2V Current R2V Proj R2V Change Source: CS Index Analytics Team, forecasts as of March 6 th ; sector and industry weight shifts greater than +/- 75 bps are highlighted R2G Current R2G Proj R2G Change Energy 3.5% 4.5% % % 1.3% 1.9% 0.6% Energy Equipment & Services 1.1% 1.7% 0.5% 1.8% 2.8% 1.1% 0.5% 0.5% 0.1% Oil, Gas & Consumable Fuels 2.3% 2.8% 0.4% 3.7% 4.2% 0.5% 0.8% 1.3% 0.5% Forecasted GICS Energy Weight Shifts: Russell 2500 Indices R25 Current R25 Proj R25 Change R25V Current R25V Proj R25V Change R25G Current R25G Proj R25G Change Energy 4.4% 4.8% 0.4% 7.4% 7.5% 0.1% % Energy Equipment & Services 1.3% 1.4% 0.1% 2.3% 2.4% 0.1% 0.2% 0.3% 0.1% Oil, Gas & Consumable Fuels 3.1% 3.4% 0.4% % % 1.7% 0.8% Forecasted GICS Energy Weight Shifts: Russell Mid Cap Indices RMid Current RMid Proj RMid Change RMidV Current RMidV Proj RMidV Change RMidG Current RMidG Proj RMidG Change Energy 5.9% 6.2% 0.3% 9.6% 8.1% -1.5% 1.3% 3.9% 2.6% Energy Equipment & Services 1.3% 1.1% -0.2% 2.3% % % 0.1% Oil, Gas & Consumable Fuels 4.6% 5.1% 0.4% 7.3% 6.1% -1.2% 1.3% 3.8% 2.5% Forecasted GICS Energy Weight Shifts: Russell 1000 Indices R1 Current R1 Proj R1 Change R1V Current R1V Proj R1V Change R1G Current R1G Proj R1G Change Energy 6.4% 6.4% % 10.7% -1.5% 0.5% 2.1% 1.6% Energy Equipment & Services 1.1% % 1.6% -0.5% % 0.5% Oil, Gas & Consumable Fuels 5.3% 5.4% 0.1% 10.1% 9.1% % 1.7% 1.2% 15

16 Going Up in Growth Has Mixed Implications For Energy Since 2005 there have been four recons where Energy has gone up in growth and down in value the last two times it happened the sector underperformed following the recon on an all cap basis. In 2011 and 2014 Energy generally went up in growth and down in value across small, mid and large cap. In 2011, relative performance was choppy around the recon, but the sector lagged following the event longer term. In 2014, the recon basically marked the peak in relative performance that year - the sector outperformed leading up to the event, but underperformed sharply in the months following. Energy also went up in growth/down in value in 2005 and In these years Energy performance was choppy immediately following the event, but went on to outperform afterwards on an all cap basis. All Cap Energy Relative Performance Around Recon Style Shifts Rel to R3000 Index, Total Returns Up in growth Source: CS US Equity Strategy, Russell, S&P Capital IQ/ClariFi 16

17 Mixed Trends For Sectors Going Up In The 2000 Core The chart below highlights the relative performance trends around recon (6 months before/after) for sectors that saw a meaningful up weight in the Russell 2000 core index (greater than 75 basis points) since Energy has not seen a meaningful up weight in the 2000 core before (looking at past recons since 2005). For other sectors, relative performance trends have been mixed before/after the recon, but on balance, they tend to underperform slightly ahead of the recon, and outperform slightly afterwards. Rel Perf Of Small Cap Sectors Seeing A Large Up Weight in The 2000 Core Before/After Recon vs. R2000 Index, Total Returns Tech (2005) CD (2006) Fin incl REITs (2006) Fin incl REITs (2008) Industrials (2008) Tech (2012) Fin incl REITs (2014) CD (2015) Recon Date Median Source: CS US Equity Strategy, Russell, S&P Capital IQ/ClariFi 17

18 Energy Stakes vs. Benchmark w/recon Shifts After this year s Russell Reconstitution, most mid and large cap growth funds seem likely to shift from being slightly overweight Energy to slightly underweight Energy. This could generate a need to buy the sector on the part of mid and large cap growth funds if the sector starts outperforming again. But on the flipside, the Recon changes are likely to cause mid cap value funds to turn less underweight, and to take large cap value funds from an underweight to an overweight resulting in less of a need to buy the sector if performance picks up, and more of a need to sell the sector if underperformance persists. Within large cap, there is more AUM benchmarked to value than growth, according to data from Morningstar. In mid cap, AUM levels are pretty similar. Energy: Projected Changes to Fund OW/UW Positions From Recon Forecasts Proj Index Median Fund Allocation Current Index Weight Weight (Recon Forecast) Current OW/UW OW/UW With Recon Forecast Change Russell 2000 Growth 2.6% 1.4% 1.9% 1.2% 0.7% OW's narrow slightly Russell 2000 Value 5.4% 5.8% % -1.6% Increases Fund UW's Russell Mid Cap Growth 1.9% 1.3% 3.9% 0.6% -2. Flips slight OW's to UW's Russell Mid Cap Value % % Narrows Fund UW's Russell 1000 Growth 1.5% 0.6% 2.1% 0.9% -0.6% Flips OW's to UW's Russell 1000 Value 12.2% % -0.9% 1.4% Flips UW's to OW's Fund allocations and current index weights are based on Jan 31st pricing, recon forecast is based on March 6th pricing Source: CS US Equity Strategy, CS Index Analytics team, Morningstar, Russell, S&P Capital IQ/ClariFi 18

19 Projected R1 to R2 Demotions Five are in Energy (mostly Equipment & Services); none are well owned by long only funds. Forecasted Russell 1000 to Russell 2000 Demotions Ranked by Market Cap Source: CS Index Analytics Team, CS US Equity Strategy, forecasts as of March 6 th, 2017; ownership based on the holdings of 466 small cap funds, 209 mid cap funds, 593 large cap funds # Small Cap Funds Market R1 Net Wgt R2 Net Wgt Ticker Name GICS Sector GICS Industry Price Cap Change Chg Chg KOS Kosmos Energy Ltd Energy Oil, Gas & Consumable Fuels ,345 R1 to R % 0.061% UFS Domtar Corp Materials Paper & Forest Products ,341 R1 to R % JUNO Juno Therapeutics Inc Health Care Biotechnology ,284 R1 to R % 0.092% PAY VeriFone Systems Inc Information Technology Electronic Equipment, Instrume ,282 R1 to R % GRPN Groupon Inc Consumer Discretionary Internet & Direct Marketing Re ,271 R1 to R % DO Diamond Offshore Drilling Energy Energy Equipment & Services ,239 R1 to R % 0.056% RDC Rowan Cos Plc Energy Energy Equipment & Services ,187 R1 to R % CCO Clear Channel Outdoor Holdings Consumer Discretionary Media ,174 R1 to R % 0.011% CCP Care Capital Properties Inc Real Estate Equity Real Estate Investment ,162 R1 to R % 0.115% MDRX Allscripts Healthcare Solutions Inc Health Care Health Care Technology ,154 R1 to R % DRQ Dril-Quip Inc Energy Energy Equipment & Services ,140 R1 to R % 0.114% AGIO Agios Pharmaceuticals Inc Health Care Biotechnology ,109 R1 to R % 0.096% APAM Artisan Partners Asset Management Financials Capital Markets ,101 R1 to R % THC Tenet Healthcare Corp Health Care Health Care Providers & Servic ,077 R1 to R % 0.089% KBR KBR Inc Industrials Construction & Engineering ,066 R1 to R % 0.109% EAT Brinker International Inc Consumer Discretionary Hotels, Restaurants & Leisure ,039 R1 to R % 0.109% CVA Covanta Holding Corp Industrials Commercial Services & Supplies ,982 R1 to R % 0.096% FEYE FireEye Inc Information Technology Software ,926 R1 to R % 0.092% JCP JC Penney Co Inc Consumer Discretionary Multiline Retail ,837 R1 to R % 0.094% QCP Quality Care Properties Inc Real Estate Equity Real Estate Investment ,792 R1 to R % 0.096% NA NA NA HTZ Hertz Global Holdings Inc Industrials Road & Rail ,757 R1 to R % INOV Inovalon Holdings Inc Health Care Health Care Technology ,739 R1 to R % DDS Dillard's Inc Consumer Discretionary Multiline Retail ,717 R1 to R % 0.047% NE Noble Corp plc Energy Energy Equipment & Services ,581 R1 to R % 0.084% FIT Fitbit Inc Information Technology Electronic Equipment, Instrume ,357 R1 to R % 0.052% HRI Herc Holdings Inc Industrials Trading Companies & Distributo ,330 R1 to R % VREX Varex Imaging Corp Health Care Health Care Equipment & Suppli ,229 R1 to R % 0.066% NA NA NA VSTO Vista Outdoor Inc Consumer Discretionary Leisure Products ,168 R1 to R % 0.062% SPWR SunPower Corp Information Technology Semiconductors & Semiconductor ,077 R1 to R % 0.024% RRD RR Donnelley & Sons Co Industrials Commercial Services & Supplies ,076 R1 to R % 0.056% LKSD LSC Communications Inc Industrials Commercial Services & Supplies R1 to R % 0.036% NA NA NA ASIX AdvanSix Inc Materials Chemicals R1 to R % 0.043% NA NA NA CHUBA CommerceHub Inc Information Technology Internet Software & Services R1 to R % 0.012% CHUBK CommerceHub Inc Information Technology Internet Software & Services R1 to R % 0.025% DFIN Donnelley Financial Solutions Inc Financials Capital Markets R1 to R % 0.029% NA NA NA # Mid Cap Funds # Large Cap Funds 19

20 Demotions Initially Lead Following The Recon Generally, demotions lag leading up to the recon. Performance trends are choppy following, but they do tend to outperform near term. Absolute Perf: Dem otions Relative Perf: Dem otions Cumulative Average Return of R1 to R2 Demotions Around Recon Date: All Sectors , Absolute Total Returns Choppy absolute performance trends. Change in Small Cap Ownership: Demotions Cumulative Average Rel Return of R1 to R2 Demotions Around Recon Date: All Sectors Rel to R2000 Idx Underperforms before the event, choppy trends after the recon. Rel to S&P 500 Idx Change in Mid/Large Ownership: Demotions Average Change in Small Cap Fund Ownership Before/After the Recon (# Funds): Demotions (1) (2) (3) (4) (5) Quarter Before Recon Quarter After Recon Average Change in Mid/Large Cap Fund Ownership Before/After the Recon (# Funds): Demotions (1) (2) (3) (4) (5) Quarter Before Recon Quarter After Recon Source: CS US Equity Strategy Team, S&P Capital IQ/ClariFi, Russell, evestment, Morningstar; performance study only includes stocks with pricing 6 months before/after event (excludes IPOs and M&A takeouts around the recon); based on performance of actual promotions/demotions (not forecasts) 20

21 Top Projected Russell 2000 Adds By Market Cap 12 of the top 25 projected Russell 2000 Adds by market cap are in Energy, mainly in Oil, Gas & Consumable Fuels industry. Top 25 Forecasted Russell 2000 Adds Ranked By Market Cap Ticker Name GICS Sector GICS Industry Price Market Cap Change R2 Net Wgt Chg JELD JELD-WEN Holding Inc Industrials Building Products ,168 R2 Add 0.04 TELL Tellurian Inc Energy Oil, Gas & Consumable Fuels ,080 R2 Add 0.096% JAG Jagged Peak Energy Inc Energy Oil, Gas & Consumable Fuels ,849 R2 Add 0.023% LAUR Laureate Education Inc Consumer Discretionary Diversified Consumer Services ,166 R2 Add 0.024% TWNK Hostess Brands Inc Consumer Staples Food Products ,992 R2 Add 0.054% ARCH Arch Coal Inc Energy Oil, Gas & Consumable Fuels ,841 R2 Add 0.084% REVG REV Group Inc Industrials Machinery ,773 R2 Add 0.019% FRAC Keane Group Inc Energy Energy Equipment & Services ,761 R2 Add 0.028% WRD WildHorse Resource Development Energy Oil, Gas & Consumable Fuels ,114 R2 Add 0.02 EXXI Energy XXI Gulf Coast Inc Energy Oil, Gas & Consumable Fuels ,023 R2 Add 0.04 BAS Basic Energy Services Inc Energy Energy Equipment & Services R2 Add 0.051% HLNE Hamilton Lane Inc Financials Capital Markets R2 Add 0.012% REN Resolute Energy Corp Energy Oil, Gas & Consumable Fuels R2 Add 0.039% AKAO Achaogen Inc Health Care Pharmaceuticals R2 Add 0.041% NXEO Nexeo Solutions Inc Industrials Trading Companies & Distributo R2 Add 0.013% JNCE Jounce Therapeutics Inc Health Care Pharmaceuticals R2 Add 0.009% PVAC Penn Virginia Corp Energy Oil, Gas & Consumable Fuels R2 Add 0.039% HK Halcon Resources Corp Energy Oil, Gas & Consumable Fuels R2 Add 0.037% FBM Foundation Building Materials Inc Industrials Trading Companies & Distributo R2 Add 0.011% SD SandRidge Energy Inc Energy Oil, Gas & Consumable Fuels R2 Add 0.021% CLPR Clipper Realty Inc Real Estate Equity Real Estate Investment R2 Add 0.004% KEG Key Energy Services Inc Energy Energy Equipment & Services R2 Add 0.015% KEM Kemet Corp Information Technology Electronic Equipment, Instrume R2 Add 0.027% METC Ramaco Resources Inc Materials Metals & Mining R2 Add 0.004% MPO Midstates Petroleum Co Inc Energy Oil, Gas & Consumable Fuels R2 Add 0.019% Source: CS Index Analytics Team, forecasts as of March 6 th,

22 Perf of R2 Adds Around Recon Date New adds to the R2000 generally outperform the broader index before the recon, but tend to lag in the six months following the event. Absolute Perf: R2000 Adds Cumulative Average Return of R2000 Adds Around Recon Date: All Sectors , absolute total returns Relative Perf: R2000 Adds Cumulative Average Relative Return of R2000 Adds Around Recon Date: All Sectors , relative total returns vs. R2000 Index New R2 adds tend to lag following the event Source: CS US Equity Strategy Team, S&P Capital IQ/ClariFi, Russell; performance study only includes stocks with pricing 6 months before/after event (excludes IPOs and M&A takeouts around the recon); based on performance of actual adds/deletes (not forecasts) 22

23 DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Companies Mentioned (Price as of 09-Mar-2017) Achaogen (AKAO.OQ, $26.7) AdvanSix (ASIX.N, $25.82) Agios Pharmaceuticals, Inc (AGIO.OQ, $51.77) Allscripts Healthcare Solutions Inc. (MDRX.OQ, $11.79) Arch Coal (ARCH.N, $66.32) Artisan Partners (APAM.N, $27.0) Basic Energy Svc (BAS.N, $30.95) Brinker International Inc. (EAT.N, $41.8) CCP (CCP.N, $24.43) Clear Ch Outdoor (CCO.N, $5.8) CommerceHub (CHUBA.OQ, $16.43) Covanta Holding Corp (CVA.N, $15.1) Diamond Offshore Drilling, Inc (DO.N, $15.23) Dillard's Inc. (DDS.N, $52.74) Domtar Corp. (UFS.N, $37.68) Donnelley Fincl (DFIN.N, $20.34) Dril-Quip, Inc. (DRQ.N, $54.15) Energy XXI Gulf (EXXI.OQ, $29.51) FireEye (FEYE.OQ, $10.44) Fitbit (FIT.N, $5.85) Foundation Bldg (FBM.N, $15.95) Groupon Inc. (GRPN.OQ, $4.04) Halcon Resources Corp. (HK.N, $7.2) Hamilton Lane (HLNE.OQ, $18.44) Herc Holdings (HRI.N, $45.94) Hertz Global Holdings Inc. (HTZ.N, $21.28) Hostess Brands (TWNK.OQ, $15.75) Inovalon Holdings Inc (INOV.OQ, $11.8) J.C. Penney Company, Inc (JCP.N, $6.3) JELD-WEN Holding (JELD.N, $31.88) Jagged Peak Energy, Inc. (JAG.N, $12.56) Jounce (JNCE.OQ, $22.55) Juno Therapeutics, Inc (JUNO.OQ, $22.43) KBR Inc. (KBR.N, $14.74) KEMET (KEM.N, $11.27) Keane Grp (FRAC.N, $15.3) Key Energy Servs (KEG.N, $25.33) Kosmos Energy Ltd (KOS.N, $5.91) LSC Commns (LKSD.N, $24.53) Laureate Education, Inc. (LAUR.OQ, $12.53) Midstat Ptrlum (MPO.N^B16) Nexeo Solutions (NXEO.OQ, $9.05) Noble Corporation (NE.N, $6.06) Penn Virginia (PVAC.OQ, $47.4) Quality Care (QCP.N, $18.49) REV Group Inc. (REVG.N, $26.69) RR Donnelley (RRD.N, $14.55) Ramaco Resources Inc. (METC.OQ, $10.7) Resolute (REN.N, $37.15) Rowan Companies (RDC.N, $15.69) SandRidge (SD.N, $17.88) SunPower Corp. (SPWR.OQ, $7.23) Tellurian Inc (TELL.OQ, $9.87) Tenet Healthcare Corporation (THC.N, $20.29) Varex Imaging (VREX.OQ, $32.34) VeriFone Systems, Inc. (PAY.N, $20.35) Vista Outdoor (VSTO.N, $20.51) Wildhorse (WRD.N, $12.01) Analyst Certification Disclosure Appendix I, Lori Calvasina, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts stock rating are defined as follows: Outperform (O) : The stock s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between - 5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 2 or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts sector weightings are distinct from analysts stock ratings and are based on the analyst s expectations for the fundamentals and/or valuation of the sector* relative to the group s historic fundamentals and/or valuation: Overweight : The analyst s expectation for the sector s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst s expectation for the sector s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst s expectation for the sector s fundamentals and/or valuation is cautious over the next 12 months. *An analyst s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (64% banking clients) Neutral/Hold* 39% (6 banking clients) Underperform/Sell* 14% (52% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other indivi dual factors. Important Global Disclosures Credit Suisse s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse s analysts to clients may depend on a specific client s preferences regarding the frequency and manner of receiving communications, the client s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS- -Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (USA) LLC... Lori Calvasina ; Sara Mahaffy, CFA ; Joseph Eddy For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at or call +1 (877)

24 This report is produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division. For more information on our structure, please use the following link: This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.the information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in European Union (except Switzerland): by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Germany: Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). United States and Canada: Credit Suisse Securities (USA) LLC; Switzerland: Credit Suisse AG; Brazil: Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; Mexico: Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); Japan: by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau ( Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; Hong Kong: Credit Suisse (Hong Kong) Limited; Australia: Credit Suisse Equities (Australia) Limited; Thailand: Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok10500, Thailand, Tel ; Malaysia: Credit Suisse Securities (Malaysia) Sdn Bhd; Singapore: Credit Suisse AG, Singapore Branch; India: Credit Suisse Securities (India) Private Limited (CIN no.u67120mh1996ptc104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH ) and as Stock Broker (registration no. INB ; INF ; INB ; INF ), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T ; South Korea: Credit Suisse Securities (Europe) Limited, Seoul Branch; Taiwan: Credit Suisse AG Taipei Securities Branch; Indonesia: PT Credit Suisse Securities Indonesia; Philippines:Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Additional Regional Disclaimers Hong Kong: Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an Australian financial services licence (AFSL) and is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (the Act) under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Act). Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Australia (to the extent services are offered in Australia): Credit Suisse Securities (Europe) Limited ( CSSEL ) and Credit Suisse International ( CSI ) are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority ( FCA ) and the Prudential Regulation Authority under UK laws, which differ from Australian Laws. CSSEL and CSI do not hold an Australian Financial Services Licence ( AFSL ) and are exempt from the requirement to hold an AFSL under the Corporations Act (Cth) 2001 ( Corporations Act ) under Class Order 03/1099 published by the Australian Securities and Investments Commission ( ASIC ), in respect of the financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's professional clients and eligible counterparties as defined by the FCA, and wholesale clients as defined under section 761G of the Corporations Act. Credit Suisse (Hong Kong) Limited ( CSHK ) is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Credit Suisse Securities (USA) LLC (CSSU) and Credit Suisse Asset Management LLC (CSAM LLC) are licensed and regulated by the Securities Exchange Commission of the United States under the laws of the United States, which differ from Australian laws. CSSU and CSAM LLC do not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1100 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore Branch to overseas investors (as defined under the Financial Advisers Regulations). Credit Suisse AG, Singapore Branch may distribute reports produced by its foreign entities or affiliates pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact Credit Suisse AG, Singapore Branch at for matters arising from, or in connection with, this report. By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore Branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the FAA ), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore Branch may provide to you. UAE: This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority ( DFSA ). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials,management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright 2017 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only