1q:2017 capital markets outlook - home - investment … · 2017-02-03 · cmo 1q 2017 | 5...
TRANSCRIPT
The information herein reflects prevailing market conditions and our judgments as of the date of this document, which are subject to change. In preparing this document, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. Opinions and estimates may be changed without notice and involve a number of assumptions which may not prove valid. There is no guarantee that any forecasts or opinions in this material will be realized. Information should not be construed as investment advice.
Investment Products Offered
• Are Not FDIC Insured • May Lose Value • Are Not Bank Guaranteed
1Q:2017 CAPITAL MARKETS OUTLOOK
1|CMO 1Q 2017
0.80.3
2.9
–0.5–1.1
–2.6–2.8
–1.2–2.2
1.8
–4.12.1
13.95.0
1.45.2
2.2
4.44.9
1.00.3
6.29.9
17.1
11.21.0
21.312.0
Past performance does not guarantee future results.As of December 31, 2016Global corporates, Japan and euro-area government bonds in hedged USD terms. All other non-US returns in unhedged USD terms. An investor cannot invest directly in an index, and its performance does not reflect the performance of any AB portfolio. The unmanaged index does not reflect the fees and expenses associated with the active management of a portfolio.*Europe, Australasia and the Far East†Returns reflect Morningstar US open-end fund category averages.Source: Bloomberg Barclays, Morningstar, MSCI, Standard & Poor’s (S&P) and AB
Returns in US Dollars
–0.10.6
1.7
–1.4–1.2
–3.8–3.6
–2.1–2.6
1.8
–4.2–0.7
8.83.8
Improved Returns for Risk Assets—Especially After US Election
Equities
Government Bonds
Credit
Alternatives†
Full Year 2016 4Q:2016
Japan
US High Yield
US
Euro Area
Emerging-Market Debt
Long/Short Equity
MultialternativeNontraditional Bond
Global Corporate
EAFE*
US Large-Cap
Emerging Markets
US Small-Cap
Municipals
Since US Election
2|CMO 1Q 2017
…Trump Bump Following US Election2016 Returns of S&P 500 Index and a 60/40 Portfolio (Percent)
S&P 500 60/40
Market Levels Hadn’t Changed Much, Until…US Aggregate Yield to Worst and Level of S&P 500 Index
1,800
1,900
2,000
2,100
2,200
2,300
1.8
2
2.2
2.4
2.6
2.8
Mar 15 Aug 15 Jan 16 Jun 16 Nov 16
Per
cent
Past performance and forecasts do not guarantee future results.As of December 31, 2016Beta trade calculated from October 1, 2010, to February 28, 2015. After the Beta Trade is from March 1, 2015, to November 8, 2016. 60/40 is 60% S&P 500 and 40% Bloomberg Barclays US Aggregate Bond. Post-US election returns calculated from November 9, 2016, to December 31, 2016US Aggregate yields represented by Bloomberg Barclays US Aggregate Bond yield to worstSource: Bloomberg Barclays, S&P and AB
After “After the Beta Trade” or Trump Bump?
Prior to Election, Equity Returns MutedAnnualized Returns of S&P 500 Index and a 60/40 Portfolio (Percent)
17.3
6.0
3.2
11.8
4.53.0
Beta Trade After the BetaTrade (ABEstimate)
After the BetaTrade (Actual)
S&P 500 60/40
US Agg. Yield(Left Scale)
S&P Level
US Election
Post US Election
5.0%
Post US Election 2.1%
12.0
8.3
3|CMO 1Q 2017
Current assessment does not guarantee future results.As of December 31, 2016Source: AB
Lower expected returns
Elevated valuations Lack of top-line growth Net margin gains limited
Higher volatility
Increased dispersion Greater alpha potential
Increased downside potential
Yields rise on a “low and slow” path
Yields rose
Curve steepened
Real yields rose
Inflation expectations rose
Muni/Treasury ratio fell
Dividend yielders underperformed
Financials, cyclicals outperformed
Small-caps beat large-caps
Higher-tax companies beat lower-tax companies
Impact of rising yields on:
Interest costs, net margins Discount rates, P/Es Home, auto sales
Impact of stronger dollar on net exports
Is this a Trump bump or a trajectory change?
Increased cash flows or sustainable growth driver?
What will ultimately be proposed?
When?
What will pass?
2017 and Beyond: After the Beta Trade Meets Trumponomics
Key ConsiderationsPost-Election RecapAfter the Beta Trade Principles
4|CMO 1Q 2017
Current assessment does not guarantee future results.As of December 31, 2016The information contained here reflects the views of AB or its affiliates and sources it believes are reliable as of the date of this publication. AB makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized.Source: AB
Focus on US Growth and Jobs Promises, Promises: Will Trump’s Proposals Translate into Policy?
Focus Growth Inflation Who Decides? Comments
Taxation ? Congress/President
To pass in late 2017 and implement in 2018
Not an easy task because of special interests
Infrastructure Congress/President
Size likely to be well below projected amount unless funding plans are changed
Trade – President has
discretion Will create winners and losers in the US
China, Mexico, South Korea have largest US trade exposure
Energy – President has discretion
Contentious issue in US, and some decisions will be challenged in courts
Might ignore international climate agreements instead of pulling out of them
Regulation – President has discretion
Focus on energy, finance and environment
A key focus in the first days of the new administration
Immigration ? President has
discretion
A big campaign issue, and President Trump will have to show progress in this area
Will the US reduce the flow of skilled labor into the country?
5|CMO 1Q 2017
Historical analysis and current forecasts do not guarantee future results. Left display through September 30, 2016; right display as of December 31, 2016*G4 is a weighted average of the US, euro area, Japan and the UK. Historical data are International Monetary Fund estimates of the change in the cyclically adjusted primary budget balance. 2016 and 2017 are AB estimates.Source: Haver Analytics, IMF and AB
The Baton Will Likely Pass to Fiscal PolicyG4 Plus China Fiscal Tightening/Loosening (Percent of GDP)*
1.9
–0.1
–0.8 –0.8 –0.9
–0.4
0.1
0.40.6
09 10 11 12 13 14 15 16E 17E
Global Trends: Fiscal Stimulus Meets Populism
Stim
ulusC
ontraction
Time Line Event/Election Outcome
Oct 19, 2015 Canada Elections Anti-establishment
Jun 23, 2016 Brexit Anti-establishment
Nov 8, 2016 US Presidential Elections Anti-establishment
Dec 4, 2016 Italian Referendum Anti-establishment
Mar 15, 2017 Dutch ParliamentaryElections ?
End Mar 2017 UK Triggers Article 50? ?
Apr/May 2017 French Presidential Elections ?
Jun 2017 French ParliamentaryElections ?
Sep/Oct 2017 German Parliamentary Elections ?
6|CMO 1Q 2017
Historical and current analysis and forecasts do not guarantee future results.As of December 31, 2016GDP represents forecast year-over-year change in real terms. Inflation represents forecast year-over-year change in Consumer Price Index. Expectations for monetary policy are through end of 2017. FX change is currency spot return for last 12 months vs. US dollar; FX forecast is AB economists’ return projections for next six months vs. US dollar.Source: Bloomberg and AB
Country/Region
GDP (%) Inflation (%)
ExpectedPolicy Rate
Path
2016FX Change
(%)FX
Forecast The Latest2016 2017 2016 2017
Global 2.4 2.8 1.8 2.6 — — — Slightly stronger but still moderate global growth with near-term risks tilting to the upside; inflation higher in DM and stable in EM
Developed Countries 1.7 2.2 0.8 2.1 — — — Central banks remain accommodative; fiscal stimulus increasing;
inflation rising; stronger growth driven by the US and Japan
Emerging Countries 3.6 3.8 3.5 3.4 — — — Growth stabilizing overall and even turning positive in countries that
lagged in 2016; inflation mostly benign; political risks declining in select countries
US 1.7 3.1 1.3 2.9 — —Fiscal policy expected to play a big role, leading to stronger growth and higher inflation; a few rate increases likely but overall pace should still be gradual and low; dollar to remain strong
UK 2.0 1.5 0.7 2.6 –16.2 Economy to slow due to continued uncertainty around Brexit; higher inflation on the back of the weakness in GBP; official rates on hold
Euro Area 1.7 1.5 0.2 1.6 –2.9Growth expected to move sideways while inflation is subdued but picking up; political risks likely to stay elevated, with the focus turning to the French elections in early 2017
Japan 1.0 1.5 –0.3 0.7 +2.1 Enhanced QQE includes yield targeting and negative rates; fiscal boost likely
China 6.5 5.7 2.0 2.5 –5.9 Growth likely to disappoint, but no hard landing as the transition from export- and investment-led growth proceeds slowly
Brazil –3.5 0.9 8.8 5.9 +24.3 Political climate improving and growth turning modestly positive; monetary easing likely as inflation stabilizes
Global Growth Projections
7|CMO 1Q 2017
Current assessment does not guarantee future results.As of December 31, 2016Source: AB
The number one theme in 2017 is uncertainty Campaign promises typically ≠ policy Market is clearly focused on positives and not potential negatives; flexibility is key!
Uncertainty = volatility = dispersion = alpha potential: find the winners, avoid the losers
Fixed Income Yield and policy environment continues to favor global currency-hedged fixed income over domestic High yield remains attractive versus passive equities, but selectivity is key; include other sector/country credits For income-driven portfolios, rising rates/tighter spreads suggest an active barbell approach
Equities Opportunities remain in post-election winners, but focus on best in class Seek better top-line growers and users of free cash flows Use caution on bond proxies
Emerging Markets Fundamentals largely intact, but policy will create/amplify winners and losers
Alternatives Market uncertainty calls for noncorrelated returns and downside protection, but target based upon client needs
The Big Picture
8|CMO 1Q 2017
Official Rates Rising, but Not All Bonds React Equally
Gradual Official Rate Hikes LikelyExpectations of Fed Funds Rate
Historical analysis does not guarantee future results. Left display as of January 3, 2017; middle display as of December 21, 2016; right display as of December 31, 2016Market expectations are determined by forward freight contracts of fed funds rates on Bloomberg. Monthly return correlations calculated against Bloomberg Barclays US Treasury for the period of January 1999 through November 2016.*Return forecasts assume that rates move on the first day. These returns also incorporate the impact of today’s carry and roll over a 12-month period and assume historical relationship between rates and credit. Fixed income sectors are for Bloomberg Barclays indices.Source: Bloomberg Barclays, US Federal Reserve and AB
Rising Rates Don’t Have to Derail Fixed-Income Returns12-Month Expected Returns*
Change in 10-Year US Treasury Yield
+50 b.p.
+100 b.p.
–50b.p.
US Treasury 0.4% –2.2% 5.6%
US Aggregate 1.0% –1.2% 5.5%
Global Aggregate USD Hedged
2.2% –0.6% 4.9%
Investment-Grade Corporate
1.7% –0.7% 6.5%
High Yield 6.4% 5.9% 7.5%
Bond Sectors Don’t Always Move in SyncBloomberg Barclays Index Correlations to US Treasuries
0.9
0.9
0.7
0.7
0.6
–0.1
–0.2
US Aggregate Bond
Global AggregateUSD Hedged
US TIPS
US Investment-Grade Corporate
US Municipal Bond
Global High YieldUSD Hedged
US High Yield
0
1
2
3
4
5
0 1 2 3 4
Per
cent
Years
Federal Reserve Market
9|CMO 1Q 2017
Credit: High Yield Attractive vs. Passive Equities, but Selectivity Is Key
Yield Often Indicates Future ReturnsYield to Worst and Forward Return
–4
0
4
8
12
16
20
24
01 04 07 10 13 16
Per
cent
Historical analysis does not guarantee future results.Left display as of December 31, 2016, except equity forecast as of September 30, 2016; right display as of December 31, 2016High yield is represented by Bloomberg Barclays Global Corporate High Yield (USD Hedged). An investor cannot invest directly in an index, and its performance does not reflect the performance of any AB portfolio. The unmanaged index does not reflect the fees and expenses associated with the active management of a portfolio. Source: Bloomberg Barclays, Credit Suisse, J.P. Morgan, Morningstar, S&P Capital IQ and AB
Five-Year ForwardAnnualized Return
Yield to Worst
US Equity Five-Year Forecast:
5.6%
Yield to Worst Global Corp. HY: 5.6%US Corp. HY: 6.1%
Wide Range in US High-Yield Valuations TodayYield Distribution in the US HY Index (Percent)
0
5
10
15
20
25
<1 1–2 2–3 3–4 4–5 5–6 6–7 7–8 8–9 9–10 >10
Per
cent
age
of B
onds
Yield to Worst (Percent)
US HY Market Yield:
6.1%
Focus on bonds with the most attractive upside/downside profile
10|CMO 1Q 2017
Historical analysis and current forecasts do not guarantee future results. Left display as of September 30, 2016; middle display as of December 31, 2016; right display as of December 31, 2015. An investor cannot invest directly in an index and its performance does not reflect the performance of any AB portfolio. The unmanaged index does not reflect fees and expenses associated with the active management of a portfolio. LTM: last 12-months debt; EBITDA: a measure of company’s ability to pay off its incurred debt. *High yield. †FICO score is a type of credit score that helps lenders assess borrower’s credit risk. Typically, scores above 650 indicated a very good credit history. FICO scores and Debt to Income ratios is for borrowers with low Loan-to-Value ratios backed by Freddie Mac. Source: Bloomberg Barclays, Freddie Mac and AB
Choose with CareCredit: Fundamentals Vary Among Sectors and Industries
Despite More Positive Data, Corporates Look to Be Late Cycle…
…but Cycle Varies Widely by Sector
3.5
3.7
3.9
4.1
4.3
4.5
4.7
4.9
5.1
5.3
1Q08
4Q08
3Q09
2Q10
1Q11
4Q11
3Q12
2Q13
1Q14
4Q14
3Q15
2Q16
LTM
Deb
t/EB
ITD
A (×
)
Leverage Leverage ex Commodities
Downturn
RecoveryRepair
Expansion
US Leveraged Loans
US HY* ex Commodities
European Industrials
US Financials
Core EuropeanFinancials
The Credit Cycle
Global Energy
Latin American Industrials
European Periphery Financials
Asia Industrials
Mortgage Market Is Still Early in the Cycle
0
2
4
6
8
10
12
14
16
18
680
690
700
710
720
730
740
750
760
770
99 01 03 05 07 09 11 13 15
Percent
The vast majority of borrowers have FICO scores above 700†
FICO (Left Scale)
Debt to Income 50+%
11|CMO 1Q 2017
Historical analysis does not guarantee future results.Left display as of December 12, 2016; middle and right displays as of December 31, 2016*10-year yield movements include time periods with an increase/decline of above 10 basis points. US low-volatility high yield is represented by Bloomberg Barclays US High-Yield 1–5 Year BB/B; CRT non-rated security is represented by CAS 2016 C011B; CRT B-rated security by CAS 2015 C031M2.Source: Credit Suisse, J.P. Morgan and AB
Credit: Look Beyond Loans for Floating Rate Exposure
…as Can Agency Credit Risk Transfer Securities (CRTs)Yields
0
5
10
15
20
25
06 08 10 12 14 16
Per
cent
As Loan Prices Reach Par, Investors Face Refinance Risk
Shorter-Maturity, Higher-Quality High Yield May Be a Better Solution when Rates Rise…* (Percent)
0
10
20
30
40
50
60
70
80
90
0
10
20
30
40
50
60
70
Jan 12 Aug 13 Mar 15 Oct 16
Percent of Loans Trading A
bove Par
Inst
itutio
nal L
oan
Rep
ricin
g V
olum
e (U
SD
Bill
ions
)
Repricing (Left Scale)
% Leveraged Loans Trading Above Par
0.92
0.36
0.98
0.48
0.85
–0.02
Average Returnwhen 10-YearUS Treasury
Increased
Average Returnwhen 10-YearUS Treasury
Declined
US Low-Volatility HY IndexUS HY IndexLeveraged Loans Index
CRTs offer a compelling alternative
CRT: Non-Rated
CRT: B-Rated
Loans
12|CMO 1Q 2017
Historical analysis does not guarantee future results.As of December 31, 2016EM local is represented by J.P. Morgan Government Bond–Emerging Markets. An investor cannot invest directly in an index, and its performance does not reflect the performance of any AB portfolio. The unmanaged index does not reflect fees and expenses associated with the active management of a portfolio.*Yields are for representative sovereign bonds close to 10-year maturities. EM FX is represented by J.P. Morgan Emerging Market Currency. Source: Bloomberg, J.P. Morgan and AB
Emerging Markets: Select Opportunities
High-Yield USD Sovereigns Be Selective
Local-Currency DebtHigh Relative Yields
EM FX: Valuations Are Attractive
–2
0
2
4
6
8
10
10 11 12 13 14 15 16
Yiel
ds (P
erce
nt)
US Treasury 10-Year
EM Local
Japanese Government
Bond 10-Year GermanBund 10-Year
US High Yield
60
70
80
90
100
110
120
02 04 06 08 10 12 14 16
Inde
x
39+% Drop Since
April 29, 2011
Favor commodity currencies and unique
country situationsSupported by: High carry Greater stability in commodity prices Stable global growth
Examples:*
Dominican Republic: Yield 6.80%
Argentina: Yield 6.77%
Gabon: Yield 7.56%
Ivory Coast: Yield 6.75%
Brazil: Opportunities in quasi-sovereigns and corporates Yield: 7.19%
13|CMO 1Q 2017
Interest-Rate Exposure: Get It Globally…and Consider Inflation Protection
Time Erases Pain of Rising Rates24-Month Rolling Returns (Percent)
Inflation Protection Is Still Cheap
Past performance does not guarantee future results.As of December 31, 2016Rising-rate environments are defined as periods during which the US 10-year Treasury yield rose by more than 100 basis points. US bonds are represented by Bloomberg Barclays US Aggregate Bond; global hedged bonds by Bloomberg Barclays Global Aggregate Bond—hedged into US dollars *Effective tightening began with the end of the US Federal Reserve’s asset purchases, which effectively concluded its stimulus program. Source: Bloomberg Barclays and AB
Hedged Global Core Bonds Preserve Capital Better as US Yields ClimbReturns During Environments of Rising US Interest Rates (Percent)
–1.2
–0.6
–1.9
–2.9
–3.0
3.5
–0.7
–2.9
2.2
0.8
0.7
–1.6
–2.4
–1.8
2.9
–0.6
–1.8
3.4
1/96–6/96
10/99–1/00
11/01–3/02
6/03–8/03
4/04–5/04
1/09–6/09
12/10–2/11
5/13–12/13
7/14–Present
US Global Hedged
(Effective Tightening*)1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
11 12 13 14 15 16
Five-Year Break-Even Inflation Rate
Core CPI
0
1
2
3
4
5
6
0
5
10
15
20
25
01 04 07 10 13 16
US Generic Government 10-Year (Right Scale)
Bloomberg Barclays US Aggregate
Bloomberg Barclays Global Aggregate—USD Hedged
Fed Hike
Taper Tantrum
2013
14|CMO 1Q 2017
Municipals: Post-Election Sell-Off Creates Value
Outflows Have Picked Up, but Are Less than Past Volatile Periods Muni Bond In/Outflows
Historical analysis does not guarantee future results.As of December 20, 2016Nominal yields. A credit rating is a measure of the quality and safety of a bond or portfolio, based on the issuer’s financial condition. AAA is highest (best) and D is lowest (worst). Ratings are subject to change. Investment-grade securities are those rated BBB and above.Source: Bloomberg Barclays, Investment Company Institute, Municipal Market Data and AB
Muni Yields Are Attractive vs. Taxable Equivalents 10-Year Yields (Percent)
–20,000
–15,000
–10,000
–5,000
0
5,000
10,000
15,000
07 08 09 10 11 12 13 14 15 16
Per
cent
2.6
3.53.8
4.9
Treasury Taxable-EquivalentYield: AAA
Muni
BBBCorps.
Taxable-EquivalentYield: BBB
Muni
15|CMO 1Q 2017
Municipals: Balance Intermediate Quality with Longer-Maturity Credit
Roll Plus Yield (Percent)
Historical analysis does not guarantee future results.As of December 20, 2016Nominal yields. A credit rating is a measure of the quality and safety of a bond or portfolio, based on the issuer’s financial condition. AAA is highest (best) and D is lowest (worst). Ratings are subject to change. Bloomberg Barclays long indices are used for each respective rating category. *Roll is the natural price gain that a bond experiences as it ages, assuming interest rates are unchanged. Yield advantage shown is for 10-year municipal securities. Short taxable bonds are represented by Bloomberg Barclays US Aggregate 1–3 Year ex Government.Source: Bloomberg Barclays, Investment Company Institute, J.P. Morgan, Municipal Market Data, US Federal Reserve and AB
Shorter Bonds: Consider short-maturity municipals vs. comparable-maturity taxable bonds
Intermediate Bonds: Focus on rolland carry
Longer Bonds: Dip down in credit for an extra yield pickup—avoid longer-maturity high grades which may remain volatile owing to possible changes to tax rates
1.301.98 2.31 2.43 2.55 2.66 3.03 3.30 3.440.49
0.941.13 1.15 0.97 1.07 0.50 0.25
0.08
4.06
2 5 7 8 9 10 15 20 30Maturity (Years)
Yield Roll* BBB Muni
16|CMO 1Q 2017
Equities Today Present Attractive Return Potential
Historical analysis and past performance do not guarantee future results.As of December 31, 2016Source: Bloomberg Barclays, S&P and AB
…but Have Typically Signaled Strong Equity PotentialStock and Bond Returns After Large Yield Gaps (Percent)
10-Year Treasury
Yield
S&P 500 Earnings
Yield
Bloomberg Barclays
Aggregate 3-Year Cum.
Return
S&P 500 3-Year Cum.
Return
Nov 1987–Mar 1988 8.5 9.6 29.2 47.7
Jul 1993–Jun 1994 6.0 7.0 18.7 58.5
Jul 2002–May 2007 4.3 6.2 13.7 14.4
Oct 2008–Feb 2013 2.7 7.6 12.3 47.8
TODAY (Dec 2016) 2.4 4.8 ? ?
Earnings historically drive total returns; intermediate bond yields are historically low today
When the yield gap between equities and bonds is big, consider tilting toward equity earnings—if underlying fundamentals are strong
Large Gaps Between Stock and Bond Yields Are Rare…Stock Earnings Yields vs. Bond Yields (Percent)
0
2
4
6
8
10
12
14
83 86 89 92 95 98 01 04 07 10 13 16
S&P 500 Earnings Yield
US 10-Year Treasury Yield
17|CMO 1Q 2017
Stocks Have Performed Well, but Watch Those Sector Swings!Elevated Valuations and Rising Rates
Current Valuations Warrant Selectivity…Average S&P 500 P/FE by YoY CPI*
15.7×
16.8×15.7×
11.5×
8.0×
–2%–0% 0%–2% 2%–4% 4%–6% 6%–14%
Not All Sectors Perform the SameSector Relative Returns During Taper Tantrum (Percent)‡
…But Equities Have Fared Well in Rate-Hike CyclesAverage Returns (Percent)†
Past performance and historical analysis do not guarantee future results. Not all sectors perform the same.Left display as of September 30, 2016; middle display as of December 31, 2016; right display as of December 31, 2013*Based on quarterly CPI data from December 31,1977, to September 30, 2016 †Average returns for the S&P 500 before and after fed funds initial rate increase, equal-weighted six months before and one year after the initial increase in the fed funds rate, based on 19 episodes from 1970 to 2016‡Annualized returns relative to the S&P 500 from May 22, 2013, to December 31, 2013Source: Bloomberg, S&P and AB
10.9
3.1
4.7
Six MonthsPrior
First SixMonths After
NextSix Months
Year After Increase
December 31, 2016: 17.4×
–15.4
–14.7
–6.5
3.5
5.2
7.7
Industrials
Consumer Discretionary
Technology
Telecom
Utilities
Consumer Staples
18|CMO 1Q 2017
…You’re Paying Too Much forToo Little DiversificationPrice/Earnings Ratio (×)‡
0
10
20
30
40
80 83 86 89 92 95 98 01 04 07 10 13 16
Historical analysis does not guarantee future results.As of December 31, 2016*Yield shown is the 10-year US Treasury Yield.†Periods ending December 31, 2016; taper tantrum is from May 1, 2013, through December 31, 2016. Correlations shown are based on monthly returns.‡Highest 20% of dividend payers among 1,500 US-listed stocks in the AB equity universe, excluding 33 companies that do not currently have a P/E ratio because they are not profitable. Source: FactSet, Morningstar, S&P, US Department of the Treasury and AB
High-Dividend, Bond-Like Stocks: Still Appear Vulnerable
Reversal of Fortune for 10-Year Yields* and Stock Sectors (Percent)
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
Dec 15 Mar 16 Jun 16 Sep 16 Dec 16
Brexit
24.9 23.4
10.5 8.0
–1.1–4.6
–5.8–7.5
TelecomUtilities
Consumer Staples10-Yr. US Treasury Index
Utilities10-Yr. US Treasury Index
Consumer StaplesTelecom
Highest-DividendPayers Trading
WellAbove
Average
Average13.6×Jan–Jun
Jul–Dec
If Your Equity Yield Exposure Mimics Your Bonds…
Same Direction
No Correlation
Opposite Direction
10Years†
FiveYears†
Since Taper Tantrum†
1
0
–1
REITsTelecom
Consumer StaplesUtilities
19|CMO 1Q 2017
Trending Now: Smaller-Cap Stocks Remain Attractively Valued Relative Valuations* (Russell 2000 vs. Russell 1000)
A Few Sectors Loom Large in Small-Cap IndicesPercent of Index
0.50
0.75
1.00
1.25
1.50
80 84 88 92 96 00 04 08 12 16
Rat
io (×
)
0
5
10
15
20
25
30
96 98 00 02 04 06 08 10 12 14 16
Historical analysis does not guarantee future results.Left and right displays through December 31, 2016; middle display as of November 30, 2016*Valuation composite is one-third price to forward earnings, one-third price to book and one-third price to sales.†Based on median 2015 effective tax rate for S&P 500 and Russell 2000. Excludes real estate and negative-pretax-income companies.An investor cannot invest directly in an index, and its performance does not reflect the performance of any AB portfolio. The unmanaged index does not reflect the fees and expenses associated with the active management of a portfolio.Source: Bloomberg, FactSet, Russell Investments, Thomson Reuters I/B/E/S and AB
Small-Caps: Opportunity Remains—an Active Edge Required
Potential Increase in Earnings per Share if Effective Tax Rate Drops to 25% for All Companies†
13.4%
7.2%
Small-Cap Large-Cap
Small-Caps Are Cheap
Large-Caps Are Cheap
Utilities & REITs
Biopharma
Historical Average in
R2000V
Historical Average in R2000G
20|CMO 1Q 2017
…but Be Careful of Costly, Lower-Growth SectorsPrice/Earnings to Growth (PEG Ratio)
Highly Taxed Firms Posted Good Gains Post Election
Trump Bump Looks to Lower Corporate Taxes…S&P 500 Stocks by Effective Tax Rate Returns from November 8, 2016 through December 31, 2016
4.8%
8.3%
13.3% 32.2%
Median Tax Rates
Historical analysis does not guarantee future results.As of December 31, 2016Source: Bloomberg, Ned Davis Research, S&P Capital IQ and S&P Compustat
2.7
2.11.9
1.81.7
Financials Industrials Healthcare ConsumerDiscretionary
TechnologyFinancials
Consumer Discretionary Industrials
TechnologyHealthcare
Consumer Discretionary
Key Sectors by Weight in Each Tax Rate Cohort
21|CMO 1Q 2017
Sales GrowthPrice/Earnings Ratio of Highest-Sales-Growth Companies vs. Market
Profitability (ROE)Price/Earnings Ratio of Highest-ROE Companies vs. Market
0.0
0.3
0.5
0.8
1.0
1.3
1.5
1.8
2.0
2.3
2.5
78 82 86 90 94 98 02 06 10 140.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
78 82 86 90 94 98 02 06 10 14
Historical analysis does not guarantee future results.Through December 31, 2016Data are based on the highest 20% of earnings growth and ROE among 1,500 of the largest US-listed stocks by market capitalization in the AB Bernstein equity universe, excluding 33 companies that do not currently have a P/E ratio because they are not profitable.Source: FactSet and AB Bernstein
Curiously Strong (but Unpopular): Fast-Growing, Profitable Companies on Sale
Highest (Q1)
Average Average
Highest (Q1)
22|CMO 1Q 2017
Higher Volatility Increases Security DispersionMonthly Dispersion* vs. Level of VIX (Percent)
Past performance and current forecasts do not guarantee future results. Left display through December 31, 2016; right display as of December 31, 2015. *Dispersion is cross-sectional standard deviation of monthly returns. †Median monthly return of the S&P 500. ‡Using data from Style Research, high-conviction strategies are defined as the top 20% of managers who consistently display a high-conviction characteristic in the eVestment US Large Cap Equity universe. Within each high-conviction category universe, the representative performance of skilled high-conviction strategies is the average of all managers whose performance is greater than that of the median manager over the period in which they reported. Monthly outlier returns are capped at the fifth percentile. A manager may be classified in more than one category. These numbers do not represent the performance history of any AB-managed product, but do include AB services if they meet the criteria of one of the universes. Factor index performance represents the returns of the MSCI indices—dividend yield: MSCI USA High Dividend Yield; value: MSCI USA Value; quality: MSCI USA Quality; low beta: MSCI USA Minimum Volatility; momentum: MSCI USA Momentum. These indices may not be investable and do not take into account transaction costs. Source: Bloomberg Barclays, Chicago Board Options Exchange, eVestment, MSCI, S&P, Style Research and AB
–0.4%
–1.6%
1.4%
2.2%
MedianMonthly Return†
Feb 1990–Sep 2010 Oct 2010–Jun 2015 Jul 2015–Dec 2016
0
20
40
60
80
0 20 40 60
Mon
thly
Dis
pers
ion
Previous Month-End VIX
After the Beta Trade: Be Active! Volatility and Dispersion Aren’t Going Away
Active High-Conviction Strategies Outperformed Passive Factors over TimeAnnualized Relative Performance vs. S&P 500 (Percent)Jan 2004–Dec 2015‡
1.91.6
2.02.4
3.0
0.0
–0.3
0.6 0.7
1.4
DividendYield
Value Quality LowBeta
Momentum
Active High-Conviction StrategyPassive Factor Index Strategy
23|CMO 1Q 2017
Flexibility to Move Across Asset Classes Can Pay OffAnnual Returns (Percent)
Current analysis does not guarantee future results. As of December 31, 2016EM equity is represented by MSCI Emerging Markets; global equity by MSCI World; EM sovereign debt by J.P. Morgan EMBIG; EM corporate debt by J.P. Morgan CEMBI; and EM local-currency debt by J.P. Morgan GBI-EM.*Price-to-earnings ratio uses next 12 months forecasted earnings.Source: J.P. Morgan, Morningstar Direct, MSCI and AB
Emerging Markets: Questions Are Warranted, but Opportunities Still Available
EM Equity19.2
EM Sov.Debt8.5
EM Local Curr. Debt19.9
Global Equity17.4
EM Sov.Debt5.5
EM Corp. Debt1.3
EM Local Curr. Debt11.4
EM Corp. Debt13.1
EM Corp. Debt2.3
EM Equity18.6
EM Corp. Debt–0.6
Global Equity5.5
EM Sov.Debt1.2
EM Equity11.2
EM Local Curr. Debt13.1
Global Equity–5.0
EM Sov.Debt18.5
EM Equity–2.3
EM Corp. Debt5.0
Global Equity–0.3
EM Sov.Debt10.2
Global Equity12.3
EM Local Curr. Debt–6.3
Global Equity16.5
EM Local Curr. Debt–5.5
EM Equity–1.8
EM Equity–14.6
EM Corp. Debt9.7
EM Sov.Debt12.0
EM Equity–18.2
EM Corp. Debt15.0
EM Sov.Debt–6.6
EM Local Curr. Debt–6.1
EM Local Curr. Debt–18.0
Global Equity7.5
2010 2011 2012 2013 2014 2015
High/Low Gap
Best
Ret
urn
Wor
st R
etur
n
EM Equities Still Cheap Compared to Developed PeersPrice/Earnings* and Price/Book of MSCI EM vs. MSCI World
7.2 26.7 4.9 24.0 11.6 19.3 3.9
2016
–30%
–50
–40
–30
–20
–10
0
10
20
06 07 08 09 10 11 12 13 14 15 16
Perc
ent
P/B Ratio
P/E Ratio–25%
24|CMO 1Q 2017
Unique Benefits of Alternatives—Important in Uncertain Markets
Historical analysis does not guarantee future results.As of December 31, 2016Alternative strategies represented by corresponding Morningstar category. Event-driven category represented by HFRX Event Driven.*Time period of December 2009–November 2016 used for credit long/short and managed futures categories owing to inception dates.Source: Barclays Bloomberg, Hedge Fund Research, Morningstar Direct and S&P
Performance Held Up Post-Election (Percent)Low Betas to Traditional InvestmentsDecember 2006–November 2016*
0.17 0.18
0.07
0.32
0.40
0.03
0.16
0.24
0.56
–0.09
–0.01 –0.02
CreditL/S
Non-TradBond
ManagedFutures
EventDriven
EquityHedge
MarketNeutral
Beta to US Stocks Beta to US Bonds
0.6 0.4
–0.4
–4.9
4.3
2.9
1.5
5.0
CreditL/S
Non-TradBond
ManagedFutures
USBonds
EventDriven
EquityHedge
MarketNeutral
USStocks
25|CMO 1Q 2017
Uncertainty and Principles: Navigating 2017
Current assessment does not guarantee future results.As of December 31, 2016 Source: AB
Evergreen Advice Environment Suggested Actions
Focus Portfolio Design on Better Up/DownCapture Generation Better betas, efficient structures, targeted alpha
Be GlobalEconomies/policies not moving in lockstep
Be BalancedAmidst uncertainty, don’t overload
Be Selective/ActiveSecurity and sector dispersion on the rise
Growth Inflation Favor These… …over These
Heating Up Small-cap equity High yield Inflation protection
Government bonds
Questionable High yield Quality and growth
equity
Government bonds Inflation protection
Surprise Slip Hedged equities Government bonds
High yield Equity Inflation protection
26|CMO 1Q 2017
A Word About Risk
The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein L.P. or its affiliates.
Important Risk Information Related to Investing in Equity and Short Strategies
All investments involve risk. Equity securities may rise and decline in value due to both real and perceived market and economic factors as well as general industry conditions.
A short strategy may not always be able to close out a short position on favorable terms. Short sales involve the risk of loss by subsequently buying a security at a higher price than the price at which it sold the security short. The amount of such loss is theoretically unlimited (since it is limited only by the increase in value of the security sold short). In contrast, the risk of loss from a long position is limited to the investment in the long position, since its value cannot fall below zero. Short selling is a form of leverage. To mitigate leverage risk, a strategy will always hold liquid assets (including its long positions) at least equal to its short position exposure, marked to market daily.
Important Risk Information Related to Investing in Emerging Markets and Foreign Currencies
Investing in emerging-market debt poses risks, including those generally associated with fixed-income investments. Fixed-income securities may lose value due to market fluctuations or changes in interest rates. Longer-maturity bonds are more vulnerable to rising interest rates. A bond issuer’s credit rating may be lowered due to deteriorating financial condition; this may result in losses and potentially default, or failure to meet payment obligations. The default probability is higher in bonds with lower, noninvestment-grade ratings (commonly known as “junk bonds”).
There are other potential risks when investing in emerging-market debt. Non-US securities may be more volatile because of the associated political, regulatory, market and economic uncertainties; these risks can be magnified in emerging-market securities. Emerging-market bonds may also be exposed to fluctuating currency values. If a bond’s currency weakens against the US dollar, this can negatively affect its value when translated back into US-dollar terms.
Bond Ratings Definition
A measure of the quality and safety of a bond or portfolio, based on the issuer’s financial condition, and not based on the financial condition of the fund itself. AAA is highest (best) and D is lowest (worst). Ratings are subject to change. Investment-grade securities are those rated BBB and above. If applicable, the Pre-Refunded category includes bonds which are secured by US government securities and therefore are deemed high-quality investment grade by the advisor.
27|CMO 1Q 2017
Index Definitions
Following are definitions of the indices referred to in this presentation. It is important to recognize that all indices are unmanaged and do not reflect fees and expenses associated with the active management of a mutual fund portfolio. Investors cannot invest directly in an index, and its performance does not reflect the performance of any AB mutual fund. Bloomberg Barclays Global Aggregate Bond Index: Measure of global investment grade debt from 24 local currency markets and includes treasury, government-related,
corporate and securitized fixed-rate bonds from both developed- and emerging-markets issuers.
Bloomberg Barclays Global Aggregate Corporate Bond Index: Tracks the performance of investment-grade corporate bonds publicly issued in the global market and found in the Global Aggregate. (Represents global corporate on slide 1.)
Bloomberg Barclays Global High Yield Index: Provides a broad-based measure of the global high-yield fixed-income markets. It represents the union of the US High Yield, Pan-European High Yield, US Emerging Markets High Yield, CMBS High Yield and Pan-European Emerging Markets High Yield indices.
Bloomberg Barclays Global Treasury: Euro Bond Index: Includes fixed-rate, local-currency sovereign debt that makes up the Euro Area Treasury sector of the Global Aggregate Index. (Represents euro-area government bonds on slide 1.)
Bloomberg Barclays Global Treasury: Japan Bond Index: Includes fixed-rate, local-currency sovereign debt that makes up the Japanese Treasury sector of the Global Aggregate Index. (Represents Japan government bonds on slide 1.)
Bloomberg Barclays US CMBS Investment-Grade Index: Designed to mirror commercial mortgage-backed securities of investment-grade quality (Baa3/BBB–/BBB– or above) using Moody’s, S&P and Fitch, respectively, with maturity of at least one year.
Bloomberg Barclays Municipal Bond Index: A rules-based, market value–weighted index engineered for the long-term tax-exempt bond market. (Represents municipals on slide 1.)
Bloomberg Barclays US Aggregate Bond Index: A broad-based benchmark that measures the investment-grade, US dollar–denominated, fixed-rate, taxable bond market, including US Treasuries, government-related and corporate securities, mortgage-backed securities (MBS [agency fixed-rate and hybrid ARM pass-throughs]), asset-backed securities (ABS), and commercial mortgage-backed securities (CMBS).
Bloomberg Barclays US Corporate High Yield Index: Represents the corporate component of the Bloomberg Barclays US High Yield Index. (Represents US high yield on slide 1.)
28|CMO 1Q 2017
Index Definitions (continued)
Bloomberg Barclays US Corporate Bond Index: Measures the investment grade, fixed-rate, taxable corporate bond market and includes USD-denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
Bloomberg Barclays US Treasury Index: Includes fixed-rate, local-currency sovereign debt that makes up the US Treasury sector of the Global Aggregate Index. (Represents US government bonds on slide 1.)
Bloomberg Barclays US Treasury Inflation-Linked Bond Index: Measures the performance of the US Treasury Inflation Protected Securities market.
HFRX Event Driven Index: Includes managers focused on maintaining positions in companies currently or prospectively involved in corporate transactions of a wide variety, including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments. Investment theses are typically predicated on fundamental characteristics, with the realization of the thesis predicated on a specific development exogenous to the existing capital structure.
J.P. Morgan Corporate Emerging Markets Bond Index: A global, corporate emerging-market benchmark that tracks USD-denominated corporate bonds issued by emerging-market entities.
J.P. Morgan Emerging Market Bond Index Global: A benchmark index for measuring the total return performance of government bonds issued by emerging-market countries that are considered sovereign (issued in something other than local currency) and that meet specific liquidity and structural requirements. In order to qualify for index membership, the debt must be more than one year to maturity, have more than $500 million outstanding, and meet stringent trading guidelines to ensure that pricing inefficiencies don’t affect the index.
J.P. Morgan Emerging Market Currency Index: A tradable benchmark for emerging-market currencies vs. the US dollar.
J.P. Morgan Government Bond Index–Emerging Markets: Tracks local-currency bonds issued by emerging-market governments.
MSCI EAFE Index: A free float–adjusted, market capitalization–weighted index designed to measure developed-market equity performance, excluding the US and Canada. It consists of 22 developed-market country indices. (Represents EAFE on slide 1.)
MSCI Emerging Markets Index: A free float–adjusted, market capitalization–weighted index designed to measure equity market performance in the global emerging markets. It consists of 21 emerging-market country indices. (Represents emerging-market debt on slide 1.)
MSCI USA High Dividend Yield Index: A stock market index that aims to capture the high-dividend-yield equity opportunity set within the standard MSCI USA index byincluding only securities that offer a higher-than-average dividend yield (i.e., at least 30% higher) relative to that of the MSCI USA index and that pass dividend sustainability and persistence screens.
29|CMO 1Q 2017
Index Definitions (continued)
MSCI USA Minimum Volatility Index: A stock market index aiming to reflect the performance characteristics of a minimum-variance strategy focused on absolute returns as well as volatility with the lowest absolute risk.
MSCI USA Momentum Index: A stock market index designed to reflect the performance of an equity-momentum strategy by emphasizing stocks with high price momentum, while maintaining reasonably high trading liquidity, investment capacity and moderate index turnover.
MSCI USA Quality Index: A stock market index that aims to provide exposure to the quality factor by identifying quality stocks by calculating a quality score for each security in the eligible equity universe based on three main fundamental variables: high ROE, stable year-over-year earnings growth and low financial leverage.
MSCI USA Value Index: A stock market index capturing large- and mid-cap US securities exhibiting overall value style characteristics. The value investment style characteristics for the index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.
MSCI World Index: A market capitalization–weighted index that measures the performance of stock markets in 24 countries.
Russell 1000 Index: A stock market index that represents the highest-ranking 1,000 stocks in the Russell 3000 Index, representing about 90% of the total market capitalization of that index.
Russell 2000 Index: Measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 Index, representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. (Represents US small-cap on slide 1.)
S&P 500 Index: Includes a representative sample of 500 leading companies in leading industries of the US economy. (Represents US large-cap on slide 1)
MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices, any securities or financial products. This report is not approved, reviewed or produced by MSCI.
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Investors should consider the investment objectives, risks, charges and expenses of the Fund/Portfolio carefully before investing. For copies of our prospectus or summary prospectus, which contain this and other information, visit us online at www.abglobal.com or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.AllianceBernstein Investments, Inc. (ABI) is the distributor of the AB family of mutual funds. ABI is a member of FINRA and is an affiliate of AllianceBernstein L.P., the manager of the funds.
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