3q:2016 capital markets outlook - alliancebernstein · through end of 2016. fx change is currency...
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.
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3Q:2016 CAPITAL MARKETS OUTLOOK
1 | CMO 3Q16
Current assessment does not guarantee future results. As of June 30, 2016 Source: AB
The Big Picture
Global economic growth remains modest; more monetary easing and potential for fiscal stimulus
Developed-market growth is mixed; emerging world faster than developed, but with challenges
After the Beta Trade theme continues to play out, with muted returns and spiking volatility
Key recent market drivers include Brexit, oil, China, political risks and global growth concerns
Investors should embrace active management and incorporate downside protection
Fixed Income: consider credit—selectively; don’t abandon global rates; municipals remain attractive
Equities: capture growth through high-conviction, active opportunities; small-cap valuations attractive
Alternatives: diversify across strategies; integrate downside protection; alpha opportunities increasing
2 | CMO 3Q16
0.3 2.0
–2.2
5.4 7.9
5.4 4.3
6.5 9.4 9.1
6.4 –4.4
2.2 3.5
Past performance does not guarantee future results. As of June 30, 2016 Global 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: Barclays, Morningstar, MSCI, Standard & Poor’s (S&P) and AB
Returns in US Dollars
0.8 1.7
0.4
2.1 3.2
2.1 2.6
3.1 4.7 5.5
0.7 –1.5
3.8 2.3
Mixed Returns amid Rising Volatility
Equities
Government Bonds
Credit
Alternatives†
Jan–Jun 2016 Returns (Percent) 2Q:2016 Returns (Percent)
Japan
US High Yield
US
Euro Area
Emerging-Market Debt
Long/Short Equity
Multialternative Nontraditional Bond
Global Corporate
EAFE*
US Large-Cap
Emerging Markets
US Small-Cap
Municipals
3 | CMO 3Q16
…and Multiples Price of Crude Oil and S&P 500 P/E
15
25
35
45
55
16
17
18
19
20
Jan Feb Mar Apr May Jun
US D
ollars
P/E
Oil Prices Impacting Short-Term Equity Market Volatility… Price of Crude Oil and Level of VIX
15
25
35
45
55
10
15
20
25
30
Jan Feb Mar Apr May Jun
US D
ollars Leve
l
Past performance does not a guarantee of future results. As of June 30, 2016 Long-term correlations calculated from 1990 to 2015. Short-term correlations calculated from January 1 to June 30, 2016. Source: Bloomberg, Chicago Board Options Exchange, S&P and AB
Rising Oil Prices Calmed Markets for Most of Second Quarter…
VIX (Left Scale)
Crude Oil
Crude Oil
S&P 500 P/E (Left Scale)
VIX Correlations Long Term 0.0 Short Term –0.7
P/E Correlations Long Term –0.5 Short Term +0.9
4 | CMO 3Q16
…but Brexit Vote Sends New Shudders of Uncertainty
Current assessment does not guarantee future results. As of June 30, 2016 Source: AB
Where Now?
Brexit Impact Financial contagion
Political contagion
Low for longer
Heightened Political Risk
July 2016 Japan Upper House Election
September 2016 New British PM
??? Article 50
October 2016 Italian Referendum (Senate Reform)
November 2016 US Presidential Election
March 2017 Dutch General Election
May 2017 French Presidential Election
September 2017 German Federal Election
Doesn’t Actually Leave the EU
New Agreement (Associate Member EEA/EFTA?)
Leaves Without Agreement
5 | CMO 3Q16
Historical and current analysis and forecasts do not guarantee future results. As of July 1, 2016 GDP represents forecast year-over-year change in real terms. Inflation represents forecasted year-over-year change in Consumer Price Index. Expectations for monetary policy are through end of 2016. FX change is currency spot return for last six 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 (%) Expected
Policy Rate Path
Jan–Jun FX Change
(%)
FX
Forecast The Latest 2016 2017 2016 2017
Global 2.5 2.6 2.1 2.6 — — — Solid global growth in 2016—but uneven pace amid political uncertainties
Developed Countries 1.7 1.9 0.9 2.0 —
—
—
Central banks likely to remain accommodative in light of Brexit; slow but positive growth and below target inflation
Emerging Countries 3.6 3.9 3.7 3.7 —
—
—
Growth stabilizing at slower than historical pace; inflation mostly benign
US 2.2 2.8 1.4 2.7 — — Positive US growth coming from the consumer sector; rate hikes delayed due to global economic/political concerns
UK 1.6 0.9 0.8 2.3 –9.7 Brexit to weigh meaningfully on growth; political uncertainty to dominate headlines; Bank of England likely to ease policy
Euro Area 1.5 1.2 0.3 1.3 +2.3 Negative rates and expanded QE purchases to combat low inflation and Brexit impact
Japan 0.5 1.3 0.3 0.9 +16.8 Maintaining QQE and negative rates; fiscal boost likely in second half of 2016
China 6.2 5.6 2.2 2.5 –2.3 Growth likely to disappoint, but no hard landing as the transition from export- and investment-led growth proceeds slowly
Brazil –3.6 0.4 8.3 6.9 +23.4 Political climate improving, but corruption headlines continue and growth struggles; monetary easing likely as inflation wanes
Global Growth Projections Impacted by Brexit
6 | CMO 3Q16
Historical analysis does not guarantee future results. Left and middle displays through April 30, 2016; right display through May 31, 2016 *4% increase from February 28, 2015, to April 30, 2015 Source: Bloomberg, Haver Analytics, Markit, national sources and AB
Record High Median Home Prices and Highest Home Sales Since 2007
200
220
240
260
280
300
320
340
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
07 08 09 10 11 12 13 14 15 16
USD
Thousands
Milli
ons
Retail Sales: Revisions Paint Better Picture than Initial Estimates
250
270
290
310
330
350
370
390
410
07 08 09 10 11 12 13 14 15 16
Billio
ns
US Economy Remains on Track Despite Lower Global Growth
Total Personal Income and Job Openings Still Strong
4% Increase*
New and Existing Home Sales (Left Scale)
Median Home Prices
0
1
2
3
4
5
6
7
10
11
12
13
14
15
16
17
07 08 09 10 11 12 13 14 15 16
Millions Trill
ions
Personal Income
(Left Scale)
Job Openings
7 | CMO 3Q16
China Faces Headwinds
Historical analysis does not guarantee future results. Left and middle displays through May 31, 2016; right display through May 1, 2016 Source: CEIC Data, General Administration of Customs, People’s Bank of China and AB
Continued Weakness in Total Fixed Investment and Housing Investment Year-over-Year Percent Change
Government Still Resorts to Old Playbook of Infrastructure Investment Year-over-Year Percent Change
Foreign Reserves and Trade Balance In US Dollars
–20
0
20
40
60
80
07 08 09 10 11 12 13 14 15 160.5
1.5
2.5
3.5
4.5
–40
–20
0
20
40
60
80
07 08 09 10 11 12 13 14 15 16
Trillions
Billio
ns
Trade Balance (Left Scale)
Foreign Reserves
–10
0
10
20
30
40
50
07 08 09 10 11 12 13 14 15 16
Total Fixed Investment
Housing Investment
8 | CMO 3Q16
After the Beta Trade, Returns Have Been Muted… Growth of a 60/40 Portfolio (USD)
Past performance and forecasts do not guarantee future results. Left display: October 1, 2010–June 30, 2016; right display: AB five-year forecast as of June 30, 2016 60/40 portfolio represented by 60% MSCI World Index and 40% Barclays US Aggregate Index. 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: Barclays, Morningstar, MSCI and AB
The Beta Ship Has Sailed
…and More of the Same Is Expected Expected Returns for a 60/40 Blend
Bonds 40% Stocks
60%
Expected Return 4%–5%
Standard Deviation
Inflation and Taxes ??
Post Beta Trade
90
100
110
120
130
140
150
10 11 12 13 14 15 16
Annualized Returns Oct 10–Jun 15 7.8% Jul 15–Jun 16 0.9%
9 | CMO 3Q16
Low Volatility Results in Low Dispersion Monthly Dispersion vs. Level of VIX (Percent)
–0.4%
–1.6%
1.4%
2.3%
Median Monthly Return*
0
20
40
60
80
0 20 40 60
Mon
thly
Dis
pers
ion
Previous Month-End VIX
Increased Dispersion + Lower Correlations = Greater Alpha Opportunity
Historical analysis is not a guarantee of future results. Left display as of May 31, 2016; right display through June 23, 2016 *Median monthly return of the S&P 500 Index †S&P one-month realized volatility and correlation Source: Chicago Board Options Exhange, Cornerstone Macro, eVestment, MSCI, S&P, Style Research and AB
Falling Correlations Increase Opportunities for Alpha S&P 500 One-Month Realized Correlation†
10
20
30
40
50
60
Jan Feb Mar Apr May Jun
2016 Feb 1990–Sep 2010 Oct 2010–Jun 2015 Jul 2015–May 2016
10 | CMO 3Q16
Past performance and forecasts do not guarantee future results. 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. Numbers may not sum due to rounding. *Represents relative performance of Morningstar Open-End US Large-Cap managers vs. S&P 500 starting January 1, 1995, through December 31, 2015, when the one-year (YoY) change in P/E was positive or negative and the market return was positive or negative over that same one-year period. †As of December 31, 2015. 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: Cornerstone Macro, eVestment, MSCI, S&P, Style Research and AB
After Beta Trade, Conditions Favor Active Management
Over Time, Active High-Conviction Equity Strategies Have Outperformed Passive Factors Annualized Relative Performance vs. S&P 500 (Percent) January 2004–December 2015†
Active Management Likely Poised to Outperform Relative Return (Percent)*
1.9 1.6
2.0 2.4
3.0
0.0
–0.3
0.6 0.7
1.4
Dividend Yield Value Quality Low Beta Momentum
Active High-Conviction Strategy Passive Factor Index Strategy
P/E Compression
P/E Expansion
Market Up +0.8 –2.5
Market Down +2.9 +2.5
11 | CMO 3Q16
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
Equities Today Present Attractive Return Potential
Historical analysis and past performance do not guarantee future results. As of June 30, 2016 Source: Barclays, S&P and AB
…but Have Typically Signaled Strong Equity Potential Stock and Bond Returns After Large Yield Gaps (Percent)
10-Year Treasury
Yield
S&P 500 Earnings
Yield
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 (Jun 2016) 1.5 5.2 ? ?
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
S&P 500 Earnings Yield
US 10-Year Treasury Yield
12 | CMO 3Q16
Yield and Reflation Trades: Value for Your Money?
Historical analysis does not guarantee future results. As of June 30, 2016 Source: S&P Dow Jones and Thomson Reuters I/B/E/S
January–June 2016 Sector Performance and Yield Percent
24.9 23.4
16.1
10.5
7.5 6.5
0.7 0.4
–0.3
–3.1
Tele
com
Util
ities
Ene
rgy
Con
sum
erS
tapl
es
Mat
eria
ls
Indu
stria
ls
Con
sum
erD
iscr
etio
nary
Hea
lthca
re
Tech
nolo
gy
Fina
ncia
ls
4.2 3.2 3.1 2.5 2.2 2.2 1.7 1.6
1.7 2.4
Trailing 12-Month Yield
Expected Earnings Growth and the Price You’re Paying for It
Sector June 2016
P/FE
2016 Median Earnings
Growth (Percent) PEG Ratio
Telecom 15.0 1.6 9.4
Utilities 18.8 3.4 5.5
Consumer Staples 22.1 6.1 3.6
Financials 14.1 4.0 3.5
Industrials 16.8 6.2 2.7
S&P 500 18.0 6.8 2.6
Materials 17.8 8.1 2.2
Technology 16.9 9.3 1.8
Healthcare 16.1 10.0 1.6
Consumer Discretionary 18.3 12.3 1.5
Energy 98.2 –79.6 N/A
High Dividend Reflation Trade Growth Oriented
13 | CMO 3Q16
Historical analysis does not guarantee future results. As of May 13, 2016. *Fund flows are through April 2016, including all US Equity mutual funds and ETFs sold in the US—2,683 funds included; highest-yielding include the vehicles with the SEC or dividend yield within the Morningstar database). †Highest 20% of dividend payers among 1,500 US-listed stocks in the AllianceBernstein equity universe, excluding 33 companies that do not currently have a P/E ratio because they are not profitable. ‡2013 Taper Tantrum: May 23, 2013. §Start date is May 22, 2012. ||High dividend yield defined as stocks with yields 20% or more greater than the cap-weighted average for the S&P 500. Long-term average shares of S&P 500 from January 1965 through June 2016. Source: FactSet, Morningstar, S&P and AB
…Means Overpaying for Bond-Like Stocks… Price/Earnings Ratio (×)†
0
10
20
30
40
1977
1981
1985
1989
1992
1996
2000
2004
2007
2011
2015
High-Dividend Focus: A Crowded Trade Where Caution Is Warranted
…That Can Turn Safety into Risky Relative Performance of the S&P High Yield Dividend Aristocrats Index vs. the S&P 500 (Basis Points)‡
Crowding into High-Yielding Stocks… US Equity Funds and ETFs: Three-Year Net Flows (USD Billions)*
345
–222
Highest-YieldingEquity Funds(535 Funds)
All OtherEquity Funds
(2,148 Funds)
Highest-Dividend Payers Trading
Well Above
Average
Average 13.4×
399
–470
One-Year Prior to the Taper Tantrum§
One-Year After Taper Tantrum
Running a Different Offense Reduce: “Highest-Dividend” Plays Increase: “High-Dividend-Growth” Plays
Sector LT
Avg. Peak Date
Index Share
at Peak
Returns Two Years After Peak
Energy 13.5% Nov 1980 33.0% –38.0%
Technology 12.2 Aug 2000 34.0 –73.1
Financials 10.1 Jan 2007 22.1 –69.9
High-Dividend Yielding Stocks||
35.0 Jun 2016 45.3 ?
14 | CMO 3Q16
Firms That Can Grow Are Poised to Lead—and They’re Cheap
Persistent Growth Is Inexpensive Today Relative Price/Forward Earnings of High-Persistent-Return Growth Stocks vs. Market†
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
90 92 94 96 98 00 02 04 06 08 10 12 14 16
Rat
io (×
)
Average
Historical analysis does not guarantee future results. Left display as of December 31, 2015; right display through June 30, 2016. *Universe consists of the top 1,000 companies by market cap each year from 1979 to 2015, with annual rebalancing. †Price to forward earnings of highest quintile of persistent profitability stocks relative to Russell 1000 Source: Center for Research in Security Prices, FactSet, Russell Investments, S&P Compustat, S&P Dow Jones and AB
Sustainable Growth Is Uncommon but Rewarding Top 1,000 Companies with Earnings Growth Rates ≥10%*
350
77
22
0.0
0.3
0.6
0.9
1.2
1.5
1.8
2.1
2.4
2.7
3.0
0
50
100
150
200
250
300
350
400
One Year Three Years Five Years
Excess (Percent)
Num
ber o
f Com
pani
es
0.9%
1.2%
2.7%
Number of Companies
Annualized Excess
Returns vs. S&P 500
15 | CMO 3Q16
Small-Caps: An Active Edge That Is Attractively Priced
Smaller-Cap Stocks Are Attractively Valued After Correction Relative Valuations†
Russell 2000 vs. Russell 1000
A Few Sectors Loom Large in Small-Cap Indices Percent of Index
Small-Cap Active Managers Have Delivered Higher Returns, Less Risk Return and Volatility: 10 Years Ending March 31, 2016
Historical analysis does not guarantee future results. Left display as of March 31, 2016; middle and right displays through June 30, 2016. *eVestment US Small Cap Core Equity universe †Valuation composite is one-third price to forward earnings, one-third price to book and one-third price to sales. 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, eVestment, FactSet, Russell Investments, Thomson Reuters I/B/E/S and AB
5
6
7
8
9
10 15 20 25
Annu
aliz
ed R
etur
n (P
erce
nt)
Annualized Standard Deviation (Percent)
Median US Small-Cap Core Manager*
Russell 2000
0.50
0.75
1.00
1.25
1.50
80 84 88 92 96 00 04 08 12 16
Rat
io (×
)
Small-Cap Is Cheap
Large-Cap Is Cheap
Average
0
5
10
15
20
25
30
96 98 00 02 04 06 08 10 12 14 16
Utilities & REITs
BioPharma
Historical Average in
R2000V
Historical Average in R2000G
16 | CMO 3Q16
Yield to Worst Is Typically a Good Indicator of Future Returns Yield to Worst and Five-Year-Forward Annualized Return
…and It Has Taken Less Time to Recover Its Losses Average Time (Months) to Recover: Trough to Prior Peak (1998–2015)
High Yield Has Had Smaller Drawdowns than Equities… Average Calendar-Year Maximum Drawdown (1998–2015)
High-Yield Bonds Are Compelling vs. Passive Equities…
Historical analysis does not guarantee future results. Left display as of June 30, 2016; middle and right displays as of December 31, 2015 High yield is represented by 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: Barclays, Bloomberg, Credit Suisse, Morningstar and AB
–11.76%
–6.33%
S&P 500 Barclays USHigh Yield Index
16.1
4.7
S&P 500 Barclays USHigh Yield Index
–4
0
4
8
12
16
20
24
01 04 07 10 13 16
Perc
ent
Yield to Worst
Five-Year-Forward Annualized Return
Represents Five-Year
Annualized Return
June 2011–June 2016
6.26%
17 | CMO 3Q16
Leverage Has Risen but Less So Outside Commodity Sectors
3.5
3.7
3.9
4.1
4.3
4.5
4.7
4.9
5.1
5.3
1Q:0
93Q
:09
1Q:1
03Q
:10
1Q:1
13Q
:11
1Q:1
23Q
:12
1Q:1
33Q
:13
1Q:1
43Q
:14
1Q:1
53Q
:15
1Q:1
6
LTM
Deb
t/EB
ITD
A
Leverage Leverage ex Commodities
High-Yield Valuations Have a Wide Range Today
Revenues Outside Commodity Companies Are Still Attractive
Historical analysis does not guarantee future results. Left display as of June 7, 2016; middle and right displays as of March 31, 2016 Source: Barclays, J.P. Morgan and S&P Capital IQ
…but Investors Must Be Selective
0
2
4
6
8
10
12
14
16
< –5
.0
–4.5
–3.5
–2.5
–1.5
–0.5
+0.5
+1.5
+2.5
+3.5
+4.5
> 5.
0
Per
cent
Yield to Worst
Be Selective
Here
Inde
x A
vera
ge
–30
–25
–20
–15
–10
–5
0
5
10
15
20
1Q:0
93Q
:09
1Q:1
03Q
:10
1Q:1
13Q
:11
1Q:1
23Q
:12
1Q:1
33Q
:13
1Q:1
43Q
:14
1Q:1
53Q
:15
1Q:1
6
Year
-ove
r-Ye
ar R
even
ue
Revenues YoY
Revenues YoY ex Commodities
Lower Yields, Fewer
Problems
18 | CMO 3Q16
Local EM Offers Attractive Opportunities Local Yield Curves (Percent)
4
6
8
10
12
14
EM FX Valuations Are at Multiyear Lows J.P. Morgan Emerging Market Currency Index
60
70
80
90
100
110
120
02 03 04 05 06 07 08 09 10 11 12 13 14 15
Historical analysis does not guarantee future results. As of June 30, 2016 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, J.P. Morgan and AB
Emerging Markets Are Attractive Bond Diversifiers…
40%+ Drop
Colombia
Turkey
Brazil
Focus on the intermediate and longer maturities where roll and carry are attractive
Focus on short- and intermediate-term government bonds that offer attractive yields
3 Mos.
5 Yrs.
30 Yrs.
10 Yrs.
19 | CMO 3Q16
…as Are Securitizations
Historical information provided for illustrative purposes only. Left display: default rates through September 15, 2015 and US Home Price Index through July 31, 2015; middle and right displays through June 30, 2016 *Credit risk transfer security represented by STACR 2014-DN3 M-3. †BBB 7–10 year ex energy bonds with maturities before 2024; CMBX.BBB tracks 25 BBB bonds, which were originated in 2012. Source: Barclays, Bloomberg, Citigroup, Credit Suisse, Freddie Mac, Intex Solutions, J.P. Morgan, National Association of Realtors, S&P Capital IQ, S&P/Case-Shiller Home Price, US Federal Reserve Board and AB
Residential MBS Provide Less Volatile Diversification than Corporates Option Adjusted Spread
Residential Mortgages Supported by Declining Defaults and Rising Home Prices
130
145
160
175
190
0
1
2
3
4
08 09 10 11 12 13 14 15
Cur
rent
to 3
0-D
ay D
efau
lt R
ate
(Per
cent
)
Default Rate (Left Scale)
300
400
500
600
700
800
900
1,000
Dec
15
Jan
16
Feb
16
Mar
16
Apr
16
May
16
Jun
16
Basi
s Po
ints
High Yield Narrows More
Third Avenue Makes the News, High Yield
Widens More
CRT Security—Issued by Fannie Mae*
High Yield
US Home Price Index
Commercial MBS Offer Premium over Corporates CMBX.BBB vs. BBB Corporates, Spread Difference†
50
150
250
350
Jun
13
Oct
13
Feb
14
Jun
14
Oct
14
Feb
15
Jun
15
Oct
15
Feb
16
Jun
16
Basi
s Po
ints
Average
20 | CMO 3Q16
Interest Rates Help to Offset Risk in Stocks and High Yield Bond Correlation to S&P 500 (1987–2015)
Current analysis does not guarantee future results. Left and middle displays as of December 31, 2015; right display as of June 30, 2016 Bar height might differ due to rounding. Global bonds hedged is represented by the Barclays Global Aggregate Hedged to USD; and US bonds by Barclays US Aggregate. 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. *Extreme down months are months when the S&P 500 return was more than one standard deviation below its sample mean. †Credit rating is represented by the Barclays methodology. Source: Barclays, Bloomberg, S&P and AB
Interest-Rate Exposure Is as Important as Ever, but Globalizing it Is Key
Currency Hedging Can Make Low-Yielding Bonds More Attractive
Global Outperforms When US Falls Up vs. Down Capture (March 1990–December 2015)
2.3
–0.9
2.2
–0.7
Average QuarterlyReturn When
US Aggregate IndexWas Positive
Average Quarterly Return When
US Aggregate IndexWas Negative
US Aggregate Index Global Aggregate Index
Up Capture: 96% Down Capture: 70%
10-Year Bond Yield
10-Year Yield
(Hedged) Credit
Rating†
Australia 1.98% 0.57% AAA
US 1.47 1.47 AAA
Canada 1.06 1.18 AAA
Germany –0.13 1.31 AAA
New Zealand 2.35 0.43 AA+
UK 0.87 1.11 AA
France 0.18 1.63 AA
Japan –0.22 1.00 A+
Spain 1.16 2.61 BBB+
Italy 1.26 2.70 BBB
Portugal 3.01 4.45 BB+
0.1 0.1
–0.1
–0.3
US Bonds Global Bonds Hedged
Overall Extreme Down Months*
21 | CMO 3Q16
Tax Revenues Remain Solid Year-over-Year State and Local Gov’t Tax Receipts and GDP
….amid Strong Demand Flows into Muni Bond Funds
Muni Debt Outstanding Remains Low… Change in Muni Bonds Outstanding*
Municipals: Supportive Technicals and Strengthening Fundamentals
Past performance does not guarantee future results. Left display through December 31, 2015; middle display through June 30, 2016; right display through September 30, 2015 *Refinancing and combined Source: Bloomberg, Bureau of Economic Analysis, Investment Company Institute, National League of Cities, US Federal Reserve and AB
–20
–15
–10
–5
0
5
10
10 11 12 13 14 15 16
USD
Billi
ons
–10
–5
0
5
10
15
91 94 97 00 03 06 09 12 15
Perc
ent
GDP
Tax Receipts
2
4
6
8
10
12
14
04 06 08 10 12 14
USD
Tril
lions
Treasuries
Corporates
Municipals
22 | CMO 3Q16
Roll Plus Yield (Percent)
Historical analysis does not guarantee future results. As of July 1, 2016 Nominal 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. 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 Barclays 1–3 Year US Aggregate ex Government. Source: Barclays, Investment Company Institute, J.P. Morgan, Municipal Market Data, US Federal Reserve and AB
Municipals: Still Attractive, but Positioning Matters Shorter Bonds: Look for opportunistic
positions in taxable bonds Intermediate Bonds: Focus on roll
and carry Longer Bonds: Dip down in credit for
an extra yield pickup
0.80 1.26 1.52 1.68 1.78 1.88
2.21 2.41 2.54
0.14
0.69 0.62
1.02 0.71 0.78 0.31 0.23 0.08
1.05
2.90
2 5 7 8 9 10 15 20 30Maturity (Years)
Yield Roll*Short Taxable BBB Muni
23 | CMO 3Q16
Current analysis does not guarantee future results. Left display from December 1, 1990, to May 31, 2016; right display as of March 31, 2016 Long/short equity represented by the HFRI Equity Hedge category. Excess returns are 12-month rolling returns. Dispersion is trailing 12-month average. Source: Hedge Fund Research, S&P and AB
Environment Improving for Hedge Funds
Hedge Fund Managers Have Outperformed in High-Dispersion Environments… Excess Return of Long/Short Equity Managers vs. Dispersion
…but Many Challenged Funds Have Left the Market Number of Fund Launches and Liquidations
–1,000
–500
0
500
1,000
1,500
07 08 09 10 11 12 13 14 15 1Q:16
Launches Liquidations Net
–40
–30
–20
–10
0
10
20
30
40
50
10 20 30 40 50 60
Exce
ss R
etur
n (P
erce
nt)
Dispersion (Percent) Dec 1990–Sep 2010 Oct 2010–Jun 2015 Jul 2015–May 2016
24 | CMO 3Q16
Seeking companies growing on the topline, shorting faltering stocks
The current period of underperformance for Long/Short Equity relative to broader market isn’t unprecedented but is extreme
Prior periods of underperformance were followed by years of strong returns, which we think is promising for the years to come
Investing long in bonds with a positive risk bias, shorting bonds at risk for default
Liquidity is a risk that cannot be avoided US high-yield has rallied significantly since spreads widened
meaningfully in 2015
The environment for Global Macro is more favorable than it has been in recent years
Geopolitical risks are mounting, central bank policies are diverging, market volatility is increasing, and heavy sovereign debt is combining with slower global growth
The VIX (the “fear index”) shows that volatility has spiked in the past year
All of these factors will create opportunities for macro managers to capture returns
The strategy had a disappointing year in 2015, as hedge funds piled into M&A despite the slow pace of successful deals
However, we have a positive outlook on the space; spreads are wide and many deals are expected to go through
Current Opportunities for Hedge Fund Strategies
Long/Short Equity Choosing the Winners
Relative Value/Credit Avoiding the Losers
Global Macro Volatility Is Spiking
Event Driven Merger Arbitrage Spreads Are Widening
Current analysis does not guarantee future results. As of June 30, 2016 Source: Chicago Board Options Exchange and AB
25 | CMO 3Q16
Prescription Within Asset Classes
Current analysis does not guarantee future results. As of June 30, 2016 Source: AB
Putting It All Together: Strategy for Modest Growth, High Volatility
Fixed Income Equities
Alternatives
Fixed Income: Be Balanced Rates: Combine Global Core and US Core
Focus on intermediate part of curve
Be mindful of negative yields
Hedge currencies
Credit: Use Global Multi-Sector
High Yield still attractive despite recent strength
Underweight energy
Consider securitized assets, EM local bonds and currencies for diversification
Manage liquidity risk
Equities: Be Active Be concentrated
Seek downside protection
Embrace large-cap and secular growth
Favor dividend growers over highest yielders
Include small-caps, which remain attractively priced
Alternatives: Be Selective Diversify across strategies
Focus on strong up/down capture
Include Relative Value/Credit and Long/Short Equity
Capitalize on wide merger/arbitrage spreads
Take advantage of macroeconomic events and rising volatility
26 | CMO 3Q16
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 3Q16
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.
Barclays Global Aggregate–Corporate Bond Index: Tracks the performance of investment-grade corporate bonds publicly issued in the global market found in the Global Aggregate. (Represents global corporate on slide 2.)
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.
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 2.)
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 2.)
Barclays Investment Grade CMBS 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.
Barclays Municipal Bond Index: A rules-based, market value–weighted index engineered for the long-term tax-exempt bond market. (Represents municipals on slide 2.)
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).
Barclays US Corporate High Yield Index: Represents the corporate component of the Barclays US High Yield Index. (Represents US high yield on slide 2.)
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 2.)
28 | CMO 3Q16
Index Definitions (continued)
J.P. Morgan Emerging Market Currency Index: A tradable benchmark for emerging-market currencies vs. USD.
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 2.)
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-markets debt on slide 2.)
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, which represents 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 2.)
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 2.)
STACR 2014-DN3: A securitization designed to provide credit protection to the Federal Home Loan Mortgage Corporation (Freddie Mac) against the performance of an approximately $32 billion reference pool of mortgages.
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.
16-1212 GEN–6340–0616
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