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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 4Q:2017 CAPITAL MARKETS OUTLOOK
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4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

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Page 1: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

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

4Q:2017 CAPITAL MARKETS OUTLOOK

Page 2: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

1|CMO 4Q17

Strong Returns: Full Steam Ahead...to Be Continued?

As of September 30, 2017Past performance does not guarantee future results.Global corporates and 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 AllianceBernstein (AB)

1.45.3

2.3

4.74.9

1.00.2

6.210.2

17.1

11.21.0

21.312.0

Returns in US Dollars

1.51.0

2.5

1.10.60.4

1.1

1.32.6

2.0

7.95.45.7

4.5

Equities

Government Bonds

Credit

Alternatives†

Full-Year 2016 Returns (Percent)

3Q:2017 Returns (Percent)

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

3.93.9

6.9

1.01.0

2.34.7

4.59.0

7.0

27.820.0

10.914.2

Jan–Sep 2017 Returns (Percent)

Page 3: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

2|CMO 4Q17

Back to the Beginning: Revisiting the Four Pillars

As of September 30, 2017For illustrative purposes onlySource: AB

Global Growth

Moderate, Below Trend,

Improving

Global Inflation

Low, Not

Deflationary

Traditional Monetary Policy

Highly Accommodative

Nontraditional Monetary Policy

HighlyAccommodative

Page 4: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

3|CMO 4Q17

...Feeds Through to OutputManufacturing Output*

…as Broad-Based PMI Improvement...

Growth Pushes Through Trend…

Left display as of July 31, 2017; middle display as of September 30, 2017; right display: US and Japan manufacturing output as of August 31, 2017, euro-area manufacturing output as of July 31, 2017.Historical analysis and current forecasts do not guarantee future results. *January 2012 = 100Source: Haver Analytics, IHS Markit and AB

Moderate Below-Trend, Improving: Global Growth Reaches a Milestone

2.0

2.5

3.0

3.5

4.0

4.5

5.0

10 11 12 13 14 15 16 17

YoY

Per

cent

Cha

nge

92

94

96

98

100

102

104

106

108

12 13 14 15 16 17

Thre

e-M

onth

Rol

ling

Aver

age

46

48

50

52

54

56

58

10 11 12 13 14 15 16 17

Inde

x

EM

DM

Global

Japan

Euro

US

Real GDP

PMI

Trend

Page 5: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

4|CMO 4Q17

Left display as of September 30, 2017; middle display as of June 30, 2017; right display as of July 31, 2017Historical analysis and current forecasts do not guarantee future results. Source: Haver Analytics, IHS Markit and AB

...Leaving Core CPI Without a DriverG7 CPI Inflation

…but Wages Have Not…Average Wage Growth in G7

Employment Keeps Improving…Developed-Market Unemployment

On the Other Hand: Inflation Remains (Structurally?) Low

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

07 09 11 13 15 17

Une

mpl

oym

ent (

Per

cent

)

Long-Term Avg. 6.4%

5.29%

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

96 99 02 05 08 11 14 17

YoY

Per

cent

Cha

nge

–2

–1

0

1

2

3

4

07 09 11 13 15 17

Per

cent

Core

Headline

Page 6: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

5|CMO 4Q17

Improving Growth and Low Inflation

EM Real Rates Much Higher than DM Rates TodayHeadline Consumer Price Index

Improved Current Account Quality Through Increased Foreign Direct InvestmentBasic Balance

Benign Inflation Allows Interest Rates to Stay Low—Good for Stocks and Bonds

Emerging Markets Playing a Similar Tune…with a Twist

0

1

2

3

4

5

6

7

8

9

10

00 02 04 06 08 10 12 14 16 18

YoY

Perc

ent C

hang

e

–2

–1

0

1

2

3

4

5

6

03 05 07 09 11 13 15 17

YoY

Perc

ent C

hang

e

–150

–100

–50

0

50

100

150

200

250

01 03 05 07 09 11 13 15Africa Asia ex ChinaEEMEA LatAmTotal

Left display as of June 30, 2017; middle display as of March 31, 2017; right display as of September 30, 2017Historical analysis and current forecasts do not guarantee future results. Source: Haver Analytics, IHS Markit and AB

GDP Headline Inflation

EM

Differential

DM

E

Page 7: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

6|CMO 4Q17

Central Bank Watch: DM vs. EMThe Great Divergence

As of September 30, 2017Current analysis and forecasts do not guarantee future results.BOE: Bank of England; BOJ: Bank of Japan; ECB: European Central Bank; RBA: Reserve Bank of Australia; RBI: Reserve Bank of IndiaSource: AB

Canada

US

Mexico

Policy Direction:

Good growth, low rates, strong equities, weaker dollar

Gradual tightening of conditions likely into 2018

Well-communicated balance-sheet reduction

Policy Direction:

Canada has already tightened rates a few times, and they’re going to do more

Brazil

Policy Direction:

Unless growth slips further, some BOE tightening now looks likely

UK

Policy Direction:

Tightening cycle over; easing to start in 3Q:2018

Policy Direction:

Aggressive Selic rate easing priced in since 4Q:2016

Policy Direction:

ECB to announce tapering in the second half of 2017, and run down the program by mid-2018 Policy Direction:

QQE-YCC policy is in play for the foreseeable future. BoJ to lag ECB and Fed in normalization process

Policy Direction:

Despite weak growth and tame inflation, RBI’s inherent hawkish stance can be prolonged with the expected introduction of fiscal stimulus in the near term

Policy Direction:

Undershoot of inflation target opens door for bigger cuts

Policy Direction:

Clear desire to contain leverage risk, but supporting growth a priority for now. Overall, low risk of overtightening

India

China

Russia

Japan

Australia

Policy Direction:

Rate cut increasingly unlikely, particularly given mounting financial stability concerns. Equally, RBA in no hurry to hike

DM

EM

Euro Area

Page 8: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

7|CMO 4Q17

High Valuations, Modest Returns†

After Periods of Top-Quartile Valuations, Large-Cap Stocks Delivered Single-Digit/Negative Returns 99% of the Time

–5

0

5

10

15

20

25

0 25 50 75 100

Ann

ualiz

ed R

etur

ns (P

erce

nt)

Valuation Quartiles

Valuations Are Ahead of Earnings—and Economic Output*

As of September 30, 2017Historical analysis and current forecasts do not guarantee future results. *US market cap to GDP is represented by S&P 500 market cap as a percent total US nominal GDP; P/E is represented by 12-month forward P/E (Bloomberg estimates).†Subsequent 10-year annualized S&P 500 returns and S&P 500 valuation percentile levels for the cyclically-adjusted price-to-earnings (CAPE) ratio are calculated from December 30, 1927, the inception of the S&P 500 Price Index. The bracketed area reflects the top-quartile (75%–100%). Source: Bloomberg, Robert J. Shiller, S&P and AB

Growth and Earnings Still a Ways from Catching Up to ValuationsGrowth and Valuations

0

20

40

60

80

100

120

140

10

12

14

16

18

20

22

24

26

28

30

97 99 01 03 05 07 09 11 13 15 17

Market C

ap to GD

P (P

ercent)

Pric

e to

Ear

ning

s (1

2-M

onth

For

war

d)

20-Year Avg.

US Market Cap to GDP

P/E

Page 9: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

8|CMO 4Q17

As of September 30, 2017Current analysis does not guarantee future results. For illustrative purposes only*CRT: agency credit risk–sharing transactionsSource: AB

Today’s Environment Calls for a Balanced Approach

High-Yield Corporatesenhance income

Floating-Rate Bonds Like CRTs*benefit when rates rise

Emerging Markets provide diversification and access to higher yields

Long- and Short-Currency Positions enhance returns and help to manage risk

Manage Duration ActivelyGlobalize your exposure and take advantage of Treasury valuations

Focus on Roll and CarryEmphasize intermediate

maturities

Solid Economic Growth + Tighter Spreads + Uncertain Way Forward

Maintain Balance but Tilt Risks Toward Credit

Page 10: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

9|CMO 4Q17

As of September 30, 2017Current analysis does not guarantee future results.*Eastern Europe, the Middle East and AfricaSource: AB

Favor LATIN

AMERICAN EMERGING-

MARKET bonds of countries

with improving fundamentals

Favor SECURITIZED

ASSETSand select

opportunities in US HY

CORPORATES

EUROPEAN CORPORATES

offer diversificationwith select

opportunities in SUBORDINATED

FINANCIALS

De-emphasize lower-yielding

ASIAN countries while favoring

SELECTCURRENCIES

Tactical opportunities

within EEMEA*

Select AFRICAN

SOVEREIGNS offer diversification within commodities

allocation and/or attractive yields

Globalized Credit for Maximum Access to Opportunities

Page 11: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

10|CMO 4Q17

Corporates: Selectivity Is Key

Opportunities Exist Within Longer-Maturity High Yield

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

Left display as of September 30, 2017; except equity forecast as of June 30, 2017; middle and right displays as of September 30, 2017Historical analysis does not guarantee future results.Global high yield is represented by Bloomberg Barclays Global Corporate High Yield (USD Hedged); US high yield by Bloomberg Barclays US Corporate High Yield; BBB by Bloomberg Barclays US Aggregate BBB and BB by Bloomberg Barclays US High Yield BB. 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 and AB

Five-Year ForwardAnnualized Return

Yield to Worst

US Equity Five-Year

Forecast: 5.8%

Yield to Worst Global HY: 5.1%US HY: 5.5%

BBBs Offer Relative Value and Diversification to BBsUS Credit Bonds

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Sep

14

Dec

14

Mar

15

Jun

15S

ep 1

5D

ec 1

5M

ar 1

6Ju

n 16

Sep

16

Dec

16

Mar

17

Jun

17S

ep 1

7

Per

cent

Difference Between 10-Year+ and Shorter-Maturity Bond Yields

Average

2

3

4

5

6

7

8

Yiel

d to

Wor

st (P

erce

nt)

3,026Issues

815Issues

BBBBB

BBB Features: Select yields similar

to BBs Lower credit risk Lower extension risk Higher duration risk

Page 12: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

11|CMO 4Q17

Try Agency Credit Risk–Sharing Transactions (CRTs)Floating-Rate Exposure?

Left and right displays as of September 30, 2017; middle display through December 31, 2016Historical analysis does not guarantee future results.*Last cash flow and equity coupons†FICO score is a type of credit score that helps lenders assess a borrower’s credit risk. Typically, scores above 650 indicate a very good credit history. FICO scores and debt-to-income ratios are for borrowers with low loan-to-value ratios backed by Freddie Mac. Bank loans are represented by Credit Suisse Leveraged Loans.Source: Bloomberg, Credit Suisse, Freddie Mac, J.P. Morgan and AB

Loans Have Not Benefited from LIBOR Rising but CRTs Have

Residential Mortgage Market Is Still Early in the Cycle

CRTs Have More Attractive Features than Loans...

Both have a floating-rate structure but CRTs offer:

Better liquidity

Better fundamentals

Better portfolio diversification

...and Comparable Yields

0

2

4

6

8

10

12

14

16

18

680

690

700

710

720

730

740

750

760

770

00 02 04 06 08 10 12 14 16

Percent

FIC

O S

core

The vast majority of borrowers have FICO scores above 700†

FICO (Left Scale)

Debt to Income 50+%

Asset

ApproximateLoss-Adjusted Yield

(Percent)

CRTs 3.5–7.0

Bank Loans 4.0–15.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

4.5

4.7

4.9

5.1

5.3

5.5

5.7

5.9

6.1

Jan

16M

ar 1

6M

ay 1

6Ju

l 16

Sep

16

Nov

16

Jan

17M

ar 1

7M

ay 1

7Ju

l 17

Sep

17

One-M

onth LIBO

R

Cou

pon

One-Month LIBOR

Average Loan Coupon (Left Scale)

CRT Coupon*(Left Scale)

Page 13: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

12|CMO 4Q17

EM Real Rates Have Risen, Offering Income PotentialPolicy Rates and Inflation

0

1

2

3

4

5

6

7

8

9

10

Jan 10 Jul 11 Jan 13 Jul 14 Jan 16 Jul 17

Per

cent

Emerging Markets: Select Opportunities

Select High-Yield USD Sovereigns Are Attractive

As of September 30, 2017Historical analysis does not guarantee future results.EM local is represented by J.P. Morgan Government Bond–Emerging Markets Global Diversified. 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.*EM FX valuations generally peaked in April 29, 2011.†Yields are for representative sovereign bonds close to 10-year maturities for Argentina; 7-year maturities for Gabon and Ukraine.Source: Bloomberg, J.P. Morgan and AB

EM FX Rates Generally Trade at a Discount and Some Offer Attractive Carry

EM Local

US High Yield

Supported by: High carry Some stability in commodity prices Stable global growth

Examples:†

Brazil: Opportunities in corporates

EM Inflation

Argentina: 5.8% Yield

Gabon: 6.8% Yield

–4

–2

0

2

4

6

8

10

12

–150 –100 –50 0

Car

ry (P

erce

nt)

Percent Change in Spot Rate Since EM FX Peak*

TRY

RUB MXN

ZARBRL

IDR

PLN KRW

NTDCZK

HUF

Less Favorable

More Favorable

Real PolicyRate

Ukraine: 6.9% Yield

Page 14: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

13|CMO 4Q17

Take a Worldview on Interest-Rate Exposure, Too

Left display as of September 27, 2017; middle and right displays as of September 30, 2017Past performance does not guarantee future results. *The scenario analysis assesses the potential impact of instantaneous changes in US high-yield spreads and a parallel shift in the US Treasury yield curve on the Bloomberg Barclays US Aggregate and US High Yield indices. Expected returns incorporate the impact of roll and carry over the subsequent 12 months. †Bar height might differ due to rounding. Global bonds hedged is represented by Bloomberg Barclays Global Aggregate Hedged to USD; US bonds by Bloomberg 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.Source: Bloomberg Barclays and AB

Global Outperforms When US FallsUp vs. Down Capture†

(March 1990–September 2017)

Rising Rates Don’t Always Have to Derail Bonds*Expected Total Returns (Percent)

2.2

–1.0

2.1

–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: 71%

US Aggregate

Change in US High-Yield Spreads (b.p.)

–50 0 50 100

Cha

nge

in

US

Trea

sury

Yi

elds

(b.p

.) 100 –1.5 –1.8 –2.2 –2.5

50 0.9 0.6 0.2 –0.2

0 3.2 2.9 2.5 2.2

USHigh Yield

Change inUS High-Yield Spreads (b.p.)

–50 0 50 100

Cha

nge

in

US

Trea

sury

Yi

elds

(b.p

.) 100 5.4 3.9 2.4 0.9

50 6.4 5.0 3.5 2.0

0 7.4 6.0 4.5 3.0

Time Erases Pain of Rising Rates24-Month Rolling Returns (Percent)

0

1

2

3

4

5

6

0

5

10

15

20

25

01 04 07 10 13 16

US Generic Government 10-Year

Bloomberg Barclays US Aggregate (Left Scale)

Bloomberg Barclays Global Aggregate—USD Hedged (Left Scale)

Fed Hike

Taper Tantrum

2013

Page 15: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

14|CMO 4Q17

Below-Average Supply Has Supported Muni Market TechnicalsSupply (USD Billions)

Be Selective in Muni Credit & Reduce High-Yield Tobacco Bonds ExposureJan–Sep 2017 Returns (Percent)

Tax Reform Shouldn’t Significantly Disrupt Municipal ValuationsAfter-Tax Yield Advantage: 10-Year AAA vs. 10-Year Treasury (Percent)

Technicals Remain Strong, Tax Reform on Horizon & Selective on Credit

As of September 30, 2017Past performance does not guarantee future results.Source: Bloomberg Barclays and AB

0

50

100

150

200

250

300

350

400

450

08 09 10 11 12 13 14 15 16 17E

0.8

0.7

0.5

Five-YearAverage

Current 43.4%Tax Rate

35% TopTax Rate

18.1

7.7 7.5

4.7

14.2

High-Yield

TobaccoBonds

High-YieldIndex

SeniorLiving

IG Muni S&P 500

Yield to Worst (YTW)Tobacco: 5.9Senior Living: 5.7High Yield: 5.4

Page 16: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

15|CMO 4Q17

Municipals: Balance Intermediate Quality with Longer-Maturity Credit

Roll Plus Yield (Percent)

As of September 30, 2017Historical analysis does not guarantee future results.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. 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

0.99 1.34 1.63 1.78 1.91 2.01 2.39 2.67 2.870.090.74

0.861.05 1.02 0.86

0.62 0.350.09

3.54

2 5 7 8 9 10 15 20 30Maturity (Years)

Yield Roll* BBB Muni

Page 17: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

16|CMO 4Q17

Valuations Elevated, but Supported by Earnings Improvement

As of September 30, 2017Past performance, historical analysis and current forecasts do not guarantee future results. Not all sectors perform the same.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. *EPS: earnings per shareSource: Bloomberg, MSCI and S&P

Equity Valuations Are Elevated… ...but Improving Earnings Are an OffsetOut-of-Stall Mode (EPS*)

$119 $119 $119

$141 $146

2014 2015 2016 2017 2018

Index P/FE20-Year Median

S&P 500 19.3× 16.5×

S&P MidCap 400 21.0 18.3

S&P SmallCap 600 23.7 19.0

MSCI EAFE 15.5 14.3

MSCI World 17.7 16.1

MSCI ACWI 17.1 15.3

MSCI EM 13.6 11.8 Actual Estimated

Page 18: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

17|CMO 4Q17

Left display as of September 30, 2017; right display through December 31, 2016Past performance and historical analysis do not guarantee future results.Source: Ned Davis Research, Northern Trust, S&P and AB

Time Between Market CorrectionsUS Large Cap Stocks (Since 1928)

Worried About a Correction? Prepare Accordingly

Stocks Usually Rebound After Large Intra-Year DeclinesS&P 500 Total Return by Calendar Year (Percent)

Weeks Between 5% Correction

Weeks Between 10%

Correction

Weeks Between 20%

Correction

Current Period

Avg. Number of Weeks

–40

–30

–20

–10

0

10

20

30

40

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

S&P 500 Return Drawdown < 5%

DrawdownCount

Drawdown Depth

Length(Days)

Time to 50%

Rebound (Days)

Time to 100%

Rebound(Days)

Fwd. 3-Mo.Return Post-

Drawdown

Fwd. 12-Mo. Return Post-

Drawdown

S&P 500 39 –8% 17 7 69 11% 16%

64

10

83

33

432

127

Drawdown > 5%

Page 19: 4Q:2017 CAPITAL MARKETS OUTLOOK - AllianceBernstein · CAPITAL MARKETS OUTLOOK. CMO 4Q17 | 1 ... Nontraditional Bond Global Corporate EAFE* ... US high yield by Bloomberg B arclays

18|CMO 4Q17

Left display as of December 31, 2016; right display through September 30, 2017Past performance and historical analysis do not guarantee future results.*The forecasted figures utilize book value and price-to-book valuations instead of earnings and price to earnings.†Historical data are for the S&P 500. ‡Next five years is the median AB proprietary forecast for a similar group of stocks.Source: Bloomberg Barclays, FactSet, S&P and AB

Equities: Look to Earnings Growth, Not Multiple Expansion

Earnings: Critical Component of Forecasted Returns*US Large-Cap Annualized Returns (Percent)

Yet Large Gap Between Stock and Bond Yields PersistsStock Earnings Yields vs. Bond Yields (Percent)

0

2

4

6

8

10

12

14

83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17

S&P 500 Earnings Yield

US 10-Year Treasury Yield

2.4 2.2

2.45.0

9.3

–1.3

Jul 2012–Dec 2016 Next Five Years

Dividends EPS Growth P/E Expansion

14.1

5.9

† ‡

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19|CMO 4Q17

Muted Volatility: Low Rates, but High Stock Rotation

As of September 30, 2017Past performance and historical analysis do not guarantee future results. Not all sectors perform the same. Source: Bloomberg, Chicago Board Options Exchange, Morningstar, Russell Investments, S&P and AB

Double Impact from Low RatesBond Yields (Percent)

Implied Stock Volatility Is Muted…VIX

0

10

20

30

40

50

60

07 08 09 10 11 12 13 14 15 16 17

…yet Stock Rotation Actually SharpPercent

Average

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

07 08 09 10 11 12 13 14 15 16 17

US 10-Year Treasury Yield

0

5

10

15

20

25

1H:16 2H:16 Jan–Sep 17

High Yield ValueGrowth S&P 500

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Large-Stock Volatility Much Higher than Broad Market

Beneath the Surface, All Is Not Calm

Left display through September 30, 2017; right display as of November 30, 2016Historical analysis does 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 the fees and expenses associated with the active management of a portfolio.*Correlation of S&P 500 option prices and prices of single-stock options on the 50 largest S&P 500 constituents (January 2018 maturities). Correlations represented by CBOE implied correlation Index (KCJ). KCJ CBOE Index represents the expected average correlation of SPX option prices and prices of single-stock options on the 50 largest components of the S&P 500. Correlation is calculated using January 2018 equity options and December 2017 SPX options. Source: Bloomberg, Empirical Research Partners, FactSet, Russell Investments, Thomson Reuters I/B/E/S and AB

0

2

4

6

8

10

12

14

16

18

20

30

40

50

60

70

80

Dec15

Feb16

Apr16

Jun16

Aug16

Oct16

Dec16

Feb17

Apr17

Jun17

Aug17

Annualized Volatility (Percent)

Cor

rela

tion

Correlation of 50 largest stocks to S&P 500 Index*

Rising Rates Amplify Passive Sector Exposure VolatilityShare of US Large-Cap Stocks in Highest Quintile of Passive Ownership

80%

59%

21% 19% 18%

REITs Utilities Energy ConsumerStaples

Materials

Current S&P 500Volatility: 5.46%

Current Top 50 Stocks Average Volatility: 17.22%

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21|CMO 4Q17

Instead, Look for ProfitabilityPrice/Earnings Ratio of Highest-ROE Companies vs. Market†

Payout Ratios Are UnsustainablePayout Ratio, Trailing 12 Months

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

78 87 96 05 14

High Yielders Remain Expensive vs. High ROE and Persistent Growers

As of September 30, 2017Historical analysis does not guarantee future results.*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†Highest 20% of earnings growth and ROE 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 profitableSource: FactSet, Russell Investments and AB

Bond Proxies Are CostlyPrice/Earnings Ratio (×)*

Average

Highest (Q1)

0

5

10

15

20

25

30

35

40

80 86 92 98 04 10 16

Highest-DividendPayers Trading Well

Above Average

Average13.8×

89%

74%

Current 10-Year Average

The most-held dividend stocks are paying out almost 90% of their earnings, a huge jump

from their historical average

Top 10 ETF Dividend Stocks

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22|CMO 4Q17

A Few Sectors Loom Large in Smaller-Cap IndicesFinancials/Utilities/REITs Weight in Russell 2500†

22

23

24

25

26

27

28

29

30

31

32

01 03 05 07 09 11 13 15 17

Per

cent

Small-Caps: Potential Policy Boost, but an Active Edge Required

As of September 30, 2017Historical analysis does 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 the fees and expenses associated with the active management of a portfolio.*Based on median 2017 effective tax rate for S&P 500 and Russell 2000. Excludes real estate and negative-pretax-income companies.†Real estate sector adjusted for mortgage REITs post–GICS sector reconstitution to make it comparable with historical.Source: Bloomberg, FactSet, Russell Investments, Thomson Reuters I/B/E/S and AB

Historical Average in

R2500

Historical Percentiles Price-to-Forward-Earnings Multiple Relative to Russell 2000

Small-Cap Cyclicals

Small-Cap Defensives

16 19

40

7078 79

Consumer Discretionary

Industrials

Technology

Real Estate†

Healthcare

Utilities

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23|CMO 4Q17

It Pays to Be Active in Moderate-Return Environments

Intra–Stock Market Correlations*Well Below Precrisis Levels

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

90 93 96 99 02 05 08 11 14 17

Sep2017

Left and middle displays as of September 30, 2017; right display as of December 31, 2016Historical analysis does not guarantee future results.*Correlation uses a six-month moving average. Latest figure is from September 30, 2017. Precrisis average is from 1990 to 2007. †Measured by the average outperformance of active managers in the Large Value/Growth/Blend, Mid Value/Growth/Blend and Value/Growth/Blend Morningstar categories vs. the respective benchmarks. ‡Measured by the average annual outperformance of active managers in the Large Blend Morningstar category vs. each fund’s primary prospectus benchmark over the past 20 years.Source: Bloomberg, FactSet, Morningstar, Russell Investments, Thomson Reuters I/B/E/S and AB

Active Managers Snap Back in 2017†

Active Managers Outperforming (Percent Beating Benchmark)

Active Managers Tend to Do Best in Challenging Markets‡

Percent Beating Benchmark

Avg.Since2008

PrecrisisAverage

34

51

Five-YearAverage

Jan–Sep2017

36

53

Strong (10%+) Moderate & Down(<10% or Negative)

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24|CMO 4Q17

I/B/E/S Five-Year Growth Forecast†

Percent

More Attractive

Less Attractive

As of September 30, 2017Past performance and historical analysis do not guarantee future results.MSCI World earnings yield calculated using reciprocal of the price/earnings ratio for the next 12 months*Indices are used for comparison purposes only. An investor generally cannot invest in an index.†Excludes energySource: Bloomberg Barclays, FactSet, MSCI, S&P Compustat, Thomson Reuters I/B/E/S, Worldscope and AB

Large Gap Between Stock and Bond Yields Persist Globally—Be Selective

Globally, Yield Is Best Found with Equities

0

1

2

3

4

5

6

7

8

9

10

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Per

cent

MSCI World Earnings Yield*

Bloomberg BarclaysGlobal Aggregate Yield

0

2

4

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8

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12

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18

12 13 14 15 16 17 18 19 20 21

P/FE

Slo

w G

row

thFa

st G

row

th

Potentially Cheap Potentially Expensive

Healthcare

Cons. Disc.

Financials

Technology

Materials

Telecom

Utilities

IndustrialsConsumer

Staples

Bond Yields Are Not Keeping Up with Equity Yields in Most Countries

–1

0

1

2

3

4

5

6

7

8

9

CN JP DE

DK NL FI AT FR SE UK

NO HK

CA

SG US

AU NZ

Per

cent

10-Year Bond Yield MSCI World Earnings Yield

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25|CMO 4Q17

FAANG Stocks: Not Exclusive to the USFAANGs Dominate US and EM

EM Stocks Compelling, but Beware of Concentration Risk

As of September 30, 2017Past performance and historical analysis 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 the fees and expenses associated with the active management of a portfolio.Source: Bloomberg, MSCI, S&P and AB

EM Stocks Are Now Trading at a Substantial DiscountMSCI EM vs. MSCI World Price/Earnings (Next 12 Months) and Price/Book Value

–40

–30

–20

–10

0

10

20

07 08 09 10 11 12 13 14 15 16 17

Perc

ent

P/B Ratio

P/E Ratio

EM “FAANGs”:Baidu, Tencent, Alibaba, Samsung Electronics, Taiwan Semi, Naspers YTD 2017 Avg. Return: 64% EM De-FANGed: 15.5%

US FAANGs:Facebook, Apple, Amazon, Netflix, Alphabet (Google) YTD 2017 Avg. Return: 34% S&P 500 De-FANGed: 10.8%

EM “FAANGs” contributed more to index returns at 44% of MSCI EM performance vs. US FAANGs withonly 24% of index performance contribution

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26|CMO 4Q17

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.

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27|CMO 4Q17

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 Bond 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 High-Yield Corporate Index: A multi-currency measure of the global high yield corporate debt market. The index represents the union of the US High Yield, the Pan-European High Yield, and the corporate sector of the Emerging Markets (EM) Hard Currency High Yield Indices. The high yield and emerging markets sub-components are mutually exclusive. The Global High Yield Corporate Index is a component of the Global High Yield Index and subsequently a component of the Multiverse Index, along with the Global Aggregate, Euro Treasury High Yield and EM Local Currency Government 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 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 Bond Index: Represents the corporate component of the Bloomberg Barclays US High Yield Index. (Represents US high yield on slide 1.) 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.

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28|CMO 4Q17

Index Definitions (continued)

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.

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. (Represents emerging-market debt on slide 1.)

J.P. Morgan Government Bond-Emerging Markets Global Diversified Index: A comprehensive global emerging markets index of local government bond debt. To qualify, a country’s Gross National Income (GNI) per capita must be below the GNI per capital level that is adjusted yearly by the growth rate of the World GNI per capita, provided by the World Bank, for three consecutive years.

MSCI All Country World Index: A market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world.

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-markets on slide 1.)

MSCI World Index: A market capitalization–weighted index that measures the performance of stock markets in 24 countries.

Russell 2500 Index: A broad index featuring 2,500 stocks that cover the small and mid cap market capitalizations. The Russell 2500 is a market cap weighted index that includes the smallest 2,500 companies covered in the Russell 3000 universe of United States-based listed equities.

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.)

S&P MidCap 400 Index: Provides investors with a benchmark for mid-sized companies. The index measures the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

S&P SmallCap 600 Index: Measures the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.

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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