1Q17 Outlook
2016 was a year of surprises, particularly of the political sort, with Brexit and the Trump election. It was also a year of solid returns in the capital markets.
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
0.8
0.3
2.9
–0.5
–1.1
–2.6
–2.8
–1.2
–2.2
1.8
–4.1
2.1
13.9
5.0
1.4
5.2
2.2
4.4
4.9
1.0
0.3
6.2
9.9
17.1
11.2
1.0
21.3
12.0
Past performance does not guarantee future results.
As of December 31, 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 expe
nses 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
–0.1
0.6
1.7
–1.4
–1.2
–3.8
–3.6
–2.1
–2.6
1.8
–4.2
–0.7
8.8
3.8
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
Multialternative
Nontraditional Bond
Global Corporate
EAFE*
US Large-
Cap
Emerging Markets
US Small-
Cap
Municipals
Since US Election
2
|
CMO 1Q 2017
...Trump Bump Following US
Election
2016 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
Percent
Past performance and forecasts do not guarantee future results.
As of December 31, 2016
Beta 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, 2016
US Aggregate yields represented by Bloomberg Barclays US Aggregate Bond yield to worst
Source: Bloomberg Barclays, S&P and AB
After “After the Beta Trade” or Trump Bump?
Prior to Election, Equity Returns
Muted
Annualized Returns of S&P 500 Index
and a 60/40 Portfolio (Percent)
17.3
6.0
3.2
11.8
4.5
3.0
Beta Trade
After the Beta
Trade (AB
Estimate)
After the Beta
Trade (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, 2016
Source: 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 Considerations
Post
-Election Recap
After the Beta Trade
Principles
4
|
CMO 1Q 2017
Current assessment does not guarantee future results.
As of December 31, 2016
The 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 materi
al 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: H
aver Analytics, IMF and AB
The Baton Will Likely Pass to Fiscal Policy
G4 Plus China Fiscal Tightening/Loosening (Percent of GDP)*
1.9
–0.1
–0.8
–0.8
–0.9
–0.4
0.1
0.4
0.6
09
10
11
12
13
14
15
16E
17E
Global Trends: Fiscal Stimulus Meets Populism
Stimulus
Contraction
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 Parliamentary
Elections
?
End
Mar
2017
UK Triggers
Article 50?
?
Apr/May 2017
French Presidential
Elections
?
Jun 2017
French Parliamentary
Elections
?
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, 2016
GDP represents forecast year
-over
-year change in real terms. Inflation represents forecast year
-over
-year change in Consumer Pri
ce 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 (%)
Expected
Policy Rate
Path
2016
FX Change
(%)
FX
Forecast
The Latest
2016
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
–2.9
Growth
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, 2016
Source: 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 Likely
Expectations 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, 2016
Market 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 rol
l 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 Returns
12-
Month Expected Returns*
Change in
10-Year
US
Treasury Yield
+50
b.p.
+100
b.p.
–50
b.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
Sync
Bloomberg Barclays Index Correlations
to US Treasuries
0.9
0.9
0.7
0.7
0.6
–0.1
–0.2
US Aggregate Bond
Global Aggregate
USD Hedged
US TIPS
US Investment-
Grade Corporate
US Municipal Bond
Global High Yield
USD Hedged
US High Yield
0
1
2
3
4
5
0
1
2
3
4
Percent
Years
Federal Reserve
Market
9
|
CMO 1Q 2017
Credit: High Yield Attractive vs. Passive Equities, but Selectivity Is Key
Yield Often Indicates Future Returns
Yield to Worst and Forward Return
–4
0
4
8
12
16
20
24
01
04
07
10
13
16
Percent
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, 2016
High 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 Forward
Annualized 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 Today
Yield 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
Percentage of Bonds
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 indic
ated 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 Care
Credit: 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
Debt/EBITDA (
×
)
Leverage
Leverage ex Commodities
Downturn
Recovery
Repair
Expansion
US Leveraged Loans
US HY* ex Commodities
European
Industrials
US Financials
Core European
Financials
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
Percent
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 Above Par
Institutional Loan Repricing Volume (USD Billions)
Repricing (Left Scale)
% Leveraged Loans Trading Above Par
0.92
0.36
0.98
0.48
0.85
–0.02
Average Return
when 10-Year
US Treasury
Increased
Average Return
when 10-Year
US Treasury
Declined
US Low-Volatility HY Index
US HY Index
Leveraged 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, 2016
EM 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 Debt
High Relative Yields
EM FX: Valuations Are Attractive
–2
0
2
4
6
8
10
10
11
12
13
14
15
16
Yields (Percent)
US Treasury
10-Year
EM Local
Japanese
Government
Bond 10-Year
German
Bund 10-Year
US High Yield
60
70
80
90
100
110
120
02
04
06
08
10
12
14
16
Index
39+%
Drop
Since
April 29,
2011
Favor commodity
currencies and unique
country situations
Supported 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 Rates
24-
Month Rolling Returns (Percent)
Inflation Protection Is Still Cheap
Past performance does not guarantee future results.
As of December 31, 2016
Rising
-rate environments are defined as periods during which the US 10-year Treasury yield rose by more than 100 basis points. U
S 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 p
rogram.
Source: Bloomberg Barclays and AB
Hedged Global Core Bonds Preserve
Capital Better as US Yields Climb
Returns 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, 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 condit
ion. 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
Percent
2.6
3.5
3.8
4.9
Treasury
Taxable-
Equivalent
Yield: AAA
Muni
BBB
Corps.
Taxable-
Equivalent
Yield: 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, 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 c
ondition. 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 roll
and 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
1.30
1.98
2.31
2.43
2.55
2.66
3.03
3.30
3.44
0.49
0.94
1.13
1.15
0.97
1.07
0.50
0.25
0.08
4.06
2
5
7
8
9
10
15
20
30
Maturity (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, 2016
Source: Bloomberg
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
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 Same
Sector Relative Returns During Taper
Tantrum (Percent)
‡
...But Equities Have Fared Well in
Rate
-Hike Cycles
Average 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, 2013
Source: Bloomberg, S&P and AB
10.9
3.1
4.7
Six Months
Prior
First Six
Months After
Next
Six 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 for
Too Little Diversification
Price/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
Telecom
Utilities
Consumer Staples
10-Yr. US Treasury Index
Utilities
10-
Yr. US Treasury Index
Consumer Staples
Telecom
Highest
-
Dividend
Payers
Trading
Well
Above
Average
Average
13.6×
Jan
–Jun
Jul–
Dec
If Your Equity Yield Exposure
Mimics Your Bonds...
Same
Direction
No
Correlation
Opposite
Direction
10
Years
†
Five
Years
†
Since Taper
Tantrum
†
1
0
–1
REITs
Telecom
Consumer Staples
Utilities
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 Indices
Percent of Index
0.50
0.75
1.00
1.25
1.50
80
84
88
92
96
00
04
08
12
16
Ratio (
×)
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 Sectors
Price/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, 2016
Source: Bloomberg, Ned Davis Research, S&P Capital IQ and S&P
Compustat
2.7
2.1
1.9
1.8
1.7
Financials
Industrials
Healthcare
Consumer
Discretionary
Technology
Financials
Consumer Discretionary
Industrials
Technology
Healthcare
Consumer Discretionary
Key Sectors by Weight in Each Tax Rate Cohort
21
|
CMO 1Q 2017
Sales Growth
Price/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
14
0.4
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, 2016
Data 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 Dispersion
Monthly 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 hi
gh-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%
Median
Monthly
Return
†
Feb 1990–
Sep 2010
Oct 2010–
Jun 2015
Jul 2015–
Dec 2016
0
20
40
60
80
0
20
40
60
Monthly Dispersion
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
Time
Annualized Relative Performance vs.
S&P 500 (Percent)
Jan 2004
–Dec 2015
‡
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
23
|
CMO 1Q 2017
Flexibility to Move Across Asset Classes Can Pay Off
Annual Returns (Percent)
Current analysis does not guarantee future results.
As of December 31, 2016
EM equity is represented by MSCI Emerging Markets; global equity by MSCI World; EM sovereign debt by J.P. Morgan EMBIG; EM corpo
rate 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
Equity
19.2
EM
Sov
.
Debt
8.5
EM Local
Curr. Debt
19.9
Global
Equity
17.4
EM
Sov
.
Debt
5.5
EM Corp.
Debt
1.3
EM Local
Curr. Debt
11.4
EM Corp.
Debt
13.1
EM Corp.
Debt
2.3
EM
Equity
18.6
EM Corp.
Debt
–0.6
Global
Equity
5.5
EM
Sov
.
Debt
1.2
EM
Equity
11.2
EM Local
Curr. Debt
13.1
Global
Equity
–5.0
EM
Sov
.
Debt
18.5
EM
Equity
–2.3
EM Corp.
Debt
5.0
Global
Equity
–0.3
EM
Sov
.
Debt
10.2
Global
Equity
12.3
EM Local
Curr. Debt
–6.3
Global
Equity
16.5
EM Local
Curr. Debt
–5.5
EM
Equity
–1.8
EM
Equity
–14.6
EM Corp.
Debt
9.7
EM
Sov
.
Debt
12.0
EM
Equity
–18.2
EM Corp.
Debt
15.0
EM
Sov
.
Debt
–6.6
EM Local
Curr. Debt
–6.1
EM Local
Curr. Debt
–18.0
Global
Equity
7.5
2010
2011
2012
2013
2014
2015
High/Low Gap
Best Return
Worst Return
EM Equities Still Cheap Compared to Developed Peers
Price/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
Percent
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, 2016
Alternative 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 Investments
December 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
Credit
L/S
Non-Trad
Bond
Managed
Futures
Event
Driven
Equity
Hedge
Market
Neutral
Beta to US Stocks
Beta to US Bonds
0.6
0.4
–0.4
–4.9
4.3
2.9
1.5
5.0
Credit
L/S
Non-Trad
Bond
Managed
Futures
US
Bonds
Event
Driven
Equity
Hedge
Market
Neutral
US
Stocks
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/Down
Capture Generation
Better betas, efficient
structures, targeted alpha
Be Global
Economies/policies not
moving in lockstep
Be Balanced
Amidst
uncertainty, don’t
overload
Be Selective/Active
Security
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 g
rowth
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 rel
iab
le 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 m
arketing 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 los
s b
y 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 posit
ion
s) 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 iss
uer’s credit rating may be lowered
due to deteriorating financial condition; this may result in losses and potentially default, or failure to meet payment obligati
ons. 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 as
sociated 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 bac
k 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 f
ina
ncial 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
, s ecurity issuance or other capital structure
adjustments. Investment theses are typically predicated on fundamental characteristics, with the realization of the thesis pr
edi
cated 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 str
uctural 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 t
he 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 by
including only securities that offer a higher
-than-average dividend yield (i.e., at least 30% higher) relative to that of the MS
CI 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 quali
ty score for each security
in the eligible equity universe based on three main fundamental variables: high ROE, stable year
-over
-year earnings growth and l
ow financial leverage.
MSCI USA Value Index:
A stock market index capturing large-
and mid-cap US securities exhibiting overall value style characteristics. The value invest
ment 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, represent
ing 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 s
lide 1)
MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MS
CI
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, r
eviewed or produced by MSCI.
17-0029
GEN–6340–0117
www.abglobal.com/go/cmo
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.
The [A/B] logo is a registered service mark of AllianceBernstein and AllianceBernstein
®
is a registered service mark used by permission of the owner, AllianceBernstein L.P.
© 2017 AllianceBernstein L.P., 1345 Avenue of the Americas, New York, NY 10105
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