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WINTER CAPITAL MARKETS OUTLOOK: 1Q15

Navigating Divergence in Global
Markets and Economies

We expect moderate global growth to continue in 2015, but economic and market patterns are diverging. The watchword is selectivity: investors need to identify opportunities in fixed income and equities, while remaining diversified and balancing risks. This includes considering exposure to alternative investments.

The Big Picture

  • Moderate global growth and benign inflation should continue, but patterns are diverging globally

  • Bond investors should balance interest-rate and credit risks, avoiding crowded areas and finding attractive individual securities

  • Equity fundamentals should remain supportive, and gains in top-line revenue should support equity markets—and active opportunities

Our Views on the Capital Markets

The past year was characterized by divergence in the world economy, a theme that is likely to continue through 2015. Rick Brink explores the disparities in the capital markets in our latest video.

Historical analysis and current forecasts do not guarantee future results. Past performance does not guarantee future results. As of December 31, 2014, unless specified otherwise.

Display 1 (2014 Returns in USD): Global high yield, 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 fees and expenses associated with the active management of a portfolio. TIPS: Treasury Inflation-Protected Securities. Global REITS: Global Real Estate Investment Trusts Source: Barclays, FactSet, FTSE, MSCI, S&P Dow Jones and AB

Displays 2 and 3 (Growth and Inflation Patterns): Display 2 as of January 2, 2015; Display 3 through October 31, 2014; EEMEA: Emerging Europe, Middle East and Africa (the forecast aggregate includes Hungary, Poland, Turkey, Russia and South Africa) VAT: Value-Added Tax
Source: Haver Analytics, Office for National Statistics, US Bureau of Labor Statistics and AB

Display 4 and 5 (Differences in Monetary Policies and Rates): Display 4 through September 30, 2014; Display 5 as of December 1, 2014; Source: Bloomberg; Cabinet Office; Government of Japan; CEIC Data; Eurostat; Haver Analytics; Ministry of Internal Affairs and Communications Japan; Thomson Reuters Datastream and AB

Displays 6 and 7 (Cheaper Oil Losers and Winners): Display 6 as of September 30, 2014; Display 7 as of November 30, 2014; Global Nominal GDP: represents 2014 estimates by Energy Information Administration (EIA) and AB. Oil exporters are the 15 countries that represent the vast majority of global oil exporters. Oil importers represent the rest of the world.
Estimated Wealth Transfer is according to AB and EIA estimates. Assumes petroleum consumption remains unchanged at 2014 levels (91.4 million barrels per day)
Source: Chicago Mercantile Exchange, Energy Information Administration and Haver Analytics

Displays 8 and 9 (US: Continued Improvement in Labor Market): Display 8 through November 30, 2014; Display 9 as of December 22, 2014; Equivalent Jobs Created: revisions are only available for payroll data through September 2014. Analysis assumes that an increase of 0.1 hour in the length of the average workweek or a 10-cent increase in hourly wages is equivalent to the creation of 100,000 jobs.
Source: Haver Analytics, US Bureau of Labor Statistics and AB

Displays 10 and 11 (US Growth Continues; Consumers Step Up): Display 10: Quarter-over-quarter annualized growth through December 31, 2014. Display 11: consumer sentiment through December 31, 2014; consumer debt through September 30, 2014; Consumer Sentiment: University of Michigan Consumer Sentiment Index. Consumer Debt: Household Financial Obligation Ratio.
Source: Bureau of Economic Analysis, Haver Analytics, University of Michigan, US Federal Reserve and AB

Display 12 (Federal Funds Rate at Year-End): Market Expectations: Longer-run expectations by the market are defined as expectations for the official rates on December 31, 2019.
Source: Barclays, Bloomberg, US Federal Reserve and AB

Displays 13 and 14 (Global Bond Returns Hedged to USD): Global Bond Returns represented by Barclays government bond indices. 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: Barclays, Bloomberg and AB

Display 15 (Petroleum Supply Curve): As of December 3, 2014 ; For illustrative purposes only.
Source: Barclays, J.P. Morgan and S&P Leveraged Commentary Data

Display 16 (Earnings Growth to Drive Stock Returns): As of November 30, 2014; 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. Columns may not sum due to rounding. Five-year annualized expected return for US equities uses AB proprietary Capital Markets Engine forecasts. Chart reflects composition of expected US equity returns.
Source: Bloomberg, MSCI, S&P Dow Jones and AB

Display 17 (Concentrated Portfolios with High Active Share): Through December 31, 2013; Median Alpha Performance of Large/Mid-Cap Strategies Includes a universe of 1,253 large- and mid-capitalization US equity separate accounts with a minimum three-year track record and $100 million in strategy assets; 231 strategies have less than 35 stocks, 1,022 fall into the 36–200 bucket, and passive is represented by the top largest passive strategies (benched to the S&P 500). All data is shown gross of fees. Active share is a five-year average.
Source: Bloomberg, Lipper, Morningstar, MSCI, S&P Dow Jones and AB

Display 18 (Putting It All Together): Source: AB

The information herein reflects prevailing market conditions and our judgments, which are subject to change, as of the date of this document. 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 that 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.

Tap into Equity Potential

Global equity markets should post attractive, though moderate, returns as we move forward. Valuations are more extended in the US than other regions, but US fundamentals are stronger and earnings growth should continue globally. Market characteristics support the case for high-conviction investing, concentrating investments in specific quality opportunities.

US: Promising Environment for Consumption

Valuation Landscape Requires an Active Approach

Be Active and High-Conviction in Your Equity Exposure

The equity landscape seems favorable to active management and high-conviction investing approaches. Correlations between individual stock returns are below their pre-financial-crisis average, so stock returns aren’t traveling in lock step as much as they were. This provides opportunities to distinguish between winners and losers.

AUIYX

Equity Income
Combines a disciplined investment approach with experienced management and rigorous research.

Why Consider
Equity Income?

ABYSX

Discovery Value
Invests in smaller companies with the potential to grow.

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FACT SHEET

WPSGX

Concentrated Growth Fund
A concentrated portfolio of companies that offer long-term growth potential and attractive prices.

Hear from the PM

WPSGX | Concentrated Growth Fund

Overall Morningstar Rating™–Advisor Share*

Rated against 1,504 funds in the Large Growth Category, based on risk-adjusted returns.

Slow and Steady Path to Higher Interest Rates

We expect interest rates to rise gradually over the next few years, but that certainly doesn’t mean a bond market selloff like those of 1981 and 1994. Bonds remain a key part of many investors’ portfolios, and there are many steps they can take to get ready for a bond-market reboot.

Opportunities and Areas of Caution

Diversification Creates a
Broader Opportunity Set

US Rates: Likely a Long Path
to "Normal"

Making the Most of the Muni Yield Curve

Muni Opportunities in Credit

Follow the Fixed-Income “Rising Rate” Playbook

With rates expected to increase gradually over the next several years, the watchword for investors will be to diversify and avoid areas of the market that have become crowded with demand. This might mean globalizing and maintaining a good balance between interest-rate and credit risk/return sources.

AGDYX

High Income
Drawing on a diverse mix of income-producing sectors.

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BROCHURE
 

ANAYX

Global Bond
A world of potential opportunity for bond investors seeking stability and income.

 
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BROCHURE

ATTYX

Tax-Aware Fixed Income Portfolio
Seeks highest available current tax-exempt income without undue risk.

 
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FACT SHEET

AGDYX | High Income Fund

Overall Morningstar Rating™–Advisor Share*

Rated against 223 funds in the Multisector Category, based on risk-adjusted returns.

ANAYX | Global Bond Fund

Overall Morningstar Rating™–Advisor Share*

Rated against 279 funds in the World Bond Category, based on risk-adjusted returns.

New Fund!

Our popular managed account is now available as a mutual fund.

Diversify with New Return Sources

Alternative investments offer access to a broader array of strategies with risk-return profiles that differ from those of stocks and bonds. If investors combine alternative strategies with traditional asset classes, they may be able to bring a better balance to both market-based and active-management risk.

Diversify Traditional Market Exposures

Investors are still looking for traditional stock and bond investments, but there’s always concern over the potential impact of equity downturns and rising rates. Alternative investment strategies may be an effective way to adjust and diversify exposure to traditional market patterns.

ASYLX

Select US Long/Short
Seeking low correlation to traditional stocks and bonds and a lower interest rate with a short duration.

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BROCHURE
 

ALTYX

Multi-Manager Alternative Strategies
Broad diversification across hedge-fund strategies in a single, professionally managed investment.

 
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ALYSX

Credit Long/Short
Seeking low correlation to traditional stocks and bonds and a lower interest rate with a duration of between ±3 years.

 
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FACT SHEET