Vadim Zlotnikov Chief Market Strategist & Co-Head—Multi-Asset Solutions
Global Market Perspective An Alternative Framework for Multi-Asset Diversification Diversifying by time horizon and equity beta may allow investors to benefit from high expected returns to contrarian, multi-asset investment opportunities while reducing drawdown risk.
How We’re Positioned and Where the Opportunities Are Highlights Fears of slowing economic growth accelerated during September. Long-term n Continued volatility—from declining expectations for inflation and nominal growth collapsed. The decline was most liquidity as well as decelerating pronounced in the US, but also extended to Europe, Japan and Australia. emerging-market growth and tepid earnings growth—should create bigger mispricings. (continued) n These opportunities are necessarily coupled with drawdown risks that can’t be hedged, because illiquidity and Current Positioning unpredictable government response can amplify short-term losses. Position Trend Overweight Underweight/Short Equities – – Japan, EU Canada, US, Australia n Distress and mispricing are often Comments and Recent Activity: Absence of traditional excesses that mark end of cycle; profit margins to sustain. Modest improvements in credit flows improve Europe, Japan outlook. High volatility, valuation drove underweight thematic, but multi-asset diversifica- Sovereign Bonds 0 Flat US, Australia, Canada Japan, Europe tion may reduce common risk Comments: Low real rates; no exposure to Japanese bonds; overweight CAN, US, AUS sovereigns for higher yields exposures. IG Credit 0/+ Flat n HY Credit 0/+ – Contrarian opportunities today Comments: EM more attractive, but selectivity is key; added on improved valuation include energy/commodity equities, Petroleum + Down Long-Dated Futures, emerging-market investment-grade Oil Services Comments: Supply growth decelerates as capex cuts offset gains from technology. Bought put spreads credit and select commodity futures.
Industrial Metals 0 Flat Comments: Attractive value; slow recovery Precious Metals 0 Flat This publication offers investors a systematic, Comments: Increased attractiveness due to decline in real yields. Gold miner equities increasingly attractive comprehensive assessment of the global
Equity Style Flat GARP Style, Value Momentum, High Risk economy and the world’s capital markets. Using Comments: Quality growth stocks, with attractive free-cash-flow yield a short horizon, we analyze current and Currencies Flat USD, JPY, High-Yield EM GBP, AUD emerging trends, risks and opportunities across countries, regions and asset classes, providing perspective on the global investing landscape Highest-conviction ideas/active positions – / 0 / + Refer to underweight, neutral and investors face today. These materials present overweight positions vs. strategic allocation the viewpoint of the Multi-Asset team and do not necessarily represent the views of other AB As of September 30, 2015 portfolio-management teams. Source: AB
OCTOBER 2015 Slower growth expectations also factored into projections for Display 1 corporate earnings globally: they’re now expected to be flat in 3Q 2015 Performance by Asset Class: Sensitivity to 10-Year 2015. Purchasing Managers’ Index surveys, which represent Breakeven business sector activity, declined substantially in most regions. 0.5 –15 Percent (Reversed Scale) This reassessment of the economic growth trajectory was 3Q Performance 0.4 Beta –12 accompanied by a sharp decline in most risk assets, most (Left Scale) 0.3 –9 notably in commodities and related equity and credit markets. The obvious question: Have valuations and expectations fallen 0.2 –6 enough that investors should consider adding exposure to 0.1 –3 economically sensitive assets and value strategies? We look at 0.0 0 Beta to 10-Year Breakeven10-Yearto Beta that topic in this report. Equities: Equities: Cyclicals– EM Equity EM Global HY Global DM Equity DM Defensive Aggregate Defensives Cyclicals—
In general, we’ve been adding to the reflation trade through Aggregate Commodities: Commodities: Consumer Price Index (CPI) swaps, select emerging-market (EM) equities and integrated oil stocks. And we’ve been shifting away As of September 30, 2015 Source: Bloomberg, Federal Reserve and AB from momentum strategies in equities, as we discussed in last month’s report. In most allocation products, we’re still under- weight equities, overweight high-yield credit and modestly Display 2 underweight sovereign bonds. What’s more, West Texas Framework to Segment Contrarian Opportunities Intermediate oil prices never declined to the $35–$40 range Typical Horizon of the Payoff that we had targeted to add exposure. As a result, we missed 6–12 Months 1–3 Years part of the early-October rally. On the flip side, selling put Procyclical; benefit from decline in Benefit from acceleration in nominal risk aversion economic growth options on gold mining companies, which we discussed last Valuation implies fundamental Valuation and profitability imply month, proved to be a profitable trade. deterioration distress Need 1–2 standard value spread to Need 2+ standard deviation enter valuation spread to enter
There weren’t many winners in September’s equity rout. Positive Globally, markets declined by 3.4%, extending the quarterly Exit based on performance/valuation Exit based on performance/valuation loss to 8%. Japan’s 8% monthly loss may have been tied to Need confirmation of stable Need confirmation of capitulation fundamentals fears of Chinese demand, a stronger yen and a slow recovery. Beta Emerging-market losses abated during September, after a 10% Provides important defensive/yield Structural distress
decline in the first two months of the third quarter. Across Equity Tends to be long volatility Perception of permanent mix shift equity sectors, returns showed a barbell pattern that’s consis- Market-neutral implementation Inconsistent with ROE/cost of capital tent with expectations of slower growth. The least crowded Correlated long-short construction Inconsistent with assumptions underlying other asset values (energy and materials) and most crowded (healthcare and Need fundamental catalyst to enter
telecom) trades suffered the biggest losses. Value strategies Zero/Negative also fell, while price momentum and profitability had strong positive returns. Target Return: LIBOR +4%–8% LIBOR +8%–12%
Among credit sectors, emerging-market and high-yield bonds As of September 30, 2015 underperformed, while government bonds gained modestly. In Source: AB corporates, energy spreads widened the most, but other sectors were affected. In governments, gains were largely tied to lower inflation expectations, with real rates relatively unchanged. In foreign currency markets, the US dollar lost ground against the
2 yen and yuan but gained against most other currencies. Most Display 3 currency risk premiums delivered positive returns. Our largest Forward-Start Variance Swap Strategy vs. MSCI ACWI allocation is to currency risk premiums in emerging markets. Performance
100% 10% Commodities saw significant losses, with the trailing three-year MSCI ACWI Performance (Left Scale) 80% 8% returns to the overall commodity index as well as petroleum, industrial metals and gold now the worst since at least the 60% 6% Percent mid-1970s. These dramatic periods of underperformance are 40% 4%
generally followed by rebounds. Because of this, we continue to Percent 20% 2% favor a tactical approach that increases exposure to commodi- 0% 0% ties as they near the marginal cash cost of production. On a –20% –2% Variance Swap Strategy more strategic level, we favor 5%–10% portfolio exposure to –40% –4% real assets and other highly reflation-sensitive investments. 97 99 01 03 05 07 09 11 13 15 Through September 30, 2015 Defining Multi-Asset Contrarian Investment Trailing 12 months Opportunities Source: Bloomberg, FactSet, MSCI and AB After every significant period of underperformance, investors rush to find assets whose prices fell below some definition of Display 4 “intrinsic value.” The theory? Weaker fundamentals and rising Uncrowded Stocks vs. MSCI ACWI Performance risk aversion can create periods of illiquidity, creating opportuni- 100% 25% ties for investors—as long as their time horizon is long enough. MSCI ACWI Performance (Left Scale) 80% 20% We see this scenario happening in early October, following the 60% 15% sharp decline in reflation-linked assets (Display 1, page 2). Percent 40% 10% 20% 5% But attempting to exploit this mispricing can be challenging for Percent several reasons: 0% 0% –20% –5% n Uncrowded Stocks The gap between prices and value can last longer than many –40% –10% investors’ horizons, especially given the loss aversion that 97 99 01 03 05 07 09 11 13 15 followed the events of 2008. Through September 30, 2015 Trailing 12 months Source: Bloomberg, FactSet, MSCI and AB n Undervalued assets can become even more undervalued and lead to losses. n The headline risk of any single investment becoming worth- Exposure to contrarian investments is critical, both to diversify less may be organizationally unacceptable. trend-following and risk-reducing strategies and to generate long-term returns. But there aren’t many extremely distressed n Long periods of high liquidity, economic expansion and areas today in which underwriting the risk of industrial restruc- resulting complacency can sharply increase risk and reduce turing (including M&A, investment cuts or bankruptcy that the expected return to value opportunities. removes capacity) could generate strong double-digit returns. Also, many relative-value opportunities are very risky, often Managing these risks by hedging them directly and/or trading depending on government policy as a catalyst—and this is aggressively can reduce the potential downside, but may also essentially impossible to research. Finally, it’s hard to diversify take a bite out of long-term returns. among value themes. Most of these themes are tied to the
3 emerging-market energy/commodity complex, which makes Display 5 investors hesitant to allocate risk capital. Examples of Factors Indicating Fundamental Distress vs. Short-Term Dislocation
There are a couple of ways to address this conundrum. One Near-Term Fundamental approach is allocating to security-specific value opportunities Dislocation* Distress* instead of thematic value opportunities; we think that’s an High-Yield OAS Bond Nominal Slope Real Yield attractive path today. This report focuses on a second approach. 3-Year Performance DM Sovereign It’s a thematic strategy that pursues contrarian opportunities Yield Level Slope Credit Selection across asset classes. Much of its risk reduction comes from an 3-Year Performance US Credit OAS innovative approach to diversification—not hedging or tactical Credit OAS allocation. EM IG 3-Year Performance OAS EM HY In general, contrarian or value strategies are uncorrelated across 3-Year Performance Price to Book P/E vs. History asset classes. But we need to be explicit about the expected Country Selection Price to Fwd. Earnings ROE vs. History payoff horizon and exposure to market risk, or beta. This means Net of Cash Price to Fwd. Earnings Equities Sector Rotation Price to Book vs. History separating the portfolio allocation along those dimensions 3-Year Performance (Display 2, page 2), creating four buckets with roughly the same ROE risk in each. This grouping makes it easier to generate ideas, vet EM vs. DM 3-Year Performance Price to Fwd. Earnings investments, size positions and execute selling strategy. Roll Yield Commodities Pricing vs. LT Averages Short-Term Momentum Currencies Interest-Rate Differential PPP/FX Why diversify along equity beta? It’s to reduce downside risk in Variance VRP a risk-off environment. Many traditional value strategies like Swap Short-Term Slope Strategy Forward-Starting Swap Level high-yield debt, distressed strategies, equity deep value and high-yielding currencies win when risk aversion is declining and As of September 30, 2015 *Descriptive terms are simply indicative of typical payoff horizon. the economic setting is improving. So, it makes sense to include Source: Bloomberg, FactSet, S&P Compustat and AB contrarian opportunities with zero or negative correlation with equity markets. Display 6 Return Correlations Across Select Value Strategies
One contrarian tack is to buy volatility when it’s attractively DM Sov. valued—when markets are complacent. Doing this systematically Bond Credit Equity Sector Timing Selection Selection Commodities using variance swaps to access volatility would have generated LT ST LT ST LT ST LT ST significant payoffs during market dislocations (Display 3, page HY Nom. Yield P/B vs. P/Fwd. LT ST 3), while generating a modestly positive overall Sharpe ratio. OAS Slope Slope Level History Earnings Value Mom. LT ST HY OAS 1.0 0.4 0.0 0.1 0.0 0.0 0.0 0.1 0.1 0.1 Bond While this strategy offers limited long-term outperformance, Nom. Timing 1.0 0.2 –0.1 0.0 0.0 0.1 0.0 0.2 0.0 we’ve seen episodic outsize returns during periods such as the Slope DM Sov. Slope 1.0 0.0 0.0 0.0 0.0 0.0 0.2 0.0 downturn of 2001 and the early recovery of 2008–2009. This Credit Yield 1.0 0.0 0.0 0.0 0.0 0.0 0.4 strategy also has attractive return asymmetry (Display 4, page 3). Selection Level P/B vs. Equity 1.0 0.4 0.0 –0.1 0.5 0.1 History Sector P/Fwd. Distinguishing among contrarian opportunities along the other Selection 1.0 0.1 0.1 0.2 0.5 Earnings continuum—expected payoff horizon—also offers diversification LT Value 1.0 0.0 0.8 0.0 Commodities potential. We don’t know for certain which dislocations are ST Mom. 1.0 0.0 0.8 Long-Term 1.0 0.1 short-term and which are long-term, but we can get a pretty Short-Term 1.0 good idea by using indicators that capture short-term, senti- As of September 30, 2015 ment-related or technical market dislocations and that indicate Source: Bloomberg, FactSet, S&P Compustat and AB
4 fundamental distress, which tends to be longer-term (Display 5, Display 7 page 4). This isn’t a perfect framework, but we can reduce North America Equities: Valuation Spreads some of the risk of being wrong by having a diversified set of Percentile vs. LT History investments. BP 1Q Market Spread: 97% Composite Composite Valuation Dispersion 2.0 Composite Dispersion: 53% 4 Short-term market dislocations happen more often than true BP Spread 1.5 3 fundamental distress, so investors are likely fully compensated 1.0 2 for buying into occasional value dislocations over the course of 0.5 1 the business cycle. We expect this to be even truer going forward, as economic uncertainty and the desire to manage SpreadBP 0.0 0 drawdown risk create periods of high volatility. –0.5 –1 Composite –1.0 –2 88 92 96 00 04 08 12 Over a long time horizon, there’s little correlation among value strategies for different assets (Display 6, page 4); the same is true Through October 9, 2015 Source: FactSet, MSCI and AB for systematic strategies with different expected horizons, because they have different performance catalysts. Shorter- horizon value strategies are generally tied to evidence that the Display 8 status quo can be maintained, that fundamental deterioration is US Sector-Neutral Value Spreads: Top Quintile vs. Broad unlikely and that the macro environment is stable. The catalyst Market for longer-horizon distressed-value strategies is tied either to Percentile vs. Long-Term History expectations of broad economic improvement or to evidence of 0.9 Deep Value: 67% 3 industrial restructuring aimed at restoring profitability. Current Value: 74%
0.6 2 Current Value Improving Returns Through Selection and Tactical Deep Value Allocation 0.3 1
So, now for the next logical question: How can investors ValueDeep 0.0 0 combine the value strategies we’ve described here into a single Current Value portfolio in an effective way? –0.3 –1 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 A simple diversified portfolio of all multi-asset value strategies Through September 30, 2015 has the potential to deliver substantial risk-adjusted returns, but Universe is 1,500 largest stocks by market capitalization within the US. Spreads it has two main drawbacks. First, it’s too diversified, so achieving measured using median book-to-price multiples for cheapest quintile* vs. market. *Current value measured using EBIT-to-EV; deep value measured using tangible returns that provide a high single-digit return premium to cash book-to-price (book value less intangibles plus R&D) requires leverage. Second, it ignores the differences in the Source: Bloomberg, S&P Compustat and AB expected returns of the different strategy types. If investors want to access this anomaly, they’d likely prefer a For example, valuation spreads for the most attractively valued manager with a more intense exposure to deep-value and stock cohort, based on price/book value ratios, are historically distressed-equity strategies. If we look a bit closer, we get a high versus the overall market (Display 7). This suggests a sizable better idea of what type of deep-value strategy might be return opportunity if spreads revert to their historical average. On effective. Most of the increase in the valuation spread comes the other hand, composite valuation spreads using a broader from differences among sectors: energy, industrials and range of traditional metrics (cash-flow yield and earnings yield, financials are trading at a historically high discount to the for example) suggest only a modest return opportunity. market. If we look at valuation spreads on a sector-neutral basis (within sectors), they’re only slightly above average (Display 8).
5 So, investors looking to exploit deep value in the US should look Display 9 for managers willing to take on substantial sector exposure High-Yield Option-Adjusted Spreads: US vs. EM and/or pursue the opportunity through combinations of sector 20 ETFs and swaps. 15 Credit markets provide another example of potential return US High Yield differences from value strategies that investors can exploit. 10
Emerging-market high-yield bond spreads have historically Percent tracked those of developed markets (Display 9). However, the 5 size of the spreads started to diverge in 2011. Emerging EM High Yield markets began to experience slower growth, commodity prices 0 declined, corporate profits came under pressure—and emerg- 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 ing-market spreads moved wider. Now, almost five years into Through September 30, 2015 this environment, underwriting standards for emerging-market Source: AB debt may have started to tighten. This may be a relative-value opportunity that’s worth examining. Display 10 The wider spreads of the CDX index are heavily influenced by Adjusted Spread for High-Yield Corporates: EM vs. US some sovereign issuers—Venezuela, for example, and, until 300 recently, Ukraine. If we exclude sovereign issuers, emerging- 250 market corporate high-yield spreads are only modestly higher 200 than those in developed markets (Display 10). This would be an 150 Average interesting but fairly risky trade. A deterioration in the ratings 100 downgrade/upgrade ratio in emerging markets suggests that 50
adverse trends still exist. An alternative strategy would pursue PointsBasis 0 relative value in the investment-grade emerging-market space: –50 there are more diverse issuers, and much of the downward –100 –150 credit migration may be behind us. So, we’d recommend a 09 10 11 12 13 14 15 higher allocation to emerging-market debt focused more on investment-grade corporate issuers. Through September 30, 2015 Source: Bank of America and AB
It’s easy to see when value spreads are elevated versus history— but do they actually carry informational value for returns? Yes, to time the entry. Furthermore, the strategy’s effectiveness for a number of strategies. For example, we looked at the actually improves with an increasing holding period. This is information ratio of global equities, assuming we’re always consistent with the notion that price-to-book metrics capture buying the most attractively valued sectors versus history and distressed valuations, which require fundamental improvements selling the least attractive. We then examined the returns of the and can take one to three years for maximum payoff. same strategy, assuming that we invest only when price-to-book spreads are more than one or two standard deviations above We took a similar approach in credit, which highlights the their trailing history (Display 11, page 7). effectiveness of using option-adjusted yield spreads for timing and which has a steadier profile across different time horizons What if we assess the returns to the “timed” value strategy over (Display 12, page 7). This is fairly intuitive. Credit spread six-month, one-year and three-year periods? For price-to-book widening is more frequent than actual recessions or periods of valuations, the information ratio improves by relying on spreads fundamental deterioration. So, on average, harvesting of
6 returns when spreads are wide more than compensates for an Display 11 occasional spike in defaults. Meanwhile, when dispersion is Value Timing for Global Equities Sector Rotation: Price-to- wider, this may indicate a period of fundamental distress, and a Book vs. History longer time horizon may be required. 4
Finally, we applied the same approach to identifying commodity 3 value opportunities. Display 13, page 8, highlights the returns to 2 a commodity strategy based on capturing the roll yield associat- ed with buying commodity futures in backwardation. 1 0 Annualized Information RatioInformationAnnualized We’ve done similar analysis for other metrics and asset classes. Full 1 Std. 2 Std. 1 Std. 2 Std. 1 Std. 2 Std. We’ve also developed a framework for identifying endogenous Period Dev. Dev. Dev. Dev. Dev. Dev. timing variables for different strategies and asset classes. We 6 Months 12 Months 36 Months used them to help identify a set of “timely” investment opportunities, which could be used to create a diversified As of September 30, 2015 Source: FactSet, MSCI and AB contrarian multi-asset portfolio.
A Contrarian Portfolio: Reducing Drawdown by Display 12 Diversifying Value Timing for US High Yield: Option-Adjusted Spreads The notion of reducing risk through diversification picked up 4 some detractors following the crisis of 2008, but we think the failure was much more about the way diversification was 3 achieved—not the viability of diversification itself. Our research 2 suggests that diversifying equity beta—usually the biggest common portfolio risk exposure—tends to survive through crisis. 1 Likewise, pursuing diversification across time horizons may 0 provide more stable returns, because investors’ risk aversion RatioInformationAnnualized Full 1 Std. 2 Std. 1 Std. 2 Std. 1 Std. 2 Std. varies over the course of the business cycle. Period Dev. Dev. Dev. Dev. Dev. Dev.
6 Months 12 Months 36 Months We applied this diversification framework to a set of contrarian strategies (Display 14, page 8). Despite elevated volatility, we As of September 30, 2015 see some opportunity to buy select variance swaps, which falls Source: Bloomberg and AB into the negative-equity-correlation, short-horizon bucket. The rationale for value comes from the depressed level of implied target returns of cash plus 8%. It’s important to note that volatility relative to observed volatility. Investments that are contrarian strategies should be sized based on risk contribution positively correlated with equities and have a short-horizon during market sell-off or spike in volatility, rather than trailing payoff structure include relative value in credit. Longer-horizon volatility. The logic is as follows. In a complacent, low-volatility contrarian strategies include exposure to energy, commodity market, the portfolio will generate very strong returns from the equities and futures, and emerging-market equities (Display 15, re-rating of contrarian investments and carry. During this time, page 8). leverage may not be necessary. However, when volatility spikes, several of the strategies may underperform and sizing becomes Implementing this portfolio can require significant leverage critical. Viewed another way, we want to have the ability to depending on the target returns. In general, we think total increase leverage when fear increases and markets give us an gross leverage of 3–5 to 1 should be sufficient to generate opportunity for sizable outperformance.
7 Display 13 Display 15 Value Timing for Commodities Aggregate: Roll Yield Contrarian Strategies: Current Indicated Portfolio Positions
1.0 Long Short Positive Equity Beta, Long-Term 0.8 EM vs. DM EM DM EM Corporate Credit EM IG Credit 0.6 Zero/Negative Equity Beta, 0.4 Long-Term Equity Sector Selection— Energy, Capital Consumer Staples, 0.2 P/B vs. History Equipment, Industrials Defense, Healthcare EM FX Value INR, IDR, MYR, PHP, CNY, TWD, CLP, 0.0 THB, BRL PEN Annualized Information RatioInformationAnnualized Full 1 Std. 2 Std. 1 Std. 2 Std. 1 Std. 2 Std. Positive Equity Beta, Short-Term Period Dev. Dev. Dev. Dev. Dev. Dev. DM Equity Country Selection— AUS, SGP, HKG, USA, GBR, CAN, NOR, P/E vs. History JPN, SWE FRA, DEU 6 Months 12 Months 36 Months Zero/Negative Equity Beta, Short-Term Equity Sector Selection— Energy, Commodities, Healthcare, As of September 30, 2015 36-Month Reversal Telecom Transportation, Autos Source: Bloomberg, FactSet and AB Industrial Metals, Commodities Petroleum, Precious Metals CAD, AUD, NZD, CHF, EUR, JPY, SEK, FX Carry GBP, NOK USD Display 14 NKY, SX5E, UKX, Forward Variance Swap Strategy Currently Attractive Contrarian Strategies by Time Horizon SX60 and Equity Beta As of September 30, 2015 Ann. Ann. Source: AB Strategy Vol. Strategy Vol. DM Equity Country 11% EM vs. DM Equities 22% Selection—P/E vs. History EM Corporate Credit 8%–15% Positive Industrial Metals 29% EM FX Value 4% Equity Sector Selection— Petroleum 35% 6% P/B vs. History
Equity Equity Beta Precious Metals 24% Equity Sector Selection— 8% 36-Month Reversal
Zero/Negative FX Carry 8% Fwd. Variance Swap Strategy 1% Up to 1 Year 1–3 Years
As of September 30, 2015 Source: Bloomberg, FactSet, S&P Compustat and AB
8 Performance Risk-Assets Sell-Off; Momentum Trumps Value
Equity Returns by Region Equity Global Sector Returns
3-Yr. 3-Yr. 1 Mo. 3 Mo. 1 Yr. 3 Yr. Percentile 1 Mo. 3 Mo. 1 Yr. 3 Yr. Percentile Global -3.4% -8.2% -1.5% 10.7% 64% Financials -3.8% -9.8% -3.1% 9.9% 74% DM -3.5 -7.7 -0.8 11.9 56 Consumer Discretionary -2.1 -6.6 8.4 16.5 83 US -2.7 -6.9 -1.2 11.8 65 Technology -1.4 -6.4 0.0 11.1 75 Canada -4.0 -7.8 -8.7 5.5 38 Industrials -3.9 -9.3 -4.3 10.2 67 UK -3.0 -6.6 -5.9 5.2 25 Energy -7.4 -17.8 -31.2 -8.1 5 EU ex UK -4.4 -7.2 2.4 12.5 73 Materials -8.0 -18.0 -18.2 -4.9 15 Japan -7.9 -13.7 6.8 25.8 87 Consumer Staples 0.3 -0.8 6.1 9.2 56 Australia -3.3 -7.3 -1.7 9.2 49 Healthcare -6.1 -8.8 4.2 17.6 87 EM -1.7 -12.1 -7.1 2.1 15 Telecom -5.6 -9.0 -4.5 4.4 54 Asia -1.0 -13.5 -6.6 2.9 15 Utilities -0.1 -1.4 -3.4 4.6 68 LatAm -3.2 -10.8 -12.5 -2.5 1 Cyclicals–Defensives -0.1 -3.3 1.8 3.8 82 Bond Returns by Region Bond Strategy Returns
3-Yr. 3-Yr. 1 Mo. 3 Mo. 1 Yr. 3 Yr. Percentile 1 Mo. 3 Mo. 1 Yr. 3 Yr. Percentile Global 0.9% 1.9% 3.9% 3.4% 10% Global Inv. Grade 0.0% -0.1% -2.7% 0.8% 3% DM 0.8 1.8 3.7 3.2 6 Global High Yield -2.2 -3.7 -4.3 3.3 10 US 0.9 1.8 3.8 1.3 5 EM Inv. Grade -1.4 -2.5 -1.4 0.7 2 Canada 0.4 2.4 10.1 7.7 4 EM High Yield -1.0 -2.1 -2.9 2.2 3 UK 1.5 3.7 17.9 10.7 19 Global Asset Backed 0.5 1.0 3.2 2.8 11 EU ex UK 1.3 2.6 4.0 6.2 41 Duration 1.0 2.1 3.4 3.3 74 Japan 0.5 1.3 4.9 4.9 1 Australia 0.3 2.7 11.1 6.9 3 Spot Currency Returns EM 0.8 1.5 3.8 2.6 9 3-Yr. Asia 1.1 1.7 4.5 2.6 5 1 Mo. 3 Mo. 1 Yr. 3 Yr. Percentile LatAm 0.0 0.7 3.5 2.4 1 USD 0.1% 0.5% 7.3% 4.2% 87% CAD -1.3 -6.1 -15.9 -9.6 0 Commodities Spot Returns EUR -0.3 0.3 -11.5 -4.6 24 3-Yr. CHF -0.6 -3.9 -1.9 -1.2 27 1 Mo. 3 Mo. 1 Yr. 3 Yr. Percentile GBP -1.4 -3.7 -6.7 -2.2 38 Dow Jones–UBS -3.4% -14.5% -26.0% -16.0% 0% NOK -2.8 -7.8 -24.6 -12.4 2 Brent Crude -12.6 -26.3 -55.7 -25.3 0 JPY 1.1 2.2 -8.5 -13.4 2 Natural Gas -8.6 -15.0 -48.0 -20.8 38 AUD -1.3 -8.9 -19.8 -12.2 1 Industrial Metals -1.3 -11.1 -25.3 -14.9 2 CNY 0.3 -2.3 -3.4 -0.4 40 Gold Spot -1.7 -4.9 -7.7 -14.3 0 Agriculture 2.2 -12.6 -8.9 -15.6 10 Non-Equity Risk Premium Returns
3-Yr. Equity Risk Premium Returns 1 Mo. 3 Mo. 1 Yr. 3 Yr. Percentile 3-Yr. DM Currency Carry 0.0% -5.0% -10.5% -4.2% 4% 1 Mo. 3 Mo. 1 Yr. 3 Yr. Percentile DM Currency Value 0.7 3.1 4.2 2.5 70 Deep Value -2.9% -4.4% -1.8% 3.6% 82% DM Currency Momentum 0.1 2.1 10.0 5.3 70 Current Value -2.8 -1.7 -3.1 1.0 0 EM Currency Carry 0.3 -1.1 0.1 0.3 15 Momentum 0.2 2.8 5.2 2.6 24 EM Currency Value 0.4 -2.8 0.4 -0.6 1 Profitability 0.3 0.4 6.9 3.9 51 EM Currency Momentum 3.4 7.6 10.0 3.1 44 Capital Use -0.7 -2.6 -1.6 -1.5 0 Fixed Income Carry 0.9 0.7 1.0 0.9 11 Quality -1.3 -2.3 -1.9 1.5 6 Fixed Income Value -0.1 1.3 2.6 -0.2 38 Beta -1.8 -5.9 -9.2 -2.8 5 Fixed Income Momentum -1.2 -0.7 -2.1 -0.5 63 Risk -2.8 -4.4 -6.4 -2.4 21 Commodity Carry -1.3 0.9 1.2 3.9 40 Size 0.0 -0.1 1.1 3.5 64 Commodity Momentum 0.0 -0.8 -1.4 6.7 65
Past performance is no guarantee of future results. Please refer to Glossary on page 17 for a description of return calculations and sources. As of September 30, 2015. Source: AB 9 Attractiveness Few Significant Misvaluations at Beta Level; Emphasize Market- Neutral Risk Premiums
High-Yield Spreads Elevated; No Major Value Opportunities 1 Asset-Class Yield
EquityEquity Forward Forward NominalNominal Yield Yield NominalNominal Slope Slope InvestmentInvestment HighHigh EarningsEarnings (10-Year)(10-Year) (10-Year(10-Year to 3-Month)to 3-Month) GradeGrade (OAS) (OAS) YieldYield (OAS) (OAS) Commodity Roll
10 100 Percentile vs. History 8 90 6 80 4 70 2 60 0 50 –2 40 –4 30 Yield (Percent)Yield –6 20 –8 10 –10 0 DM EM DM EM DM EM Global EM Global EM WTI Gold Copper Current Yield (Left Scale) Percentile
As of September 30, 2015 Source: AB
Equities, Bonds Modestly Attractive; Favor Japan Equities and US Bonds as Diversifier 2 Asset-Class Attractiveness DM & EM Global Assets Equity Regions IG & HY Credit DM Bond DM & EM Commodity (3) (1) Regions (3) Regions (1, 4) Currencies (2) Sectors 1.5 1.0 0.5 0.0 –0.5
ZScore –1.0 –1.5 –2.0 –2.5 US US UK UK EM EM AxJ AxJ JPY JPN JPN SEK CHF EUR USD GBP NZD CAD CAN CAN AUD NOK US IG US EMEA EMEA US HY US LATAM LATAM EMAsia EMAsia IG Credit IG EU ex UK ex EU EU ex UK ex EU HY Credit HY Petroleum DM Equity DM DM Bonds DM IndMetals Prec Metals Prec EU ex UK IGUK ex EU EU ex UK HY UK ex EU
As of September 30, 2015 Source: AB
Equity Factor Allocation: Barbell Deep Value, Momentum 3 EM FX Carry Most Attractive 4 Equity Factor Strategy Risk Allocation Non-Equity Factor Strategy Attractiveness
Factor Spread Quintile* Top Exposure† North Emerging Asset Strategy Carry Value Mom. Long Short America Europe Japan Oceania Markets Global Carry 2 Capital Use 5% 5% 5% 0% 0% 5% G10 FX Value 1 USD, JPY NOK, AUD Momentum 3 2 Carry 4 3 Current Value 20 10 5 5 5 15 INR, IDR, TWD, EM FX Value 4 PEN KRW, CLP Deep Value 25 50 80 0 15 36 Momentum 1 1 Carry 1 Momentum 25 30 0 95 60 28 Fixed Income Value 1 CA, SE, UK DE, JP, CH Momentum Profitability 20 5 10 0 0 14 Carry 3 Gold, Copper, Commodity Value 3 2 Quality Cocoa Coffee 5 0 0 0 20 4 Momentum
As of September 30, 2015 As of September 30, 2015 Numbers may not sum due to rounding. Green shading = overweighted strategy Source: AB *Only showing the spreads with statistical significance †Higher quintile indicates higher attractiveness. Source: AB
Past performance is no guarantee of future results. See Glossary for notes and commentary. 10 Growth Labor Markets and Growth Robust Outside of China, but Expectations Already Elevated
Continuing Labor Improvement 1 China PMI Diverges 2 Unemployment Rate of Major Economies PMI of Major Economies
20 60 US 15 55 Europe ex UK 50
10 PMI* US 45 5 Japan Europe ex UK China Japan 40
Unemployment Rate (Percent) Unemployment 0 Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 10 10 10 11 11 12 12 12 13 13 14 14 15 15
Through September 30, 2015 Through September 30, 2015 Source: AB *Purchasing Managers’ Index Source: AB
Japan Downside Surprise 3 Output Surprises Positive 4 Employment Surprise Output Surprise
1.5 1.5 Eurozone Japan US 1.0 1.0 Positive Positive 0.5 0.5 0.0 0.0
Surprise –0.5 Surprise –0.5 Japan Eurozone –1.0 US –1.0
Negative –1.5 Negative –1.5 Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug 14 14 14 14 14 14 15 15 15 15 14 14 14 14 14 14 15 15 15 15
Through September 30, 2015 Through September 30, 2015 Source: AB Source: AB
Sentiment Rebound in Japan… 5 …but Businesses Turn Down 6 Consumer Sentiment Surprise Business Sentiment Surprise 3 2 Eurozone US 2 Positive Positive US Japan 1 1 0
0 Surprise Surprise –1 –1 Eurozone Japan –2 –2 Negative Negative Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Jan Mar May Jul Sep Nov Jan Mar May Jul Sep 14 14 14 14 14 14 15 15 15 15 15 14 14 14 14 14 14 15 15 15 15 15
Through September 30, 2015 Through September 30, 2015 Source: AB Source: AB
Past performance is no guarantee of future results. See Glossary for notes and commentary. 11 Corporates Little Differentiation in CY16 Consensus Expectations
Revisions Remain Broadly Negative 1 Strong Dollar Hurts US Sales; Rest OK 2 I/B/E/S Cap-Weighted Earnings Revision Trailing 12 Months YoY Sales Growth 8 Cyclicals Defensives Industrials Technology 6 4 US –0.1% 0.3% –7.5% –1.2% 2 0
EU & UK –6.6 –7.1 –18.5 –2.4 Percent –2 –4 Japan 2.4 2.9 –1.4 5.1 –6 –8 US EU Asia ex Japan –4.3 –3.7 –6.0 –4.2 EM Japan Energy Utilities Telecom
AU & NZ –3.8 –6.9 –45.3 0.0 Materials Industrials Healthcare Technology MSCI ACWI MSCI Con. Staples Con. Asia ex Japan ex Asia LatAm –2.5 –4.7 –13.9 0.5 Cyclicals Con. Regions Sectors
As of September 30, 2015. Arrow: improving or deteriorating earnings revision of As of September 30, 2015 past six months; cell color: red means bottom 30%, while teal means top 30%. Source: MSCI and AB Cyclicals: consumer cyclicals, financials, autos & housing; defensives: defense, consumer staples, utilities, healthcare, telecom; industrials: capital equipment, energy, commodities, transportation Source: Thomson Reuters I/B/E/S and AB
Uniformity of CY16 EPS Growth Indicates Lack of Conviction 3 Corporate Earnings by Region
FY16 Expected Sales Growth Gross Margin ROE FY16 Expected Earnings Growth Current Jan 15 Current Jan 15 LT Median Current Jan 15 LT Median Global 9.5% 5.1% 5.6% 31.1% 30.4% 30.9% 11.4% 11.7% 11.9% US 10.0 5.5 5.8 35.9 35.1 36.1 13.5 14.0 15.0 UK 6.9 4.9 6.9 23.8 23.4 30.7 12.1 11.9 14.8 EU ex UK 8.7 3.3 4.5 30.7 30.0 30.5 10.0 9.8 11.5 Japan 10.2 3.1 3.7 29.6 28.5 25.8 8.4 8.2 6.3 Asia ex Japan 8.7 8.2 6.6 27.7 29.1 27.2 9.5 10.3 11.3 EM 10.5 8.2 7.3 28.0 27.5 30.3 11.6 12.1 11.9
As of September 30, 2015 Source: AB
No Clean Sales Growth Leadership in CY16 4 Corporate Earnings by Sector FY16 Expected Sales Growth Gross Margin ROE Current Jan15 Current Jan 15 LT Median Current Jan 15 LT Median Financials 4.0% 5.0% — — — 9.8% 9.5% 10.3% Consumer Discretionary 5.8 6.0 32.4% 32.6% 29.6% 13.0 13.7 11.2 Technology 4.9 4.4 41.8 41.1 38.3 16.4 15.7 13.5 Industrials 4.6 3.7 24.6 23.0 23.1 12.7 12.3 11.6 Energy 7.2 10.5 21.5 23.1 27.5 8.4 11.6 13.0 Materials 4.6 5.1 26.6 26.5 29.6 9.5 9.5 10.3 Consumer Staples 5.0 4.9 31.6 30.6 33.7 15.6 16.0 16.7 Healthcare 7.0 5.8 44.4 43.7 50.0 13.2 13.7 17.0 Telecom 4.5 2.4 53.2 53.7 54.0 10.5 13.3 12.9 Utilities 2.1 1.7 27.5 26.0 35.0 9.6 9.1 10.3
As of September 30, 2015 Source: AB
Past performance is no guarantee of future results. See Glossary for notes and commentary. 12 Inflation Extremely Low Inflation Expectations
Core Fairly Stable 1 Expectation Calls for <2% Inflation, Except EM 2 CPI and Core CPI YoY Change (Percent) Five-Year Implied Inflation Level vs. CPI
2.5 4 EM (Up) 2.0 3 Japan 1.5 (Down) UK (Down) 2 1.0 Germany DM Australia (Down) (Down) (Down) APAC ex Japan (Down) 0.5 1 Breakevens (Percent) Canada (Down) EU ex UK US (Down) 0.0 0 (Down) US Canada UK Germany Japan Australia –1 0 1 2 3 4 CPI Core CPI Consumer Price Index (YoY % Change)
As of September 30, 2015 As of September 30, 2015 Source: AB Source: AB
Inflation Expectations Decline… 3 …but Unit Labor Cost Accelerating 4 Inflation Swap Forward 5y5y Rate Unit Labor Cost vs. Two Quarters Ago (YoY % Change) 1.0 4 Inflationary/ Australia Canada US 0.5 Accelerating UK Germany 3 0.0 Accelerating –0.5 2 Euro Area Eurozone –1.0 OECD Total US 1 –1.5 Percent 0 –2.0 Japan Deflationary/ Japan (%) Inflationin Change –2.5 –1 Decelerating Decelerating –3.0 –2 –1.0 –0.5 0.0 0.5 1.0 1.5 2.0 05 06 07 08 09 10 11 12 13 14 15 YoY % Change in Unit Labor Cost
Through September 30, 2015 As of September 30, 2015 Source: AB Source: Haver Analytics, OECD and AB
5 6 Housing Prices Drove Trend (ex China) Some Currency-Driven Reflation in Europe Housing Price Inflation vs. Since 2007 (Percent) Change in Import Prices/Imports as Percent of Economy 15 6 10 France Germany 4 5 Canada UK 0 2 China Australia New Zealand –5 0 Japan –10 US Mexico –2 Brazil –4 10 15 20 25 30 35 40 45 YoY Change in Housing Prices Annualized Growth Since Dec 2007 4-Month Change in Import Prices (%) Importin Change 4-Month Imports as Percent of Economy
As of September 30, 2015 As of September 30, 2015 Source: AB Source: Haver Analytics and AB
Past performance is no guarantee of future results. See Glossary for notes and commentary. 13 Equities Few Deep-Value Opportunities, Except Select EM/Commodities
Asia EM Near Trough Valuations… 1 …as Are Energy/Industrials and Technology Sectors 2 Current Relative Valuations vs. History by Geography Current Relative Valuations vs. History by Sector
Shiller P/E Price/Forward Earnings Shiller P/E Price/Forward Earnings Relative to Relative to Relative to Relative to Global Equity Percentile Global Equity Percentile Global Equity Percentile Global Equity Percentile Energy 0.6 1% Technology 1.1 6% Lowest Multiples Lowest Multiples Technology 1.2 12 Transportation 0.9 10 Russia 0.3 3% Japan 1.0 3% Commodities 0.8 22 Capital Equipment 1.0 13 Turkey 0.5 4 Singapore 0.8 11 Capital Equipment 1.0 28 Autos & Housing 0.8 14 China 0.5 12 Taiwan 0.8 12 Telecom 0.9 40 Financials 0.8 15 Czech Republic 0.5 16 China 0.7 18 Financials 0.8 41 Healthcare 1.2 50 Colombia 0.4 16 Austria 0.8 27 Autos & Housing 0.9 44 Telecom 1.0 53 Highest Multiples Highest Multiples Consumer Staples 1.5 75 Commodities 1.0 60 Ireland 2.3 100% UK 1.0 100% Utilities 0.9 84 Utilities 1.0 68 Netherlands 1.2 100 South Africa 1.0 98 Transportation 1.3 87 Defense 1.0 70 Denmark 1.6 99 Switzerland 1.1 95 Defense 1.3 91 Consumer Cyclicals 1.2 84 Belgium 1.5 96 Belgium 1.2 94 Healthcare 1.6 92 Consumer Staples 1.4 95 Portugal 1.1 94 Norway 0.9 93 Consumer Cyclicals 1.5 98 Energy 1.1 97 Global 15.0 43% Global 15.2 68% Global 15.0 43% Global 15.2 68%
As of September 30, 2015 As of September 30, 2015 Source: AB Source: AB
Surprisingly, Still Crowding in EM 3 Consumer, Tech Crowded; Commodities Underowned 4 Crowding by Global Regions Crowding by Global Sectors
Percent of Market Cap Percent of Market Cap More 96 Percent of Companies More Percent of Companies 88 93 84 90 91 83 85 75 80 79 76 72 68 67 55 53 52
48 Crowding 42 33 33 Crowding 39 23 25 35 32 12 24 4 2 2 Less Less Energy Staples Utilities Telecom
Emerging Japan North Asia UK Europe Staples Materials Financials Consumer Consumer Industrials Consumer Healthcare Technology Markets America ex Japan ex UK Consumer Discretionary Discretionary
January 1, 1988–September 30, 2015 January 1, 1988–September 30, 2015 Note: 100 means most crowded; 0 means least crowded. Note: 100 means most crowded; 0 means less crowded. Source: AB Source: AB
Implied Volatility High 5 Unusual Uncertainty in Healthcare 6 Equity Volatility by Region Equity Volatility by Sector
Sector Implied Volatility Percentile Region Implied Volatility Percentile Financials 22.6% 53.7% US 22.7% 85.4% Consumer Discretionary 21.8 58.7 Technology 23.6 58.7 UK 26.1 85.7 Industrial 21.2 64.1 EU ex UK 31.2 85.4 Energy 31.0 86.5 Materials 25.9 69.1 Japan 31.3 90.4 Consumer Staples 17.7 73.6 Australia 26.7 85.3 Healthcare 27.5 94.0 Telecom 22.6 75.7 EM 30.9 70.6 Utilities 17.4 67.6 As of September 30, 2015 As of September 30, 2015 Source: AB Source: AB
Past performance is no guarantee of future results. See Glossary for notes and commentary. 14 Fixed Income, Currencies and Commodities Commodities Collapse; Few Currency Tilts
Real-Yield Slope Attractive in US, EM 1 Spreads Mostly Widen 2 Real Interest Rates and Slope (Percent)* Regional Credit Spreads and Recent Momentum 2.0 2.0 1.5 EM Germany EU ex UK Steeper Global 1.5 1.0 More Attractive Canada Australia Canada 0.5 US 1.0 EU ex UK DM Asia ex Japan DM Asia ex Japan 0.0 EM Germany 0.5 Australia US –0.5 MomentumSpread Real-Yield SlopeReal-Yield Japan UK Japan UK 0.0 –1.0 Narrowing Widening –1.5 Less Attractive –1.0 –0.5 0.0 0.5 1.0 1.5 Less Steep Less –2.0 –1.0 0.0 1.0 2.0 3.0 4.0 Regional Credit Spread* Real Yields Narrow Wide
As of September 30, 2015 As of September 30, 2015 *Regional 10-year bonds relative to global universe *Expressed as z score vs. history Source: AB Source: AB
CNY Modestly Unattractive 3 Long-Term Oil Trades at Marginal Cost 4 Contribution to Currency Attractiveness WTI Crude Futures Curve
0.8 100 CHF SEK WTI Crude One Year Ago 0.6 90 0.4 JPY GBP 0.2 80 WTI Crude Three Months Ago 0.0 70 CAD NOK –0.2 60 –0.4 CNY AUD Other FactorsOther NZD USD/Barrel WTI Crude Current –0.6 50 BRL –0.8 40 –1.0 Nov Aug May Feb Nov Aug May Feb Nov Aug May –1.0 –0.5 0.0 0.5 15 16 17 18 18 19 20 21 21 22 23 Valuation Future Expiration Month
As of September 30, 2015 As of September 30, 2015 Source: AB Source: AB
Uniform Downward Move in Gold 5 Copper Pessimism Persists 6 Gold Futures Curve LME Copper Futures Curve*
1,400 350 Gold One Year Ago Copper One Year Ago 1,300 300 Gold Three Months Ago Copper Three Months Ago
1,200 250 USD/Tonne
USD/Troy Ounce Gold Current Copper Current 1,100 200 Nov Jun Jan Aug Mar Oct May Dec Jul Feb Sep Nov May Nov May Nov May Nov May Nov May 15 16 17 17 18 18 19 19 20 21 21 15 16 16 17 17 18 18 19 19 20 Future Expiration Month Future Expiration Month
As of September 30, 2015 As of September 30, 2015 Source: AB *London Metal Exchange Source: AB
Past performance is no guarantee of future results. See Glossary for notes and commentary. 15 Risk and Correlation Opportunities to Take Cross-Sectional Risk Are Limited
1 Volatility Up Slightly Correlations Reverting Toward Zero 2 Historical Volatility Historical Correlation 80 40 8 ACWI vs. Global Bonds Global Sovereign Global Investment- 60 Debt (Right Scale) Grade CDX ACWI vs. USD 30 6 40
20 Percent 20 4 0 Percent Percent
–20 10 2 ACWI vs. Oil –40 Global Equity 0 0 –60 70 75 80 85 90 95 00 05 10 15 70 75 80 85 90 95 00 05 10 15
Through September 30, 2015 Through September 30, 2015 Source: AB Source: MSCI and AB
Limited Geographic Diversification Opportunities 3 Modest Increase in Correlation Among Commodities 4 Macro Impact on Cross-Sectional Pricing* Macro Impact on Cross-Sectional Pricing*
80 60 Bonds Equities Percentile = 15 55 70 50 60 45
50 40 Bonds Percentile = 78 35 40 30
Equities/Credits Single a byFactor Explained Variance Percentof Percent of Variance Explained by a Single a byFactor Explained Variance Percentof 30 25 1971 1977 1983 1989 1995 2001 2007 2013 1971 1977 1983 1989 1995 2001 2007 2013
Through September 30, 2015 Through September 30, 2015 *Equities/credits and bonds *Commodities Source: AB Source: AB
Past performance is no guarantee of future results. See Glossary for notes and commentary. 16 Glossary
PERFORMANCE (Page 9) based on purchasing power parity (PPP) divided by FX rate for Equity Returns by Region: Total returns, in local-currency currencies and level of yield for fixed income. Momentum terms, of countries and regions from the MSCI family of global strategies are based on past performance. Fixed income and DM indices. Three-year percentiles are compared with historical currencies are selected from US, Canada, UK, Germany, Switzer- returns since January 1970 or the earliest available returns for land, Norway, Sweden, Japan, Australia and New Zealand. EM developed markets, and since January 2001 for emerging currencies are selected from a basket in Asia, EMEA and Latin markets (EM) and emerging-market subregions. America. Commodities are selected from a basket in petroleum, industrial metals, precious metals, grains, soft commodities and Equity Global Sector Returns: Various sector returns, in livestock. local-currency terms, of the MSCI All Country World Index. Three-year percentiles are compared with historical returns since ATTRACTIVENESS (Page 10) January 1999. Asset Class Yield: This display shows the yields of each asset Bond Returns by Region: Various country and regional returns class and its current percentile rankings versus history. are derived from the Barclays Global Treasury Bond Index. Attractiveness: This display shows attractiveness of each asset Regional treasury returns are weighted using the country class based on the team’s proprietary return model. Notes: (1) weights from the Barclays Global Aggregate Bond Index. DM equity, EM equity and DM bond regions are relative to their Three-year percentiles are compared with historical regional DM aggregates. (2) Currencies are versus USD, except for USD, bond returns since January 1970 and with historical global which is versus the GDP-weighted basket. (3) Global assets and treasury returns since September 2000. regional credit are relative to their duration-equivalent treasur- Bond Strategy Returns: Global-investment-grade, global-high- ies. (4) EU ex UK bonds are weighted by the EU index weight, yield, EM-investment-grade, EM-high-yield and global-asset- but the underlying asset is DEU bonds after 1998. backed returns are from the Barclays Global Aggregate Bond Equity Factor Allocation: This display shows each factor’s Index. Duration returns are calculated by combining a long share of each region’s risk budget based on assessment of its position in the Barclays Global Treasury 7–10 Year Index business cycle, recent efficacy, valuation and crowding. (Hedged) and a short position in the Barclays Global Treasury 1–3 Year Index (Hedged). Non-Equity Factor Strategy Attractiveness: This display shows the quintile of factor spreads for each strategy, the Commodities Spot Returns: Commodity returns based on the current top exposure recommended by a proprietary optimiza- Bloomberg Commodity Index and subcomponents. Three-year tion model and the strategies currently overweighted by the percentiles are compared with historical returns since January team. A higher quintile is associated with higher attractiveness 1991 for all returns except gold, which is compared with for a strategy according to historical Sharpe ratio. historical returns since January 1970.
Spot Currency Returns: Spot returns versus the US dollar for all GROWTH (Page 11) currencies except the US dollar, based on data from Bloomberg. Growth 1 and 2: By measuring unemployment and the The US dollar is measured as a spot return versus a basket of Purchasing Managers’ Index of major economies, these displays other countries’ currencies weighted by gross domestic product identify those regions with strong and improving growth and (GDP), based on data from Bloomberg. Three-year percentiles are those with weak and deteriorating growth. compared with historical returns since January 1971 or the Growth 3 and 4: Each series is a proprietary composite of earliest available returns. periodic employment and output data releases expressed as the Equity Risk Premium Returns: Risk premium returns are degree of deviation from the average for major economies. calculated by applying a quantitative screen to a global universe Growth 5 and 6: Each series is a proprietary composite of of large-cap stocks to assemble a group of stocks that embody periodic consumption and business data releases expressed as each specific premium. Three-year percentiles are compared with the degree of deviation from the average for consumer and historical returns since January 2003. business sentiment for different countries and regions over time. Non-Equity Risk Premium Returns: Risk premium returns are calculated by constructing long/short strategies that embody CORPORATES (Page 12) each specific premium. Carry strategies are based on interest-rate Corporates 1: This display shows market-capitalization-weighted differential for currencies, slope of yield curve for fixed income earnings revisions for equity sectors across different regions to and roll of futures curve for commodities. Value strategies are gauge investor sentiment.
17 Corporates 2: This display shows market-capitalization-weighted Equities 5 and 6: These displays show one-month implied realized sales growth in local currency for equity sectors and volatility for various regions and sectors and their percentile regions to gauge corporate revenue growth. ranking since 2001. Implied volatility is calculated using volatility surface with maturity of one month and delta of 0.5. Sectors are Corporates 3 and 4: By capturing recent changes in sentiment based on S&P 500 Index components. and profitability data and comparing it with the long-term median, these displays identify those equity regions and sectors FIXEDINCOME,CURRENCIESANDCOMMODITIES with strong and improving growth and those with weak and (Page 15) deteriorating growth. Fixed Income, Currencies and Commodities 1: This display looks at the level and slope of real bond yields as a valuation INFLATION (Page 13) measure for inflation-indexed bonds across regions. “Real Inflation 1: This display compares the Consumer Price Index yields” are the current yields for 10-year inflation-indexed bonds (CPI) and core CPI for select developed economies to partially (using nine-year when 10-year wasn’t available), and the “real- capture the effects of commodities on inflation. yield slope” is the difference in real yields between the 10-year Inflation 2: This display captures three dimensions of inflation and three-month bonds. and identifies regional outliers. The three measures are actual Fixed Income, Currencies and Commodities 2: This display inflation (the year-over-year percent change in the CPI on the establishes the relative attractiveness of credit by looking at horizontal axis), the market’s view of future inflation (break- current credit spreads by region and the recent changes in those evens on the vertical axis) and how inflation expectation has credit spreads. “Regional credit spread” is expressed as the degree changed recently (indicated by “up” or “down” next to the of deviation from the historical average. “Spread momentum” is a country/region name). Breakeven implied inflation is calculated composite degree of deviation from the historical average of the as the difference between five-year nominal and real yields. change in spreads over the intermediate term. Inflation 3: This display shows the long-term evolution of the Fixed Income, Currencies and Commodities 3: This display inflation swap forward 5y5y rate for major economies to gauge breaks down the attractiveness of various currencies into inflation expectation. fundamental valuations and other factors. Both measures are Inflation 4: This display examines trends in unit labor costs by shown as a degree of deviation from the historical average region. “Change in unit labor cost” measures the average cost versus USD. “Valuation” is a proprietary composite based on of labor per unit of output and is calculated as the ratio of total interest-rate differentials and PPP divided by FX rate. “Other labor cost to real output year over year. “Change in inflation” is factors” is a proprietary composite based on growth, economic the six-month change in the year-over-year unit labor cost. stimulus, credit risk and sentiment.
Inflation 5: This display compares two measures of housing Fixed Income, Currencies and Commodities 4–6: These price inflation in select economies: 12-month change in price displays look at the market’s current and recent expectations of and annualized growth rate since December 2007. future prices of WTI crude, gold and LME copper.
Inflation 6: This display looks at the potential for a buildup in RISK AND CORRELATION (Page 16) inflation as a consequence of rising import prices in select Risk and Correlation 1: This display provides perspective on economies. current risk levels by looking at current and historical equity and EQUITIES (Page 14) fixed-income volatility. Levels of risk are calculated as volatility over an intermediate-term decay with a six-month half-life. Equities 1 and 2: These displays highlight the regions and sectors that are most and least attractive by looking at two Risk and Correlation 2: This display looks at current and different measures of equity valuations relative to their global historical cross-asset correlations. Correlations are calculated levels (Shiller P/E and forward P/E). The displays also show the over an intermediate-term decay with a six-month half-life. current percentile versus history since 1970 for each measure. “Oil” is represented by a composite of WTI crude, Brent crude, gasoline and heating oil prices. Equities 3 and 4: These displays look at the level of crowding in equities by regions and sectors. Crowding is based on proprie- Risk and Correlation 3 and 4: These displays look at the impact tary models that look at metrics such as high analyst ratings, of macro factors on equity, bond and commodity returns. The elevated valuations, strong recent performance and large smaller the percentile number, the less the impact from a single holdings of institutional investors. Each measure shows the macro factor and the greater the chance that security selection current percentile versus history since 1988. will be rewarded. This number is based on a proprietary model.
18 © 2015 AllianceBernstein L.P.
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