CAPITAL MARKETS OUTLOOK - AllianceBernstein
First Quarter 2018
CAPITAL MARKETS OUTLOOK
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.
Investment Products Offered:
Are Not FDIC Insured
May Lose Value
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2017 Returns Recap: Everything Is Awesome
Returns in US Dollars
Equities
Credit
Government Bonds Alternatives
4Q:2017 Returns
Full-Year 2017 Returns
(Percent)
(Percent)
US Large-Cap US Small-Cap
6.6 3.3
21.8 14.6
EAFE*
4.2
25.0
Emerging Markets
7.4
37.3
US High Yield Emerging-Market Debt
Global Corporate
0.5 1.2 1.2
7.5 10.3
5.7
Municipals US
Japan Euro Area
0.7 0.0
0.9 2.3
5.4 2.3 1.9
3.4
Long/Short Equity Nontraditional Bond
Multialternative
3.3 0.4
1.7
10.5 4.3
5.6
As of December 31, 2017 Past performance does not guarantee future results. Global corporates and Japan and euro-area government bonds in hedged USD terms. All other non-US returns in unhedged USD terms. An investor cannot invest directly in an index, and its performance does not reflect the performance of any AllianceBernstein (AB) portfolio. The unmanaged index does not reflect the fees and expenses associated with the active management of a portfolio. *Europe, Australasia and the Far East Returns reflect Morningstar US open-end fund category averages. Source: Bloomberg Barclays, Morningstar, MSCI, S&P and AB
CMO 1Q18 | 1
2018 Baseline Forecast: "Goldilocks" Is Still in the Driver's Seat
Base Case
Growth: Another year of solid global growth; 3.2%, similar to 2017
Inflation: Gradual increase in underlying inflation/wages as we move through 2018
Fiscal Policy: Gentle stimulus at global level
China: "Quality" of growth now assuming greater importance
Politics, Populism and Geopolitics: Important risks remain
Central Bank Response
Global: Gradual withdrawal of monetary accommodation
Fed: Four rate hikes expected in 2018
ECB: Asset purchases to end in September; rates to rise in 1Q:2019
BOJ: Likely to stay the course; focus on yield level rather than volume of purchases
PBC: Increased focus on containing leverage risk
Market Implications
Risk Assets: Still a generally benign backdrop, but risks higher than they were
Core Yields: Further rise likely, led by the US and Europe; Japan still anchored
USD: Fed rate hikes may help USD reverse some of last year's lost ground
EM Risk: Higher core yields/ stronger USD point to slightly less supportive backdrop; continue to be selective
As of December 31, 2017 Current analysis does not guarantee future results. Fed: US Federal Reserve; ECB: European Central Bank; BOJ: Bank of Japan; PBC: People's Bank of China; EM: emerging market Source: AB
CMO 1Q18 | 2
Global Cyclical Outlook: The Recovery Gains Strength and Breadth
Trade Cycle Shifts to Higher Gear
YoY Percent Change YoY Percent Change
Global Real GDP and PMI Proxy
4.5
4.0 PMI Proxy
3.5
3.0
2.5 Real GDP
2.0 10 11 12 13 14 15 16 17
Manufacturing PMIs December 2017*
Germany Europe US UK DM Canada Global Japan EM China
1.2 1.1 1.1 0.9 0.8 0.8 0.3 0.2
2.0 1.8
As of December 31, 2017 Historical analysis does not guarantee future results. *Standard deviation from mean DM: developed markets EM: emerging markets Source: Haver Analytics and IHS Markit
Global Trade and IP Growth Three-Month Moving Average
6
Global Trade 5
4
Industrial Production
3
2
1
0 12 13 14 15 16 17
CMO 1Q18 | 3
Inflation Remains Low Today, but Cyclical/Structural Forces on the Horizon
Inflation Backdrop Demographics Globalization/Populism Debt Overhang Technology Monetary Regime Net Impact
Rearview Mirror Past 5?10 Years
As of January 3, 2018 Historical analysis and current forecasts do not guarantee future results. Source: AB
Strategic Horizon Next 2?5 Years
Secular Horizon 5+ Years
CMO 1Q18 | 4
Central Banks (Ever So Slowly) Beginning to Remove the Punch Bowl...
USD Trillions USD Trillions
Aggregated DM Central Bank Balance Sheet and Flow of Purchases
12
Expected
G3
10
Aggregate Balance
Sheet
8
G3 Central Bank
Balance Sheet*
6
Fed
4
Expected
Purchases
BOJ
2
0
ECB
?2 08 09 10 11 12 13 14 15 16 17 18F 19F
G3 Net Issuance
3.5
Budget Deficit 3.0
2.5
Central Bank
2.0
Purchases
1.5
1.0
0.5
0.0 Net Issuance
?0.5
?1.0 08 09 10 11 12 13 14 15 16 17 18F 19F
As of September 30, 2017 Historical analysis and current forecasts do not guarantee future results. *G3 is the US, euro area and Japan. Source: Bloomberg, International Monetary Fund and AB
CMO 1Q18 | 5
...but at Different Speeds
AB 2018 Rates and Growth Forecasts
Policy Direction:
Policy Direction:
Rates
Expected tapering will likely put upward pressure on Bund yields
Rates
AB 2018 forecast: 0.00%
Two hikes expected
Growth
Policy Direction: Rates
AB 2018 forecast: 1.00%
Growth
Slower economic growth due to slowdown in real income growth and Brexit concerns
AB 2018 forecast: 1.6%
UK Euro Area
Continued economic strength from robust economic data (higher growth, pickup in inflation, stronger PMI)
AB 2018 forecast: 2.5%
US
Four hikes expected
AB 2018 forecast: 2.38% Growth
Policy Direction: Emerging Markets
Continued economic expansion (supported by buoyant asset prices, consumption, investment growth)
Rates
Most EM countries are expected to loosen monetary policy or keep policy stable
AB 2018 forecast: 4.79%
AB 2018 forecast: 2.3%
Growth
Economic growth should remain steady in
absence of drastic changes to inflation or
DM
tighter-than-expected global monetary
policy EM
AB 2018 forecast: 4.6%
As of December 31, 2017 Current analysis and forecasts do not guarantee future results. *QQE: quantitative and qualitative easing; YCC: yield-curve control Source: AB
China
Policy Direction:
Rates QQE/YCC policy in play for
foreseeable future, anchoring 10-year yields close to zero* AB 2018 forecast: ?0.10% Growth Fiscal and monetary stimulus, along with improved private sector demand, to produce abovetrend growth AB 2018 forecast: 1.7%
Japan
Policy Direction:
Rates Cautious tightening on
financial leverage continues. AB 2018 forecast: 3.10% Growth Growth will moderate somewhat due to tighter regulations on financing and environmental control AB 2018 forecast: 6.0%
CMO 1Q18 | 6
US Growth Continues to Expand, but 2H:2018 May Mark an Inflection Point
Survey Measures of Confidence Index
160
The Conference Board120
Consumer Confidence
(Left Scale)
140
110
120
100
100
90
80
80
60
70
40
60
University of Michigan
Survey of Consumers
20
50
82 87 92 97 02 07 12 17
Small Businesses Are Surging NFIB Survey of Small-Business Sentiment (Percent)*
60 50 40 30 20 10
0 ?10 ?20 ?30 ?40
87 92 97 02 07 12 17
Macroeconomic Cycle Transitioning from the Sweet Spot in 2018?
Growth Rising/ Inflation Low
18 17
16
Growth High/ Inflation Rising 18
19
15
Growth Low/ Inflation Falling
Growth Falling/ Inflation High
As of December 31, 2017 Historical analysis and current forecasts do not guarantee future results. *NFIB: National Federation of Independent Business Source: The Conference Board, Thomson Reuters Datastream and AB
CMO 1Q18 | 7
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