globalmarketperspective - alliancebernstein · (growth,displays1,3and4,page10and credit/sentiment,...

MARCH 2015

Global Market Perspective

Current Positioning

Position Trend Overweight Underweight/Short

Equities + Flat Europe, Japan, Select EM Canada, US

Comments and Recent Activity: Absence of traditional excesses that mark end of cycle; profit margins to sustain; low and declining rates. Modest improvements in credit flows improve Europe outlook. Underweight commodity producers, underweight US

Sovereign Bonds – Flat US, Australia Japan, Europe

Comments: Low real rates, some decline in diversification benefit; no exposure to Japanese bonds, sold TIPS given appreciation

IG Credit 0/+ Flat Europe Japan

HY Credit 0 Flat Europe

Comments: EM more attractive, but selectivity is key

Petroleum + Flat Long-dated futures, oil services

Comments: 2018 WTI futures have $3–$5 downside risk and $15+ upside: supply growth decelerates as capex cuts offset gains from technology

Industrial Metals 0 Flat

Comments: Attractive value; slow recovery

Precious Metals + Flat

Comments: Increased attractiveness due to decline in real yields. Gold-miner equities increasingly attractive

Equity Style Flat GARP Style, Value Momentum, High Risk

Comments: Quality growth stocks, with attractive free-cash-flow yield

Currencies USD EUR, GBP, AUD �Highest-conviction ideas/active positions – / 0 / + Refer to underweight, neutral and

overweight positions vs. strategic allocation

How We’re Positioned and Where Opportunities AreOur positioning remained largely unchanged in February (Display). We continue tooverweight risk assets, with a modest preference for non-US equities. As we discussedin last month’s report, assets that normally perform well in an environment ofimproving economic growth and reflation seem unusually attractive.

Highlights

n Risk assets are still attractive, but thezero-interest-rate environment arguesfor a conservative approach toposition sizing

n European and Japanese equitiesappear more attractive based on USdollar strength; we maintain a modestpreference for Japan, given itssuperior valuation

n We maintain our conviction in a barbellexposure combining income-generat-ing investments with those that areleveraged to improving economicgrowth

n Overall portfolio positioning waslargely unchanged in February

Vadim ZlotnikovChief Market Strategist &Co-Head—Multi-Asset Solutions

This publication offers investors a systematic,

comprehensive assessment of the global

economy and the world’s capital markets. Using

a short horizon, we analyze current and

emerging trends, risks and opportunities across

countries, regions and asset classes, providing

perspective on the global investing landscape

investors face today. These materials present

the viewpoint of the Multi-Asset team and do

not necessarily represent the views of other AB

portfolio-management teams.

(continued)

Signs of Abatement in Deflationary Fears: Will Reflation Kill the Equity Bull Market—or Perpetuate It?Our quantitative models continue to argue for overweighting risk assets, based on the decline in commodity prices and stimula-

tive monetary policies. The country selection opportunity is subpar, but Japanese equities remain attractive.

2

But it takes patience to exploit those opportunities, especiallygiven the uncertainties due to unconventional monetary policies.As a result, we’ve structured our portfolios to take advantage ofthe improving economic environment, while hedging against thepotential resurfacing of short-term deflation fears by incorporat-ing carry trades in bonds. For example, we’ve taken longpositions in higher-yielding US bonds while shorting euro bonds.

During February, our portfolios generally benefited fromoutperformance by risk assets and rising inflation expectations(Performance, page 8). In particular, equity returns ranged from6% to 7% for the month, with Japan and Europe outperform-ing the US by about 2%. Performance patterns were largelyprocyclical, with consumer discretionary, industrials andtechnology outperforming healthcare, staples and utilities/tele-com. Higher-beta, higher-volatility stocks outperformed. The USdollar was essentially flat, as gains versus the yen and euro wereoffset by losses against the Canadian dollar and British pound.The three-year declines in the Canadian dollar and yen nowrank among the very worst since 1971.

Commodities rebounded modestly in February, with animpressive 15% gain in the price of Brent crude oil. Gains inother commodities were more subdued. The three-year trailingreturns of most commodity indices are now in the negativeteens, historically an extreme level of underperformance. As wediscussed last month, we think investment in energy futuresand energy equities is attractive, as are emerging opportunitiesin high-yield energy credits. Bonds have generally underper-formed, and break-even inflation rates have increased slightlyfrom extremely depressed levels. Consumer Price Index (CPI)swaps and other vehicles that benefit from rising break-eveninflation appear attractively valued.

One of the biggest challenges in running a multi-asset portfoliois assessing how much historical relationships will last in an eraof central bank experimentation. For example, many of thesignals associated with disinflation—such as declining CPI,falling interest rates and/or lower commodity prices—havehistorically predicted strong returns to most traditional assets,including stocks, government bonds and corporate credit. Butwith long-term rates hovering near zero and fears skewedtoward deflation rather than runaway inflation, we shouldquestion how much weight to put on empirical observations.

Display 1

52-Week Rolling Correlation: 5-Year Treasury Yield and5-Year Break-Even Inflation vs. S&P 500 Weekly Changes

–0.8

–0.6

–0.4

–0.2

0.0

0.2

0.4

0.6

0.8

63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14

5-Year Treasury Yield

5-Year Treasury Breakeven

Through February 28, 2015Source: AB

More generally, the question is: How do we use fundamentaljudgment to refine portfolio position sizing? In this report, welook at the impact of the composition of factors that make riskassets attractive versus bonds. We also focus on specific factorsthat have historically enabled us to distinguish among equitiesfrom different regions of the world. In both cases, we find thatour directional exposure to different return sources is largelyconsistent with what’s indicated by quantitative models andhistorical relationships. But we also conclude that position sizingshould be more conservative than in the past.

Display 2

5-Year Breakevens by Country

Australia Germany Japan UK US DM Global

Current 1.9% 0.6% 1.4% 2.5% 1.7% 1.5% 1.7%

YE 2014 1.9 0.4 1.3 2.5 1.3 1.3 1.6

Average from 2000*

2.5 1.5 0.2 2.6 1.8 1.9 2.2

As of February 28, 2015*Germany from 2006, Japan from 2004Source: AB

3

Risk Asset Opportunities, Conservative Position SizesA decline in commodity prices and low interest rates—or ratesthat have fallen—tend to make risk assets attractive, but thezero-interest-rate environment argues for conservative positionsizing.

The historically negative relationship between US bond yields (aproxy for implied inflation expectations) and equities has turnedlargely positive over the past 12 years (Display 1, page 2). Thisisn’t a completely surprising relationship because periods ofpositive correlation between these two assets have tended toaccompany highly accommodative monetary policies andnear-zero real interest rates. Markets have interpreted anyincrease in rates as stronger economic growth, rather than asign of a tight monetary environment. Last month’s equity rallywas also accompanied by an increase in inflation expectations(Display 2, page 2). Breaking down inflation drivers in the US,we see what could be a tug-of-war between deflationarypressures from raw materials on one side, and increasing wagepressures and select evidence of pricing power on the other(Display 3).

As part of our research effort, we’ve developed models that useempirical relationships to predict the excess returns of differentasset classes, which support the portfolio allocation decisionswe’ve made. Historical relationships suggest that inflation isgenerally a negative for performance of risk assets. In fact, oftotal attractiveness z score of 1.33 for equities, inflationpredictive signals directly or indirectly tied to inflation accountfor 0.95, or 71% of the total. For high-yield credit, inflationaccounts for 52% and inflation signals make government bondsseem about half as unattractive as they would otherwise be(Display 4). Declining rates and commodity prices, as well as alower inflation trend, made all traditional assets appear moreattractive. If we ignore inflation-related signals, risk assets aresomewhat less attractive while bonds’ attractiveness deterio-rates significantly. Therefore, inflation-related signals are drivingmost of the current relative attractiveness of equities and creditinvestments. Other periods that saw such a large share ofassets’ attractiveness concentrated in inflation signals were theearly 1980s, 1998 and late 2008/early 2009 (Display 5, page 4).

Given the unusual nature of the current environment, we’reskeptical that further declines in interest rates and commodity

prices would be interpreted as positives for equity or creditmarkets. So we continue to advocate a barbell: investments thatcould perform effectively in a low-inflation environment, on oneside, balanced on the other side with commodities and equities,which are likely to benefit from stronger nominal economicgrowth (Display 6, page 4). Given the substantial—and, in ourview, indiscriminate—sell-off in energy high-yield credit, ourfixed-income team sees opportunities in differentiating amongissuers to capture a performance premium in a long-shortstrategy.

Display 3

YoY Change in Final Demand PPI

–0.09%

1.68%1.91%

0.97%

–1.18%

1.95%

Current Average LTM

FinalDemand

Less Foods & Energy

Goods for Export

Less Foods & Energy

Final DemandServices

Finished Consumer

GoodsLess Foods &

Energy

PrivateCapital

Equipment

Final Demand

As of February 28, 2015Source: AB

Display 4

Contribution of Key Macro Themes to Attractiveness ofAsset Classes (Z Scores)

Theme/FactorDM

EquityDM Bond HY

Valuation & Quality — –0.91 0.03

Growth 0.24 –0.30 0.38

Inflation 0.95 0.62 0.55YoY Change in CPI (Level and Momentum) + + +

Commodity Index (Momentum) ++ ++ +

Sovereign Bond (Momentum, Short Rate, Break-Even Momentum)

++ 0 0

Liquidity / Solvency Risk 0.14 –0.03 0.10

Total Attractiveness Score 1.33 –0.62 1.06Attractiveness ex Inflation 0.38 –1.24 0.51

As of February 28, 2015++ = Significant positive contribution; + = positive contribution; 0 = contribution notsubstantially different from zeroSource: AB

4

Does Currency Momentum Stimulate EarningsSurprises?Currency depreciation is making European and Japaneseequities more attractive, and we modestly prefer Japan basedon valuation. On the whole, the potential for enhancing returnsthrough country selection appears below average. Currentearnings yields are nearly identical among the major developedcountries (Attractiveness, Display 2, page 9), while correlationamong country returns has spiked (Risk and Correlation, Display3, page 15). We’re not surprised that valuation spreads betweenvarious countries are relatively low, because the environment isrelatively benign and there are few standouts in terms ofgrowth prospects.

Our quantitative models suggest fairly muted differences inrelative attractiveness, with the exception of currency-momen-tum (Display 7, page 5). Most of the decision to take risk incountry selection is likely to come down to a specific assess-ment: Will a weaker currency stimulate growth and produceoutperformance? Historically, currency movements have beenfairly strong in predicting equity market returns, but there havebeen ineffective periods. One example was from 1994 to 1998(Display 8, page 5).

Given the current relative strength of currency momentum inour country equity selection model, we thought it might be agood idea to assess whether weaker currency is acting as astimulus, which would likely lead to potential earnings surprises.At the aggregate level, there’s a modest correlation betweencurrency moves and relative earnings revisions for a region. Forexample, earnings revisions of European companies versus USpeers have generally followed broad currency moves (Display 9,page 6). Of course, currency is only one of the factors affectingrelative earnings revisions, and it’s hard to distinguish its impactfrom that of general business conditions.

Opportunities in Non-US Companies with US SalesExposureThe impact of currency moves on earnings and prices tends toshow up with a four- to six-month lag because of the impact ofinventory liquidation, contract renegotiations and other factors.We attempted to isolate the currency impact by comparing therelative earnings revisions of sectors that had large US sales withthose that are primarily domestic (Display 10, page 6). As we

Display 6

Potentially Attractive Disinflation/Reflation Barbell

Disinflation Investments Rationale

Equities Thematic GrowthRelative growth is scarce; enabling technology companies to outperform

Private Credit High-interest margin/carry; low financing costs

Carry/Value in Sovereign Bonds

Superior way to get exposure to duration; historically outperformed

Low-Volatility EquitiesCompanies with pricing and stability may be rerated in low inflation setting

Credit StrategiesPotentially attractive depending on degree of disinflation

Display 5

Inflation Contribution to DM Equity Attractiveness Score

–2.0

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

Current

Value

0.62


Reflation Investments Rationale

Real AssetsExtremely depressed valuations; massive supply cutback in energy

Value Equity in Europe/JapanCyclical multinational companies have attractive valuation and benefit from weak currency

Select EMDeflation fears indiscriminately hurt EM, with numerous beneficiaries of reflation

Short Fed Funds Futures/Duration

Fed fund futures discount rates well below Fed guidance and economic data

Call Options on Euro or YenExtremely uncrowded trade, with very high optionality of inflation increases


5

expected, with the dollar appreciating, earnings revisions insectors with high sales exposure to the US are generally betterthan those of industries that are primarily domestic to Europe orJapan (Display 11, page 7). Exporters’ stock performance hasalso turned (Display 12, page 7). In summary, weaker currenciesversus the US dollar appear to be supporting improving earningsgrowth and could provide stimulus.

Equity markets in Europe, Japan and Australia—each of whichsaw weaker currencies—have outperformed US stocks byroughly 11%, 5% and 7%, respectively, so far this year. So it’sworth asking whether most of the gains may already be in therear-view mirror. If we compare valuation and profitability withhistorical trends, it suggests stronger support for upside in Japan(Display 13, page 7), the only region trading significantly belowmedian valuations. Even though the earnings of Japanesecompanies have roughly doubled since 2013, the market is onlyup 60%, which led to substantial compression in price-to-earn-ings ratios. This isn’t surprising, given that profitability nowstands at a premium to history and some mean reversion isbeing discounted.

Perhaps more interesting is the modest decoupling of Japanesecurrency and equity markets (Display 14, page 7) year to date.One interpretation is that the current economic outlook forJapan is becoming somewhat less dependent on currencystimulus and more reliant on improving sentiment, capitalspending and bank lending. At this point, economic surprisesfor Japan (and other regions) remain somewhat subdued, evenas sentiment and earnings-revision trends are improving(Growth, Displays 1, 3 and 4, page 10 and Credit/Sentiment,Displays 5 and 6, page 12). On a positive note, bank lending inEurope and Japan is now positive (Credit Sentiment, Display 4,page 12).

Based on our analysis, we’re maintaining our overweight tonon-US equities—based on the assumption that the rest of thehistorical valuation gap versus the US will close as growthimproves. From a relative valuation standpoint, we have amodest preference for Japan over Europe. We also believe thatthe probability of structural labor reform is higher in Japan,which could lead to a higher valuation premium.

Display 8

Currency Momentum (IT) Efficacy

–3

–2

–1

0

1

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Cluster Robust T-Statistic

Through February 28, 2015Note: 3-month rollingSource: AB

Display 7

Contribution of Export Competitiveness to Regional EquityAttractiveness

DM Equity Regions

AxJ CAN ExU JPN UK US

Valuation & Quality –0.23 –0.35 –0.05 0.04 0.27 0.01

Growth –0.27 –0.35 –0.04 0.13 –0.20 0.07

Economic Stimulus 0.05 0.29 0.13 –0.24 –0.10 –0.01

Export Competitiveness 0.60 0.71 0.70 0.63 –0.04 –0.37

Of which: Currency Momentum

+ ++ ++ + 0 —

Credit Risk –0.18 –0.23 0.03 0.17 –0.08 0.01

Total Attractiveness Score

–0.03 0.06 0.76 0.73 –0.14 –0.30

Attractivenessex Export Competitiveness

–0.63 –0.65 0.06 0.10 –0.10 0.07


Current RecommendationsOur portfolios continue to overweight risk (and reflation-oriented)assets based on the assumptions of improving nominal growth,strong liquidity and persistently accommodative monetary policy.Among risk assets, our biggest overweight is in equities andenergy. Our high-yield exposure is more modest, and we’reunderweight real estate investment trusts (REITs). Within equities,we favor cyclical sectors, non-US equities and deep-valuestrategies in Europe and Japan. Given the outperformance ofTreasury Inflation Protected Securities (TIPS) since the beginning ofthe year, we now have a more neutral exposure to these assets.

6

However, we believe that maintaining exposure to income-gener-ating investments is fairly important to reduce risk. In particular,the bouts of deflation fears that caused a sell-off in the secondhalf of 2014 could return. That’s why we’re keeping exposure toa variety of carry trades across assets. One example is taking longpositions in US, Singapore and Australia bonds while shortingGerman Bunds and Japanese government bonds. n

Display 9

EU-US Earnings Revision Spread and USD/EUR

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

–0.30–0.25

–0.20

–0.15–0.10

–0.050.00

0.050.10

0.15

0.20

1988

1989

1991

1993

1995

1996

1998

2000

2002

2003

2005

2007

2009

2010

2012

2014

Percen

t

Earnings Revision Spread (Left Scale)

USD/EUR


Display 10

Share of Sector Sales to North America

0%5%

10%15%20%25%30%35%

EU ex UK Japan

Autos

Healthcare

Technology

Capital

Equipm

ent

Consumer

Staples

Consumer

Cyclicals

Com

modities

Telecom

Transportation

Energy

Utilities

Overall

Percent


7

Display 11

Relative Revisions Are Better Among “Exporting” Sectors

–30%–20%–10%

0%10%20%30%40%50%

Def

ense

Aut

os/H

ousing

Cap

ital E

quip

men

t

Util

ities

Tran

spor

ts

Fina

ncia

ls

Tech

nolo

gy

Aut

os/H

ousing

Cap

ital E

quip

men

t

Con

sum

er S

tapl

es

Tran

spor

ts

Hea

lthca

re

Perc

ent

Best in EU Worst in EU Worst in JapanBest in Japan


Display 12

Relative Performance Generally Better Among “Exporting”Sectors, as in Display 11

0

5

10

15

20

25

Defen

se

Aut

os/H

ousing

Cap

ital

Equipm

ent

Utilities

Tran

spor

ts

Fina

ncials

Aut

os/H

ousing

Cap

ital

Equipm

ent

Tech

nology

Con

sumer

Stap

les

Tran

spor

ts

Hea

lthc

are

EU EU JP JP

Percen

t


Display 13

Select Developed Economies Valuation and ProfitabilityRelative to the United States

0.00.20.40.60.81.01.21.41.6

P/B P/FE ROE* P/B P/FE ROE* P/B P/FE ROE*

Current Historical Median

Europe ex UK Japan Australia

As of February 28, 2015*ROE excluding financials, energy, commodities and utilities sectorsSource: AB

Display 14

High Correlation Between Nikkei and USD/JPY in RecentYears

74%

–60%

–40%

–20%

0%

20%

40%

60%

80%

100%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Percent

12-Month Moving Correlation

YTD Correlation (Beta) = 39%


8

Past performance is no guarantee of future results.Please refer to Glossary on page 16 for a description of return calculations and sources.As of February 28, 2015Source: AB

Equity Returns by Region

1 Mo. 3 Mo. 1 Yr. 3 Yr.3-Yr.

Percentile

Canada 4.3% 4.2% 11.1% 9.5% 68%

US 5.8 2.4 14.6 17.2 93

Japan 7.9 7.8 27.6 24.5 87

UK 3.3 3.7 5.4 9.5 34

Australia 7.1 12.6 14.6 16.9 78

Global 5.6 4.3 14.5 15.1 84

DM 5.9 4.5 14.7 16.4 78

Asia-Pac ex Japan 4.2 7.9 13.2 13.8 74

EU ex UK 7.4 10.0 16.0 17.1 83

EM 3.3 2.1 12.9 5.9 38

LatAm 7.6 -3.4 9.4 -0.1 6

EU & MidEast 5.2 0.6 3.9 1.8 39

Asia 2.4 3.4 14.2 7.1 38

Far East 2.5 3.5 11.8 5.9 33

Bond Returns by Region

1 Mo. 3 Mo. 1 Yr. 3 Yr.3-Yr.

Percentile

Canada -0.2% 5.0% 10.9% 5.4% 24%

US -1.5 1.1 4.4 1.8 6

Japan -0.3 1.2 4.0 4.2 3

UK -3.1 3.3 14.0 5.9 27

Australia 0.1 4.4 13.0 6.4 30

DM -1.3 1.8 7.0 3.3 7

Asia-Pac ex Japan -0.1 3.0 8.9 3.4 37

Eurozone 0.3 3.4 12.7 7.8 59

EU ex UK 0.2 3.5 12.3 6.8 48

EM -1.3 1.1 7.2 3.6 8

Global Treasury -0.8 2.0 7.4 4.3 41

Equity Global Sector Returns

1 Mo. 3 Mo. 1 Yr. 3 Yr.3-Yr.

Percentile

Energy 4.4% 0.1% -8.6% -2.3% 26%

Materials 7.7 7.7 4.8 0.9 47

Industrials 6.1 4.9 11.0 13.6 77

Consumer Discretionary 7.4 7.2 15.2 19.5 96

Consumer Staples 3.5 4.1 17.5 13.8 93

Healthcare 4.5 5.2 21.4 24.8 99

Financials 6.0 2.5 11.5 14.0 85

Technology 7.0 3.4 19.6 15.3 89

Telecom 4.1 2.7 12.8 10.9 92

Utilities -3.5 -0.9 10.3 6.8 73

Bond Strategy Returns

1 Mo. 3 Mo. 1 Yr. 3 Yr.3-Yr.

Percentile

Global Inv. Grade -0.6% -0.8% 0.5% 3.3% 7%

Global High Yield 2.5 -0.9 -0.8 6.7 26

EM Inv. Grade 0.5 0.2 6.2 4.6 6

EM High Yield 3.3 -4.0 0.6 4.2 3

Global Asset Backed -0.3 -0.6 -0.1 3.1 12

Duration -0.5 2.0 8.3 4.6 89

FI Carry -0.7 0.3 3.8 3.9 76

Commodities Spot Returns

1 Mo. 3 Mo. 1 Yr. 3 Yr.3-Yr.

Percentile

Dow Jones–UBS 2.6% -8.4% -22.8% -11.2% 1%

Natural Gas 0.5 -33.6 -44.5 -16.3 49

Industrial Metals 1.1 -8.5 -8.1 -11.5 11

Agriculture 2.2 -5.5 -21.2 -8.9 17

WTI Crude 3.8 -24.8 -48.1 -21.9 4

Brent Crude 14.8 -15.4 -45.2 -18.2 1

Gold Spot -5.5 3.9 -8.5 -10.6 4

Spot Currency Returns

1 Mo. 3 Mo. 1 Yr. 3 Yr.3-Yr.

Percentile

JPY -1.7% -0.8% -14.9% -12.1% 2%

EUR -0.8 -10.1 -18.9 -5.6 21

GBP 2.5 -1.3 -7.8 -1.0 46

CAD 1.8 -8.7 -11.5 -7.5 0

AUD 0.6 -8.2 -12.5 -10.1 3

CHF -3.5 1.3 -7.7 -1.8 26

NOK 0.6 -8.5 -21.9 -10.1 6

CNY -0.2 -2.0 -1.9 0.2 63

USD 0.1 4.1 10.3 3.7 85

Performance

February: Risk-On, Reflation Performance Tenor

Equity Risk Premium Returns

1 Mo. 3 Mo. 1 Yr. 3 Yr.3-Yr.

Percentile

Value 0.1% -1.0% 0.3% 1.8% 2%

Growth -0.6 0.5 1.1 1.7 5

Income 0.1 1.3 1.5 2.4 37

High Risk 1.8 1.4 -4.6 0.0 81

High Beta 2.3 -1.7 -3.8 -2.9 7

MN Quant 0.5 0.2 -0.4 0.8 1

9

Attractiveness

Pro-Risk, Procyclical Positioning, Maintain Non-US Equities Overweight

Equities, Credit Attractive, Favor Non-US Equities but Hedge CurrenciesAsset-Class Attractiveness

Global Assets(3)

DM & EMEquity Regions

(1)IG & HY CreditRegions (3)

DM BondRegions (1, 4)

DM & EMCurrencies (2)

CommoditySectors

–2

–1

0

1

2

DM Equity

DM Bonds

IG Credit

HY Credit

AxJ

CAN

ExU

JPN UK

USA EM

LATAM

EMEA

EMAsia

US IG

ExU IG

US HY

ExU HY

AxJ

CAN

ExU

JPN UK

USA

AUD

CAD

CHF

EUR

GBP

JPY

NOK

NZD SEK

USD EM

LATAM

EMEA

EMAsia

Petroleum

Ind Metals

Prec Metals

Z Score

EM Asia


Very Tight Spreads but Japan at ExtremeEquities (Region)

0

20

40

60

80

100

0

2

4

6

8

10

Current Level (Left Scale)

Percentile

Earnings Yield (Percent) Percentile vs. H

istory

Through February 28, 2015. Forward earnings yields for all MSCI region andcountry local indices (since 1970 or earliest available after that).Source: MSCI and AB

Favor Carry: US/UK Long vs. Germany/Japan ShortBonds (Slope)

0

25

50

75

100

0

1

2

3

4


Bon

d-Yield Slope

(Per

cent

)

Percentile

Percentile vs. History

Through February 28, 2015. Slope is the difference in the yields of the 10-year andthree-month bonds, using AB proprietary data (since 1950 or earliest available afterthat).Source: AB

High Carry in CNY and AUDCurrency

0

20

40

60

80

100

–2

0

2

4

6

AUD CAD EUR-Germany

JPY GBP CHF NOK CNY


Percentile

Percentile vs. History

Inte

rest

-Rat

e Diff

eren

tial

(Per

cent

)

Through February 28, 2015. Interest-rate differential vs. the USD for each currencyusing AB proprietary data (since 1950 or earliest available after that).Source: AB

Past performance is no guarantee of future results. See Glossary for notes and commentary.

1

2 3

5Diversified Factor Exposure PreferredGlobal Theme Allocations

0%

20%

40%

60%

80%

100%

US EU Japan Asia exJapan

Australia

Percent �Value

�Small-Cap/High Risk�Growth

� Income/Stability


4

10

Solid Employment Gains Outside AsiaRecent Growth and Trends

AU/NZ

Canada–3.0

–2.5

–2.0

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5

–0.6–0.4–0.20.00.20.4

Weak, Deteriorating

Growth

Strong,Improving Growth

Impr

ovin

g Fu

ndam

enta

lsD

eter

iora

ting

Fund

amen

tals

Asia ex Japan

Change in Unemployment (Percent)

US

JapanGlobal

FranceEU ex UK

EUR

EM

Germany

DM

UK

As of February 28, 2015Source: Haver Analytics and AB

Growth

Positive Trends but High US Expectation Tougher to Achieve


US, AxJ, CAN Consumer Spending Short of ExpectationsConsumer Spending Trends and PMI

AU/NZ

Canada

UK

EUxUK

Global

AxJ–2.5

–2.0

–1.5

–1.0

–0.5

0.0

0.5

1.0

–2.0 –1.5 –1.0 –0.5 0.0 0.5

Cha

nge

in P

MI:

Z Sc

ore

EPS Revisions of Consumer Cyclicals: Z Score

US Japan


Modest Sales Growth in US, EU; Rest RobustTTM YoY Sales Growth

–4–20246810

MSCI ACWI

Japan

Asia ex Japan EM US

EU

Technology

Healthcare

Con. Cyclicals

Telecom

Materials

Industrials

Con. Staples

Energy

Utilities

Percent

Regions Sectors

As of February 27, 2015Source: MSCI and AB

Weak US, Industrial Revision Trends; Rest OKI/B/E/S Cap-Weighted Earnings Revision

Cyclicals Defensives Industrials Technology

US –4.5% –4.5% –35.9% –0.3%

EU & UK –4.5 –4.7 –54.8 2.8

Japan 5.9 –1.7 1.4 6.9

Asia ex Japan –3.8 1.9 –14.1 –3.2

AU & NZ –0.8 –0.4 –42.8 0.0

LatAm 2.2 –0.3 –31.0 –2.8

As of February 28, 2015Arrow: improving or deteriorating earnings revision of past six months; cell color: redmeans bottom 30%, while teal means top 30% for the past 10 years.Source: Thomson Reuters I/B/E/S and AB

Eurozone, Japan Employment Surprises on UpsideEmployment Surprise

–1.0

–0.5

0.0

0.5

1.0

1.5

Jan14

Feb14

Mar14

Apr14

May14

Jun14

Jul14

Aug14

Sep14

Oct14

Nov14

Dec14

Jan15

Feb15

Japan

Eurozone

UK

US

Positive

Negative

Surprise


Positive Output Surprise in Eurozone; Rest WeakOutput Surprise

–1.0

–0.5

0.0

0.5

1.0

1.5

Jan14

Feb14

Mar14

Apr14

May14

Jun14

Jul14

Aug14

Sep14

Oct14

Nov14

Dec14

Jan15

Feb15

Positive

Neg

ative

Surprise

Eurozone

UK

Japan

US


1 2

3 4

5 6

11

Subdued Inflation ex EMFive-Year Implied Inflation Level vs. CPI

–1

0

1

2

3

4

0 1 2 3 4 5

Breakevens (Percent)

US (UP)Consumer Price Index

(YoY

% Change) Japan (Down) APAC ex Japan (Down)

Canada (Down)

EM (Down)

DM (Down)

EU ex UK (Down)

UK (Down)Germany (Down)

Australia (Down)


Cost of “Inflation Insurance” Rising but Still LowReal Yield on 10-Year Inflation-Indexed Bonds*

–0.4

–0.2

0.0

0.2

0.4

0.6

–2.2 –1.8 –1.4 –1.0 –0.6

Rising

Falling

High Low

“Inflation Insurance” CostChange in “Inflation Insurance” Cost

UK

EU ex UK

DM

Asia ex Japan

US

Canada Japan

EM

Australia

Global

Germany

As of February 28, 2015*Level vs. history and recent change (percent)Source: AB

Asset Prices Outside China Continue to Move Up…Housing Prices vs. Consumer-Loan Growth (Percent)

Australia

Canada

France

Germany

UK

US

China

EUR

EU ex UK

EM

–4

–2

0

2

4

6

–6 –4 –2 0 2 4 6

4-M

onth

Cha

nge

in

Con

sum

er-L

oan

Gro

wth

New Zealand

4-Month Change in Housing Prices

Brazil

DM


…but Commodities Continue to WeakenCommodities Inflation (Percent)

–6.0–4.5–3.0–1.5 0.0 1.5 3.0

–24–18–12–60612

Natural Gas

Petroleum

Grains

Livestock

Soft Com

modities

Ind. Metals

Gold

Spot Returns

Contango

and Cost Y

ield

Spot Returns Contango Daily Cost Yield

Inflationary

Disinflationary



Inflation

No Inflationary Pressures Outside Asset Appreciation

Disinflationary Imports in US, ChinaChange in Import Prices/Imports as Percent of Economy

–8

–6

–4

–2

0

2

4

10 15 20 25 30 35 40 45

Imports as Percent of Economy

Japan

Canada

US

Mexico GermanyFrance

Brazil

China

UK

4-Mon

th Cha

nge in Im

port Price

s (%

)


ULC Below 2% Except for JapanUnit Labor Cost vs. Two Quarters Ago (YoY % Change)

–4

–2

0

2

4

6

0 1 2 3 4

YoY % Change in Unit Labor Cost

Japan

CanadaUS

Germany

OECD Total

UK

Labor Cost Inflation (%

)

Australia Euro Area

Inflationary/Accelerating

Deflationary/Decelerating

Accelerating

Decelerating

As of February 28, 2015Source: Haver Analytics, OECD and AB

1 2

3 4

5 6

12

Credit/Sentiment

Economic Sentiment Neutral


Spreads Mostly NarrowRegional Credit Spreads and Recent Momentum

–0.5

0.0

0.5

–1.0 –0.5 0.0 0.5

Spre

ad M

omen

tum

Regional Credit Spread*

Australia

Wid

enin

g N

arro

win

g

EM

Asia ex Japan

EU ex UK

JapanUS

DM

UK

Canada

Germany

Narrow Wide

Global

As of February 28, 2015*Expressed as z score vs. historySource: AB

Persistence in Risk-Seeking Behavior Outside JapanEquity VRP*

–1.2

–1.0

–0.8

–0.6

–0.4

–0.2

0.0

0.2

0.4

–1.6 –1.4 –1.2 –1.0 –0.8 –0.6 –0.4 –0.2 0.0 0.2

4-Month Average

1-Month Average

Japan

US

DM

Asia ex Japan

UKEU ex UK

EMCanada

GermanyAustralia

IncreasinglyRisk-Seeking

PersistingRisk Aversion

IncreasinglyRisk-Averse

PersistingRisk-Seeking

As of February 28, 2015*Volatility risk premium (VRP) is the difference between implied and observedvolatility.Source: AB

Setting Favors Defensives, Quality over Trend FollowingRisk Aversion: Regional Level and Trend*

–1.00

–0.75

–0.50

–0.25

0.00

–2.5 –2.0 –1.5 –1.0 –0.5 0.0 0.5 1.0 1.5 2.0 2.5Current Level of Risk Aversion

Exploit ValueOpportunities

Risk-Averse Risk-Seeking

Japan†

Canada

UK

Asia-Pacificex Japan

EM

EU ex UK

DM

Global

Defensive

Trend Following Wins

Favor High Quality

Risk-Seeking

Risk-Averse

US

Change in Risk Aversion Australia

Germany

As of February 28, 2015*The difference in z scores of (10-year minus two-year) bond slopes minus z scores ofoption-adjusted spreads†Driven by an unusually flat bond slope as a result of monetary policySource: AB

Some Acceleration in Loan GrowthCredit Growth vs. Trend

US

UK

Canada

Australia

Japan–0.4

–0.2

0.0

0.2

0.4

0.6

–2.0 –1.5 –1.0 –0.5 0.0 0.5 1.0 1.5

Slower Faster

Accelerating

Decelerating

NZ

Germany

Upward Pressure on Rates

Downward Pressure on RatesC

hange in Loan Growth

YoY % Bank-Loan Growth


Consumer Improves, Except UKConsumer Sentiment Surprise Index

–2

–1

0

1

2

3

4

Jan14

Feb14

Mar14

Apr14

May14

Jun14

Jul14

Aug14

Sep14

Oct14

Nov14

Dec14

Jan15

Feb15

US

Eurozone

UK Japan

Positive

Neg

ative

Surp

rise


Business Surprises Largely NeutralBusiness Sentiment Surprise Index

–2

–1

0

1

2

Jan14

Feb14

Mar14

Apr14

May14

Jun14

Jul14

Aug14

Sep14

Oct14

Nov14

Dec14

Jan15

Feb15

EurozoneJapan

UK

US

Positive

Negative

Surprise


1 2

3 4

5 6

13


Valuation (Equities/Bonds)

Misvaluations Are Starting to Develop

US vs. Japan High Valuation GapRegional Equity Valuations: Shiller & Forward P/E

0

25

50

75

100

0 25 50 75 100

Relative Shiller P/E (Percentile Rank)Attractive Unattractive

Unattractive

Global

Canada

Germany

Asia-Pacific ex Japan

UK

Japan

EU ex UK US

EM

Relative Forward P/E

(Percentile Rank)

Attractive

Australia

DM


Sales Growth, ROE Still ExpensiveCurrent Relative Valuations vs. History by Factor Exposure*

0

25

50

75

100

0 25 50 75 100

Pric

e to

For

war

d Ea

rnin

gs

Price to Book

12-Mo.Momentum Capex/

Depr.

Div. Yield

Revisions

1-Yr. SalesGrowth

Return Vol.

Net Buyback Yield

P/FCFBeta

LT Growth

Debt/Equity

P/B

P/E

P/FE

Attractive Unattractive

Una

ttra

ctiv

eA

ttra

ctiv

e

ROE

ReturnReversal

ROEVol.

Through February 28, 2015*Percentile vs. history. MSCI All-Country World universe, medians, January 1,1988–January 31, 2015Source: FactSet, MSCI, Thomson Reuters I/B/E/S and AB

Energy, Financials Exhibit Relative Value…Global Equity Sectors: Valuation Relative to History*

0

25

50

75

100

0 25 50 75 100

Price to Forward Earnings

Price to Book

Food & Drug Retailing

Materials

Utilities

EnergyReal Estate

HC Equip & Svcs.

Banks

Diversified Financials

Insurance

Transport.

HW & SemisAutos & Components

Food, Beverage & Tobacco

Consumer Svcs.

Telecom Svcs.

ConsumerDurables& Apparel

Retailing

Software Svcs. Media

Pharma

HH Products

Capital Goods

Commercial Svcs.

Unattractive

Attractive

Attractive Unattractive

Through February 28, 2015*MSCI All-Country World universe, medians, January 1, 1988–February 28,2015Source: FactSet, MSCI, Thomson Reuters I/B/E/S and AB

…as Do EM Equities; Rest ExpensiveOverall Valuations (Percentile)*

0

6

12

18

24

30

0

20

40

60

80

100

DMEquity

EMEquity

DMBonds

EMBonds

Current

Rising

Declining

Unattractive

Attractive

Current(Left Scale)

Change

Change vs. Four M

onths Ago

Through February 28, 2015*Stocks and bonds relative to history (percentile rank since 1970)Source: FactSet, MSCI, Thomson Reuters I/B/E/S and AB

Tightening Credit SpreadsGlobal Credit Valuation

–175

–150

–125

–100

–75

–50

–25

0

–1.0 –0.5 0.0 0.5 1.0

Widen

ing

Wide

Tigh

tening

Glbl. HY [476]

Narrow

EM HY

[765]

EM IG [205]

Glbl. ABS [74] Glbl. IG [114]

Spread vs. History

Spread

Cha

nge vs. Last Mon

th

As of February 28, 2015[ ] indicates current spread level.Source: AB

Real-Yield Slope Attractive in US, EMReal Interest Rates and Slope (Percent)*

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

–2 –1 0 1 2 3 4

Rea

l-Yield Slope

Real Yields

Less

Attractive

EM

US

GlobalCanada

UK

Germany DM

Japan

More

Attractive

Less Steep

Stee

per

Australia

EU ex UK

Asia ex Japan

As of February 28, 2015*Regional 10-year bonds relative to global universeSource: AB

1 2

3 4

5 6

14

Valuation (Currencies/Commodities)

Collapse in Commodities, Few Clear Signals on CurrencyAppreciation

Expected Further Declines for JPYCurrency Valuation and Technical Signals

AUDCAD

EUR NOK

CHF

GBP

USD

–2.0

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5

–2.0 –1.5 –1.0 –0.5 0.0 0.5 1.0 1.5 2.0

CNY

Technical Signals

Valuation

BRL

Poised toAppreciate

Poised toDepreciate

Poor Value,Favorable Sentiment

Good Value, Poor Sentiment

JPY


WTI Moves into ContangoWTI Crude Futures Curve

50

55

60

65

70

75

80

85

90

95

100

Apr

15

Aug

15

Dec

15

Apr

16

Aug

16

Dec

16

Apr

17

Aug

17

Dec

17

Apr

18

Aug

18

Dec

18

Apr

19

Aug

19

Dec

19

Apr

20

Aug

20

Dec

20

Future Expiration MonthU

SD/B

arre

l

WTI Crude 1 Year Ago

WTI Crude Current


Copper Pessimism PersistsLME Copper Futures Curve*

250

260

270

280

290

300

310

320

330

Mar15

Aug15

Jan16

Jun16

Nov16

Apr17

Sep17

Feb18

Jul18

Dec18

May19

Oct19

USD/Tonne

Future Expiration Month

Copper Current

Copper 1 Year Ago

As of February 28, 2015*London Metal ExchangeSource: AB

Uniform Downward Move in GoldGold Futures Curve

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350

1,400

1,450

1,500

Gold Current

Gold 1 Year Ago

Future Expiration Month

USD/Troy Ounce

Feb15

Sep15

Apr16

Nov16

Jun17

Aug18

Mar19

Oct19

May20

Dec20



1 2

3 4

15

Risk and Correlation

Returns of Macro Risks in Equities; Consensus Regional Bets

Volatility Still Near Historical LowsHistorical Volatility

0

2

4

6

8

0

10

20

30

40

50

1970 1976 1982 1988 1994 2000 2006 2012

Perc

ent

Global SovereignDebt

Global Equity (Left Scale)

Global Investment-Grade CDX (Left Scale)

Percent


Country Selection Opportunities Better in Bonds…Macro Impact on Cross-Sectional Pricing*

20

30

40

50

60

70

80

1971 1978 1985 1992 1999 2006 2013

Bonds Percentile = 69

Percen

t of V

arianc

e Ex

plaine

d by

a Single Fa

ctor

Equities Percentile = 88

Equities/CreditsBonds

Through February 28, 2015*Equities/credits and bondsSource: AB

…and in CommoditiesMacro Impact on Cross-Sectional Pricing*

20

25

30

35

40

45

50

55

60

Commodities Percentile = 11

Percent of Variance Explained

by a Single Factor

Through February 28, 2015*CommoditiesSource: AB

Surge in EM Crowding, While US LowerCrowding by Global Regions

93

79 77

3121

9

8273

61

13

43

20

EmergingMarkets

NorthAmerica

Japan Asia exJapan

UK Europe exUK

Percent of Market Cap

Percent of Companies

Crowding

More

Less

January 1, 1988–February 28, 2015Note: 100 means most crowded; 0 means least crowded.Source: AB

Technology, Healthcare Crowded; Commodities CollapsedCrowding by Global Sectors

100 97

7160

33 3016

91 1

97 98

7279

27

50 45

6 1 3

Hea

lthca

re

Tech

nolo

gy

Con

sum

erD

iscr

etio

nary

Tele

com

Util

ities

Fina

ncia

ls

Indu

stri

als

Con

sum

erSt

aple

s

Ener

gy

Mat

eria

ls

Percent of Market Cap

Percent of Companies

Cro

wdi

ng

Mor

eLe

ss

Con

sum

erD

iscr

etio

nary

Con

sum

erSt

aple

s

January 1, 1988–February 28, 2015Note: 100 means most crowded; 0 means least crowded.Source: AB


3 4

5 6

Correlations Reverting Toward ZeroHistorical Correlation

–80

–40

0

40

80

1970 1976 1982 1988 1994 2000 2006 2012

Percent

Global Equity vs. Global Bonds

Global Equity vs. USD

Global Equity vs. Oil

Through February 28, 2015Source: MSCI and AB

1 2

16

PERFORMANCE (Page 8)Equity Returns by Region: Total returns, in local-currencyterms, of countries and regions from the MSCI family of globalindices. Three-year percentiles are compared with historicalreturns since January 1970 or the earliest available returns fordeveloped markets, and since January 2001 for emergingmarkets (EM) and emerging-market subregions.

Equity Global Sector Returns: Various sector returns, inlocal-currency terms, of the MSCI All-Country World Index.Three-year percentiles are compared with historical returns sinceJanuary 1999.

Equity Risk Premium Returns: Value, growth, income, high-riskand high-beta premium returns are calculated by applying aquantitative screen to a global universe of large-cap stocks toassemble a group of stocks that embody the specific premium.

The MN Quant return applies a similar methodology to a globaluniverse of large-cap stocks to create groups of stocks withdeep-value, current-value, capital-use, profitability, quality andmomentum factors, and then equally weights those groups.

Three-year percentiles are compared with historical returns sinceJanuary 2003.

Bond Returns by Region: Various country and regional returnsare derived from the Barclays Global Treasury Bond Index.Regional treasury returns are weighted using the countryweights from the Barclays Global Aggregate Bond Index.Three-year percentiles are compared with historical regionalbond returns since January 1970 and with historical globaltreasury returns since September 2000.

Bond Strategy Returns: Global-investment-grade, global-high-yield, EM-investment-grade, EM-high-yield and global-asset-backed returns are from the Barclays Global Aggregate BondIndex.

Duration returns are calculated by combining a long position inthe Barclays Global Treasury 7–10 Year Index (Hedged) and ashort position in the Barclays Global Treasury 1–3 Year Index(Hedged).

Fixed Income Carry returns are calculated from the 10-year/three-month government-bond yield-curve slopes of eightcountries: the US, the UK, Japan, France, Germany, Italy,Australia and Canada. Long exposures in hedged 7-year bondsin countries with steep slopes are combined with short positionsin hedged 7-year bonds in countries with flat slopes.

Three-year percentiles are compared with historical regionalbond returns since 1970 or the earliest available returns.

Commodities Spot Returns: Commodity returns based on theBloomberg Commodity Index and subcomponents. Three-yearpercentiles are compared with historical returns since January1991 for all returns except gold, which is compared withhistorical returns since January 1970.

Spot Currency Returns: Spot returns versus the US dollar forall currencies except the US dollar, based on data fromBloomberg. The US dollar is measured as a spot return versus abasket of other countries’ currencies weighted by grossdomestic product (GDP), based on data from Bloomberg.Three-year percentiles are compared with historical returns sinceJanuary 1971 or the earliest available returns.

ATTRACTIVENESS (Page 9)Each display looks at a specific asset class and shows measuresof yield and their current percentile rankings versus history.

Attractiveness 1: The first display shows attractiveness ofeach asset class. Notes: (1) DM Equity, EM Equity and DM BondRegions are relative to their DM aggregates. (2) Currencies arevs. USD, except for USD, which is vs. the GDP-weighted basket.(3) Global and Regional Credit are relative to their duration-equivalent treasuries. (4) EU ex UK Bonds are weighted by theEU index weight, but the underlying asset is DEU Bondspost-1998.

GROWTH (Page 10)Growth 1: By capturing recent changes in sentiment andeconomic data, this display identifies those regions with strongand improving growth and those with weak and deterioratinggrowth.

“Fundamentals” shows the views of company managements bymeasuring the degree of deviation versus the average for thelevel of the Purchasing Managers’ Index survey results by region.“Change in unemployment” is calculated over the last fourmonths—negative change is good, since employment is rising.

Growth 2: This display shows consumer spending trends bycomparing the degree of deviation versus the average for thelast four-month change in Purchasing Managers’ Index surveyresults with recent market data for consumer-cyclicals stocks.

Growth 3: By capturing recent changes in sentiment andprofitability data, this display identifies those equity regions andsectors with strong and improving growth and those with weakand deteriorating growth.

Glossary

17

Growth 4: This display shows market-capitalization-weightedearnings revisions for equity sectors across different regions togauge investor sentiment. Cyclicals: consumer cyclicals, financials,autos & housing; defensives: defense, consumer staples, utilities,healthcare, telecom; industrials: capital equipment, energy,commodities, transports; technology: technology

Growth 5, 6: Each series in this display is a proprietary compos-ite of periodic economic data releases expressed as the degreeof deviation versus the average for employment and output fordifferent countries and regions.

INFLATION (Page 11)Inflation 1: This display captures three dimensions of inflationand identifies regional outliers. The three measures are actualinflation (the year-over-year percent change in the ConsumerPrice Index [CPI] on the vertical axis), the market’s view of futureinflation (“Breakevens” on the horizontal axis) and how that haschanged recently (indicated by up or down next to the country/region name).

“Breakeven” implied inflation is calculated as the differencebetween five-year nominal and real yields.

Inflation 2: This display captures the market-derived cost ofinflation insurance and how that has changed recently indifferent regions of the world.

“’Inflation insurance’ cost” is the degree of deviation versus theaverage for the 10-year inflation-indexed bond yield. The“change in ‘inflation insurance’ cost” is the one-month changein the 10-year inflation-indexed bond yield.

Inflation 3: This display looks at two measures of potentialinflation in different regions of the world: housing prices andconsumer-loan growth.

Inflation 4: This display looks at inflationary pressures withincommodities and how they’re reflected in the futures market.

“Contango” is the degree of deviation versus the average forthe price difference between spot and the next available futurescontract. “Daily cost yield” is the degree of deviation versus theaverage for the average cost of production as a percent of thecurrent spot price. Spot returns are month-over-monthprice changes.

Inflation 5: This display looks at the potential for inflationbuilding up as a consequence of rising import prices inselect economies.

Inflation 6: This display examines trends in unit labor costsby region.

“Unit labor cost” measures the average cost of labor per unit ofoutput and is calculated as the ratio of total labor cost to realoutput year over year. “Labor cost inflation” is the six-monthchange in the year-over-year unit labor cost.

CREDIT/SENTIMENT (Page 12)Credit/Sentiment 1: This display establishes the relativeattractiveness of credit by looking at current credit spreads byregion and the recent changes in those credit spreads.

“Regional credit spread” is expressed as the degree of deviationversus the historical average. “Spread momentum” is acomposite degree of deviation versus the historical average ofthe change in spreads over the intermediate term.

Credit/Sentiment 2: This display looks at the market senti-ment, as expressed through the equity volatility risk premium(VRP)—both the average over the last month and over the lastfour months. A higher reading for both indicates persistingmarket fear or uncertainty.

“Equity VRP” is measured by the difference between theone-month implied and the observed volatility in each regionalequity market.

Credit/Sentiment 3: This display looks at the current level andtrend of risk aversion across various regions.

“Current level of risk aversion” is measured by the difference inthe degree of deviation versus the historical average of thebond slope (as defined by the 10-year yield minus the two-yearyield) minus the degree of deviation versus the historicalaverage of option-adjusted spreads (OASs). “Change in riskaversion” is the four-month change in this signal.

Credit/Sentiment 4: This display measures current loan growthand the trend of loan growth for different countries, as a way todetermine the fundamental pressure on rates.

“YoY % bank-loan growth” is defined as the degree ofdeviation versus the historical average for each region’syear-over-year bank loan growth. “Change in loan growth” isdefined as the four-month change in that score.

Credit/Sentiment 5: Each series in this display shows thedegree of deviation versus the average for consumer sentimentfor different countries and regions over time.

“Consumer Sentiment Surprise Index” is a proprietary compositeindex level created by combining various economic releases.

18

Credit/Sentiment 6: Each series in this display shows thedegree of deviation versus the average for business sentimentfor different countries and regions over time.

“Business Sentiment Surprise Index” is a proprietary compositeindex level created by combining various economic releases.

VALUATION (EQUITIES/BONDS) (Page 13)Valuation (Equities/Bonds) 1: This display confirms therelative attractiveness of regions by looking at two differentmeasures of equity valuations (Shiller P/E and forward P/E).Each measure shows the current percentile versus historysince 1970.

Valuation (Equities/Bonds) 2: This display confirms the relative attractiveness of global equity market factors by looking at two different measures of equity valuation (P/FE and P/B). Each measure shows the current percentile versus history since 1988.

Valuation (Equities/Bonds) 3: This display confirms the relative attractiveness of global equity market sectors by looking at two different measures of equity valuation (P/FE and P/B). Each measure shows the current percentile versus history since 1988.

Valuation (Equities/Bonds) 4: This display uses a proprietaryvaluation composite that covers a broad range of inputs toexpress percentile rankings versus history since 1970 and thefour-month change in those rankings for developed- andemerging-market equities and bonds.

Valuation (Equities/Bonds) 5: This display looks at currentlevels and recent changes in credit spreads for different regionsand sectors of the bond markets.

“Spread versus history” is measured as the OAS and shows thedegree of deviation versus the historical average. The verticalaxis shows the month-over-month change in OAS.

Valuation (Equities/Bonds) 6: This display looks at the leveland slope of real bond yields as a valuation measure forinflation-indexed bonds across regions.

“Real yields” are the current yields for 10-year inflation-indexedbonds (using nine-year when 10-year wasn’t available), and the“real-yield slope” is the difference in real yields between the10-year and three-month bonds.

VALUATION (CURRENCIES/COMMODITIES) (Page 14)Valuation (Currencies/Commodities) 1: This display rates theattractiveness of various currencies by looking at bothfundamental valuations and technical signals.

Both measures are shown as a degree of deviation versus thehistorical average versus USD (except for USD, which is shownrelative to a GDP-weighted basket of currencies). The valuationscore is a proprietary composite based on interest-ratedifferentials and purchasing power parity (PPP) divided by FXrate. “Technical signals” is a proprietary composite based on thelevel of and change in option skew.

Valuation (Currencies/Commodities) 2: This display looks atthe market’s expectations of future prices of WTI crude now anda year ago.

Valuation (Currencies/Commodities) 3: This display looks atthe market’s expectations of future prices of gold now and ayear ago.

Valuation (Currencies/Commodities) 4: This display looks atthe market’s expectations of future prices of LME copper nowand a year ago.

RISK AND CORRELATION (Page 15)Risk and Correlation 1: This display provides perspective oncurrent risk levels by looking at current and historical equity andfixed-income volatility.

Levels of risk are calculated as volatility over an intermediate-term decay with a six-month half-life.

Risk and Correlation 2: This display looks at current andhistorical cross-asset correlations.

Correlations are calculated over an intermediate-term decaywith a six-month half-life. Oil is represented by a composite ofWTI crude, Brent crude, gasoline and heating oil prices.

Risk and Correlation 3: This display looks at the impact ofmacro factors on stock and bond returns. The smaller thepercentile number, the less the impact from a single macrofactor and the greater the chance that security selection will berewarded. This number is based on a proprietary model.

Risk and Correlation 4: This display looks at the impact ofmacro factors on commodity returns. The smaller the percentilenumber, the less the impact from a single macro factor and thegreater the chance that security selection will be rewarded. Thisnumber is based on a proprietary model.

Risk and Correlation 5: This display looks at the level ofcrowding in equities by regions.

“Crowding” is based on proprietary models that look at metricssuch as high analyst ratings, elevated valuations, strong recentperformance and large holdings of institutional investors. Eachnumber is relative to history.

19

Risk and Correlation 6: This display looks at the impact ofcrowding on equities by global sectors.

“Crowding” is based on proprietary models that look at metricssuch as high analyst ratings, elevated valuations, strong recentperformance and large holdings of institutional investors. Eachnumber is relative to history.

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