January 2010 Capital Markets Outlook The Road to Recovery Edward B. Marrinan Senior Portfolio Manager This presentation is provided by AllianceBernstein L.P. Bernstein Global Wealth Management is a unit of AllianceBernstein L.P. This presentation booklet has been provided to you for use in a private and confidential meeting to discuss a potential or existing investment advisory relationship. This presentation is not an advertisement and is not intended for public use or distribution beyond our private meeting. Bernstein does not provide tax, legal or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.
Introduction • The markets have responded to signs of economic recovery • We expect the recovery to begin modestly, because significant risks and challenges persist • Continued uncertainty means great opportunity for stock pickers and sizable return potential for credit markets
Equity Markets Have Rallied… MSCI World: Growth of $100 Oct 31, 2007–Dec 31, 2009 Andy Walther UPDATED 1/4 990100 USD Price Net w/ Dividends 73% Source: FactSet, MSCI and AllianceBernstein
Global Financial Meltdown Is Behind Us L: Allie Boxer Bloomberg and AB Updated 11/3 R: Sloane Barclays Capital Global agg-corp-BBB UPDATED 11/3 Global BBB Corporates Spreads vs. Government Bonds Through October 31, 2009 Source: Barclays Capital
Industrial Production Is Recovering As Inventories Are Drawn Down Colangelo updated 11/3 Industrial Production Emerging Countries Global Through September 30, 2009 Source: Haver Analytics and AllianceBernstein
Slowdown in Job Losses Typically Precedes Recovery US Unemployment Insurance: Initial Claims A. Walther DOL/HAVER/BBERG UPDATED 12/1 Recession Thousands Through November 20, 2009 Four-week moving average Source: Haver Analytics, National Bureau of Economic Research, US Department of Labor and AllianceBernstein
Significant Fiscal Stimulus Remains in Pipeline Left chart: Carson/Schoregge AB UPDATED 10/5 US Fiscal Stimulus Right chart: Ken Colangelo Recovery.gov Sources: CBO, Recovery accountability board; us fed agency, ab Updated 10/5 As of September 15, 2009 Includes increases in federal spending and tax cuts to individuals and businesses. Direct aid to specific firms or sectors is not included. *Includes realized tax cuts and amount paid out Source: Congressional Budget Office, Recovery Accountability and Transparency Board, US federal agency financial and activity reports, and AllianceBernstein
2010 Outlook: Brighter, Though Still Modest GDP Forecasts Colangelo UPDATED 10/5 November update Not yet released 11/3 Global Japan Euro Area US Emerging Countries • 2009F* • 2010F As of November 30, 2009 *F = Forecast Source: AllianceBernstein
US Households Are Repairing Their Balance Sheets Carson forecasts BEA, AB UPDATED 10/2 a/o 11/3 3Q data not avail US Financial Obligations Ratio* 4Q:2010F *Ratio of financial payments to disposable income, historical through June 30, 2009 and forecasted thereafter Source: US Bureau of Economic Analysis and AllianceBernstein
Productivity Growth Has Been Strong… Ken Colangelo AB and Haver Uses gov’t revision UPDATED 10/6 It IS peak to trough, per Carson US Productivity Growth in Major Recessions Percentage Change • DATES • 2008:2Q to 2009:1Q • 1973:4Q to 1975:1Q • 1981:4Q to 1982:3Q • 1990:3Q to 1991:2Q Real GDP Growth* (2.2)% (2.6)% (3.2)% (1.4)% (3.7)% Through 2Q:2009 Deepest recessions since 1970 *Peak to trough Source: Haver Analytics, US Bureau of Economic Analysis, US Bureau of Labor Statistics and AllianceBernstein
…Helping Companies Beat Earnings Estimates Percentage of Companies with Positive Earnings SurprisesS&P 500 Andy Walther UPDATED 12/1 BBH As of November 30, 2009 Source: Bloomberg, Brown Brothers Harriman, FactSet, Standard & Poor’s, Thomson Reuters and AllianceBernstein
Depressed Earnings Should Rebound in 2010 and 2011 S&P 500 Operating Earnings per Share A. Walther UPDATED 12/1 SPX Trend line from EPS, P, GDP (Fedak) 2011 Consensus Earnings Growth 22% 2010 Consensus Earnings Growth 25% Long-Term Trend Past performance does not guarantee future results. Actual earnings through December 31, 2008; 2009–2011 consensus estimates as of November 30, 2009 Source: Standard & Poor’s,Thomson Reuters and AllianceBernstein
Attractive Valuations on 2010 and 2011 Expected Earnings Price to Forward Earnings S&P 500 A. Walther UPDATED 12/1 SP50.R Price / SPX Forward EPS As of November 30, 2009 Source: FactSet, Standard & Poor’s, Thomson Reuters and AllianceBernstein
Continuing Risks • Credit markets are normalizing, but it’s still expensive to raise capital Credit Availability • Persistently high unemployment and uncertainty hamper consumer spending Consumers(Particularly in the US) • Can governments unwind the fiscal and monetary programs they’ve put in place? Inflation Commercial Real Estate • Large losses yet to come but appear manageable
US household borrowing is down $270 billion from 2008 levels,* and the US savings rate has risen Why Inflation Is Likely to Stay Low in the Near-Term Aggregate Demand vs. Supply Capacity-utilization rates are at all-time lows around the world Money and Credit Growth Wage and Asset Growth The US unemployment rate is in the 10% range *Based on second-quarter net annualized level Source: US Bureau of Economic Analysis, US Bureau of Labor Statistics and US Federal Reserve
Commercial Real Estate: Market Is Dwarfed by Residential Size of US Mortgage Markets*$ Trillions $10.9 $3.5 $6.6 $0.9 *Commercial as of June 30, 2009; residential as of August 31, 2009 Source: Commercial Mortgage Securities Associationand US Federal Reserve
Uncertainty Has Driven “Risk-Free” Rates Toward Historic Lows UPDATED 12/1 Mark Howard (Sloane calcs averages) 10-Year Government Bond Yields As of January 4, 2010 *Long-term averages for all: January 1989–present; German data used in lieu of euro-area yields prior to 1999 Source: Bloomberg and AllianceBernstein
Strong Return Potential in Other Asset Classes Sloane UPDATED 12/1 Brian Lomax for equity ERPs UPDATED 12/3 Brian confirms it’s against US Treas, says there’s no perfect global match and for practical purposes shouldn’t significantly change the outcome anyway Risk Premiums over Government Bonds Basis Points Today GlobalInv.-Grade Corporates Global Equities Global High Yield Multiple of Long-Term Average 1.4× 1.4× 1.2× As of December 31, 2009 Fixed-income “risk premiums” are option-adjusted spreads. The Global Equities risk premium is the dividend yield of the Morgan Stanley Capital International (MSCI) World Index plus the long-term MSCI World dividend growth rate less the 10-year US Treasury yield. Averages are since 1999 for Global Equities, 2000 for Global High Yield, and 2001 for Global Investment-Grade Corporates. Source: Barclays Capital, Bloomberg, MSCI and AllianceBernstein
Value Return Potential Is Elevated Brian Lomax UPDATED 10/7 Global Equities Price/Book Spread: Most Expensive vs. Cheapest Through December 31, 2009 Global developed large-cap stocks; represents the ratio of most expensive quintile to cheapest quintile of stocks Source: Center for Research in Security Prices, Morgan Stanley Capital International and AllianceBernstein
Company-Specific Value Opportunities Abound Chris Marx RepresentativeHoldings Sector Opportunity UPDATED 10/12 Financials • Traditional banks with competitive advantages • ANZ • US Bancorp CapitalEquipment • Deferred replacement and maintenance spending creates pent-up demand • Caterpillar • Ingersoll-Rand • Rolls-Royce Energy • Underappreciated high-quality assets • Nexen • Suncor • Valero Energy As of September 30, 2009. See Disclosures at the end of this presentation. Source: AllianceBernstein
US Growth Stocks Priced at Historical Lows Jay Panwar UPDATED 10/6 Russell Growth Index vs. S&P 500 Average Through December 31, 2009 Composite comprises one-third price to cash flow, one-third forward price to earnings and one-third price to sales. The Growth index is the Russell 1000 (large-capitalization) growth series. Source: Russell Investments, Standard & Poor’s, Thomson I/B/E/S, Thomson Reuters and AllianceBernstein
Array of Growth-Stock Opportunities Bob Scheetz UPDATED 10/12 RepresentativeHoldings Sector Opportunity Technology • Intel • Qualcomm • Leaders that will benefit from a recovery in technology spending Consumer • Emphasis on high-quality names that are gaining market share and have strong secular trends • PepsiCo • Kohl’s Energy/Materials • Favor companies with sound and strong supply/demand fundamentals • ArcelorMittal • Occidental As of Decemeber 31, 2009. See Disclosures at the end of this presentation. Source: AllianceBernstein
Signs of recovery are proliferating, but challenges remain Summary: Dislocation Creates Opportunity for Long-Term Investors • What are the fundamental prospects for the economy? • What is the opportunity in equities? • Markets look fairly valued on 2009 earnings but should rise with 2010 and 2011 expectations • Return potential is still significant in Value and Growth
Disclosure on Stock Examples References to specific securities are presented to illustrate the application of our investment philosophy only and are not to be considered recommendations by AllianceBernstein. The specific securities identified and described in this presentation do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable. Please note that the specific securities discussed in this presentation may no longer be held within the strategy or portfolio after the date of this report. Upon request, we will furnish a listing of all investments made during the prior one-year period.
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Performance Disclosure All Only US Strategic Value (All Accounts) 1. General Notes: a. Performance Statistics Are Not Financial Statements—There are various methods of compiling or reporting performance statistics. The standards of performance measurement used in compiling these data are in accordance with the methods set forth below. Past performance does not guarantee future results. A portfolio could suffer losses as well as achieve gains. b. Composite Structure—Beginning in 1993, the Bernstein US Strategic Value (all accounts) composite (the “Composite”) includes only fee-paying private and institutional discretionary accounts not subject to significant investment restrictions imposed by clients. From 1974 through 1992, the Composite includes all private and institutional discretionary US Strategic Value accounts. c. Rate of Return—Performance returns for each account are calculated monthly using trade-date accounting. Performance results are reported on a total-return basis, which includes all income from dividends and interest, and realized and unrealized gains or losses. Prior to July 1993, all cash flows were assumed to have occurred on the last day of the month. From July 1993 through 2000, if an account’s net monthly cash flows were equal to or exceeded 10% of its beginning market value, the Modified Dietz Method was used to daily-weight the cash flows. When an account’s net monthly cash flows were less than 10% of its beginning market value, the cash flows were assumed to have occurred on the last day of the month. Beginning in 2001, all cash flows are daily-weighted using the Modified Dietz Method. Beginning in 1993, the monthly Composite returns are calculated by weighting each account’s monthly return by its beginning market value as a percent of the total Composite’s beginning market value. Prior to 1993, the Composite results are equal-weighted on a quarterly basis. These monthly and quarterly performance figures are geometrically linked to calculate cumulative and/or annualized “time-weighted” rates of return for various time periods. Closed accounts are included in the Composite for each full quarter prior to their closing. d. Benchmark—The benchmark for the Composite is the S&P 500 Index. The S&P 500 Index is widely regarded as the standard for measuring large-cap US stock-market performance. 2. Net-of-Fee performance figures for the Composite have been calculated as follows: a. Prior to 1983, management fees were not charged; instead, the accounts incurred transaction costs. b. From 1983 through 1992, the Composite’s net-of-fee return is the equal-weighted average of the actual after-fee returns of each account in the Composite. From 1993 forward, the Composite’s net-of-fee return is the asset-weighted average of the actual after-fee returns of each account in the Composite. c. Net-of-fee returns for the past 10 years are as follows: 1999: (0.2)%; 2000: 10.0%; 2001: 9.3%; 2002: (17.6)%; 2003: 32.0%; 2004: 13.5%; 2005: 8.6%; 2006: 20.1%; 2007: (1.4)%; 2008: (46.9)%. 3. Dispersion—Dispersion is calculated on the gross-of-fee annual returns of the accounts included in the Composite for all 12 months of the calendar year; it is the asset-weighted standard deviation of these returns. The Composite’s dispersion of returns for the last 10 years is as follows: 1999: 2.0%; 2000: 1.6%; 2001: 1.7%; 2002: 1.6%; 2003: 1.4%; 2004: 1.2%; 2005: 1.1%; 2006: 0.8%; 2007: 1.1%; 2008: 1.0%.
Performance Disclosure All Only US Strategic Growth (All Accounts) 1. General Notes: a. Performance Statistics Are Not Financial Statements—There are various methods of compiling and reporting performance statistics. The standards of performance measurement used in compiling these data are in accordance with the methods set forth below. Past performance does not guarantee future results. A portfolio could suffer losses as well as achieve gains. b. Preparation of Data—The performance results of the US Strategic Growth (all accounts) composite (the “Composite”) are calculated by geometrically linking the asset-weighted monthly returns of the Alliance Large Cap Growth composite from 1978 through 2000 to those of Bernstein US Strategic Growth (all accounts) thereafter. These monthly returns are used to calculate cumulative and/or annualized “time-weighted” rates of return for various periods. Bernstein US Strategic Growth differs from Alliance Large Cap Growth in that, among other things, it offers tax management and may contain fewer stocks. c. Rate of Return—Performance returns for each account are calculated monthly using trade-date accounting. Performance results are reported on a total-return basis, which includes all income from dividends and interest, and realized and unrealized gains or losses. All cash flows are daily-weighted using the Modified Dietz Method. The monthly Composite returns are calculated by weighting each account’s monthly return by its beginning market value as a percent of the total Composite’s beginning market value. Closed accounts are included in the Composite for each full quarter prior to their closing. d. Benchmark—The benchmark for the Composite is the S&P 500 Index. The S&P 500 Index is widely regarded as the standard for measuring large-cap US stock-market performance. 2. Alliance Large Cap Growth Composite Structure (1978–2000)—The Composite includes fee-paying discretionary tax-exempt accounts with assets over $10 million not subject to significant investment restrictions imposed by clients. The Composite includes the equity segment of balanced accounts. In these equity portfolios, the asset-allocation mix is generally determined by client guidelines, and cash flows are allocated in accordance with these guidelines. Fee structures exclude accounts with performance-based fee arrangements. Net-of-fee performance figures reflect the compounding effect of such fees. 3. Bernstein US Strategic Growth (all accounts) Composite Structure (2001–present)—The Composite includes only fee-paying, discretionary accounts, both private and institutional. 4. Net-of-Fee Performance Figures—Net-of-fee performance figures for the Composite have been calculated as follows: a. From 1978 through 1982, 0.75%, the highest annual fee charged to an Alliance Large Cap Growth account for that period (excluding accounts with performance-based fee arrangements) was deducted from the Composite’s gross-of-fee returns. b. From 1983 through 2000, the actual average quarterly fee charged by Bernstein for the US Strategic Value (all accounts) service was deducted from the Alliance Large Cap Growth composite gross-of-fee returns. c. From January 2001 forward, the Composite’s net-of-fee return is the asset-weighted average of the actual after-fee returns of US Strategic Growth accounts in the Composite. d. Net-of-fee returns for the past 10 years are as follows: 1999: 32.3%; 2000: (17.2)%; 2001: (18.5)%; 2002: (32.9)%; 2003: 21.2%; 2004: 4.1%; 2005: 11.5%; 2006: (2.5)%; 2007: 14.1%; 2008: (40.8)%. 5. Dispersion—Dispersion is calculated on the gross-of-fee annual returns of the accounts included in the Composite for all 12 months of the calendar year; it is the asset-weighted standard deviation of these returns. The Composite’s dispersion of returns for the last 10 years is as follows: for Alliance Large Cap Growth: 1999: 3.2%; 2000: 2.1%; for US Strategic Growth (all accounts): 2001: 2.0%; 2002: 1.2%; 2003: 1.4%; 2004: 1.2%; 2005: 1.2%; 2006: 1.0%; 2007: 1.3%; 2008: 1.2%.
Performance Disclosure Over 5 Only 50/50 Simulation: US Strategic Value/US Strategic Growth (All Accounts) Returns for the 50/50 Simulation (“50/50”) were calculated by blending the actual returns of the Bernstein US Strategic Value and the Bernstein US Strategic Growth composites (see disclosure for each composite on preceding pages) in a 50/50 allocation using the following methodology: 1. From January 1978 through December 1982, the summed quarterly returns for US Strategic Value and US Strategic Growth were divided by two. For example, a quarterly US Strategic Value return of 1.00% and a quarterly US Strategic Growth return of 3.00% would result in a quarterly 50/50 return of 2.00% [(1.0% + 3.0%)/2 = 2.0%]. 2. From January 1983 to the present, the methodology is the same, except monthly composite returns are used instead of quarterly returns. Prior to 1983, only quarterly returns are available for US Strategic Value. 3. These 50/50 quarterly and monthly returns are geometrically linked, or compounded, to calculate cumulative and/or annualized returns for various time periods. 4. This methodology assumes quarterly rebalancing from 1978 through 1982 and monthly rebalancing thereafter. Transaction costs associated with rebalancing are not considered in this simulation.