cmm_0711-praese
TRANSCRIPT
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Capital Market Presentation
July 2011:
Giving money away
Hans-Jrg Naumer, Dennis Nacken,
Stefan Scheurer
Not for circulation to
private investors
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Giving money away
Nominal and real return of government bonds in Europe, USA and Japan (5-year maturity).
Source: Datastream; Allianz Global Investors Capital Market Analysis
2,16%1,55%
0,42%0,12%
-2,50%
-2,00%
-1,50%
-1,00%
-0,50%
0,00%
0,50%
1,00%
1,50%
2,00%2,50%
5-year
German Bundesanleihe
5-year
US-treasuries
5-jhrige
Japanese government note
Nominal return
-0,54%
-2,02%
Real return
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Fear of escalation of European debt crisis
Risk premia of 10y European government bonds vs. German government bonds (-2 years)
Source: Datastream; Allianz Global Investors Capital Market Analysis
28/06/11
J A S O N D J F M A M J J A S O N D J F M A M J
0
2
4
6
8
10
12
14
16
Spread Italy - Germany (10y)Spread Spain - GermanySpread Greece - Germany
Spread Portugal - GermanySpread Ireland - GermanySpread Belgium - Germany
0
2
4
6
8
10
12
14
16
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Europe: Successful debt reduction in the past 30 years (Debt/GDP ratio)
4
Debt reduction in Europe: Nothings impossible!
Source:: ECB, "Major Public Debt Reductions. Lessons From The Past, Lessons For The Future", Working Paper 09/2010, Allianz GI Capital Market Analysis
134,2
80,1 76,166,8
72,1
52,4
84,0
26,8
50,5
36,2 38,0 33,3
0,0
20,0
40,0
60,0
80,0
100,0
120,0
140,0
160,0
Belgium Denmark Netherlands Spain Sweden UK
1994-2007 1994-2007 1996-2002 1997-2007 1996-2008 1985-1990
before debt reduction after debt reduction
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Central banks: Lender of last resort?
Treasury holdings of the FED and major foreign creditors (in USD billions)
Source: Federal Reserve, US Treasury Departement; Allianz Global Investors Capital Market Analysis
-200
0
200
400
600
800
1000
1200
1400
1600
1800
US-FED*
China
Japan
UnitedKingdom
OilExporters
Brazil
CaribianBanks
Taiwan
Russia
Hong
Kong
Switzerland
Canada
Luxembourg
Germany
Purchases since August 2010
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Fear of subsequent recession
Sentiment indicators point to a cooling but still suggest expanding economic growth.
Source: Datastream; Allianz Global Investors Capital Market Analysis
28/6/11
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
30
40
50
60
70
80
90
100
110
120
130
140
ifo World Economic Surv ey: Business Climate
ifo World Economic Surv ey: Current Assessmentifo World Economic Surv ey: Business E xpectations
30
40
50
60
70
80
90
100
110
120
130
140
Source: Thomson Datastream
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Germany is becoming the economic driving force
Global economic engine is firing on (almost) all cylinders.
* May 2011
Source: Datastream; Allianz Global Investors Capital Market Analysis
13,3
9,6
6,35,2 4,7
3,7 3,42,6
-0,1
-1,1 -1,2
-12,3-15
-10
-5
0
5
10
15
China*
Germany
India
Eurozone
Russia
Italy
USA*
France
Brazil
UKSpain
Japan
Industrial production April 2011 vs. previous year (in % )
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The turnaround in monetary policy has taken place.
Central banks will continue to tighten monetary policy, especially in the emerging markets.
Source: Datastream; Allianz Global Investors Capital Market Analysis
28/6/11
2006 2007 2008 2009 2010 2011
0
2
4
6
8
10
12
14
16
ECB Short Term Repo Rate
Fed Funds Target RateJapan Target Rate
China T arget Rate
Brazil Target Rate
0
2
4
6
8
10
12
14
16
Source: Thomson Datastream
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When will the capital markets react?
Yields of German, Japanese and US 10-year government bonds (30 years and 1 year)
Source: Datastream; Allianz Global Investors Capital Market Analysis
28/6/11
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
0
2
4
6
8
10
12
14
Yiel d 10y German government bond
Yield 10y US government bondYield 10y Japanese government bond
0
2
4
6
8
10
12
14
Source: Thomson Datastream
28/6/11
J A S O N D J F M A M J
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Yield 10y German government bond
Yield 10y US government bondYield 10y Japanese government bond
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Source: Thomson D atastream
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Investment theme: Flexible bond strategies
Interest
rate rise1
-3 -2 -1 +1 +2 +3 +4 +5 +6 +7 +8
1,47 0,99 0,50 +50Bp -0,50 -0,99 -1,47 -1,93 -2,36 -2,77 -3,16 -3,53
2,90 1,96 0,99 +100Bp -0,99 -1,96 -2,90 -3,81 -4,65 -5,45 -6,21 -6,92
5,70 3,85 1,96 +200Bp -1,96 -3,85 -5,70 -7,44 -9,03 -10,54 -11,96 -13,27
The longer the maturity, the deeper the fall.
If the rates go up, prices come down
Interest
rates
bond
prices
It is possible to gain from a rise in interest rates:
short duration
Price movements of bonds when interest rates rise by x basis points (theoretical)
Duration2 Duration2
Assumption: parallel shift of the yield curve based on Bund-yields by X basis points.
2 Macaulay Duration; In this example bond price movements are determined by the change of the fair value (present value of future cash flows) with an initial face and market
value of 100 and different Macaulay durations. A success of the strategy can not be guaranteed and losses are not excluded.
interest
rates
bond
price
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Sharpe Ratio (excess return in relation to risk) has never been so high since 1989 for US-stocks.
Valuations are still in favour for equities
Source: Datastream; Allianz Global Investors Capital Market Analysis
28/6/11
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
-0.15
-0.10
-0.05
0
0.05
0.10
0.15
0.20
0.25
0.30
Sharpe Ratio US-Stocks ((Stock return - 10y. US Treasuries)/V IX)
-0.15
-0.10
-0.05
0
0.05
0.10
0.15
0.20
0.25
0.30
Source: Thomson Datastream
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Decisive Insights:
Equities should strategically remain overweight compared to bonds.
Bond investors seem to be paying a high price for the flight to safe havens. Real returns on 5-
year German and US bonds have recently slipped into negative territory.
While the markets will presumably continue to be held in thrall by Europes debt crisis for a while
yet, the basic global economic trend seems to be upwards.
In view of the continued high levels of uncertainty on the markets, it could be advisable to maintain
a somewhat more defensive portfolio orientation.
But the attractive valuations of equities compared to bonds, the increase in global Merger &
Acquisitions speculation, the prevailing desperation of investors to find a home for their money and
the risk of a turnaround in interest rates, all still point to a recommendation to stay slightly
overweight in equities.
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www.allianzglobalinvestors.de/capitalmarketanalysis
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Disclaimer
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