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PUTTING MARKETS IN PERSPECTIVE | 2Q14
Bank of America Corporation (Bank of America) is a financial holding company that, through its subsidiaries and affiliated companies, provides banking and investment products and other financial services. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly-owned subsidiary of Bank of America Corporation, and a registered broker-dealer and member of FINRA and SIPC. Investment products provided by Merrill Lynch, Pierce, Fenner & Smith, Incorporated: The views and opinions expressed in this presentation are not necessarily those of Bank of America Corporation; Merrill Lynch, Pierce, Fenner & Smith Incorporated; or any affiliates. Nothing discussed or suggested in these materials should be construed as permission to supersede or circumvent any Bank of America, Merrill Lynch, Pierce, Fenner & Smith Incorporated policies, procedures, rules, and guidelines. Merrill Lynch, Pierce, Fenner & Smith Incorporated is not a tax or legal advisors. Clients should consult a personal tax or legal advisor prior to making any tax or legal related investment decisions. Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value
PUTTING MARKETS IN PERSPECTIVE | 2Q14 Introduction PIMCOs process Cyclical insights Economy Global U.S. Europe Emerging markets Financial markets Emerging market debt Credit Income Municipals Pg 3
PUTTING MARKETS IN PERSPECTIVE | 2Q14 PIMCOs Cyclical Forums take place three times a year and distill extensive analysis into the market views highlighted in this presentation. PIMCOs Cyclical Forums: Reading the road Long-term secular inputs and analysis to set guardrails, and short-term cyclical inputs to help set near- term strategy Forums Develop and implement portfolio strategies, combining top-down and bottom- up analysis to actively manage portfolios Portfolio Managers Investment Committee Distills insights from across PIMCO into specific investment themes BOTTOM UP TOP DOWN Portfolios managed within mandated parameters and consistent with the firms views Pg 4
PUTTING MARKETS IN PERSPECTIVE | 2Q14 Saumil H. Parikh Managing Director Cyclical Forum Leader The global economy will likely experience steady broad-based growth in The key question now is whether this period of tranquility can last for more than just one year. Pg 5
PUTTING MARKETS IN PERSPECTIVE | 2Q14 Global economy We expect global growth of 2.5%– 3.0%, driven largely by modest increases in our expectations for the U.S. and the eurozone. ECONOMY Pg 6
PUTTING MARKETS IN PERSPECTIVE | 2Q14 PIMCO forecasts steady global growth... ECONOMY Pg 7 Source: Bloomberg, PIMCO. Current data for real GDP represents four quarters ending Q World is a weighted average sum of countries listed in the chart.
PUTTING MARKETS IN PERSPECTIVE | 2Q14 … although monetary policy expectations are diverging ECONOMY Pg 8 Source: Bloomberg
PUTTING MARKETS IN PERSPECTIVE | 2Q14 U.S. economy Our expectation of 2.5%–3.0% real growth in the U.S. recognizes the continuing transition from policy-assisted to demand-driven growth. ECONOMY Pg 9
PUTTING MARKETS IN PERSPECTIVE | 2Q14 The Fed has backed away from its unemployment threshold … ECONOMY Pg 10 Source: Bureau of Economic Analysis, Haver. Data through 31 January *Year-over-year percentage change in the core personal consumption expenditure deflator.
PUTTING MARKETS IN PERSPECTIVE | 2Q14 … although trends in short-term unemployment suggest wage pressures may be rising ECONOMY Pg 11 Source: Bureau of Labor Statistics. Data through 31 January Long-term unemployment refers to a subset of the U.S. Bureau of Labor Statistics U3, defined as people who have been unemployed for more than 26 weeks but who actively looked for work within the past four weeks. Short-term unemployment is also a subset of U3 for people who have only been unemployed for less than 26 weeks.
PUTTING MARKETS IN PERSPECTIVE | 2Q14 European economy We are forecasting real growth of 1.0%–1.5% for the eurozone, reflecting improved conditions in peripherals and greater access to capital markets. ECONOMY Pg 12
PUTTING MARKETS IN PERSPECTIVE | 2Q14 The eurozone has recovered from its double-dip recession … ECONOMY Pg 13 Source: Markit, ISM, PIMCO. PMI is Purchasing Managers Index, data through February ISM is the Institute of Supply Management Index, data through January 2014.
PUTTING MARKETS IN PERSPECTIVE | 2Q14 … and improving growth extends beyond Germany ECONOMY Pg 14 Source: Eurostat. Data through December 2013.
PUTTING MARKETS IN PERSPECTIVE | 2Q14 Emerging markets Emerging markets growth advantage will continue, with GDP (ex. China) increasing about 3% in But, a slowing China poses risks to the EM outlook. ECONOMY Pg 15
PUTTING MARKETS IN PERSPECTIVE | 2Q14 EM depends on China as a buyer … ECONOMY Pg 16 Source: International Monetary Fund (IMF), 2012 data as reported during 2013.
PUTTING MARKETS IN PERSPECTIVE | 2Q14 … and is vulnerable to a potential China slowdown ECONOMY Pg 17 Source: China National Bureau of Statistics, HSBC/Markit. IP data through December 2013, HSBC PMI data through February 2014.
PUTTING MARKETS IN PERSPECTIVE | 2Q14 Key topics PIMCOs outlook Implications Global Steady, though multi-speed, growth of 2.5%–3.0% Invest globally to take advantage of opportunities presented by differentiation in growth rates and policy responses U.S. Real growth of 2.5%–3.0% as economy transitions to demand-driven growth Fixed income investors may want to reduce duration in favor of credit risk. Equity investors may want to favor cyclicals with strong fundamentals. European 1.0%–1.5% real growth reflecting improved conditions in peripherals Overweight select periphery sovereign debt and underweight U.K., focus on select multinational stocks with exposure to growth markets. Emerging markets Growth advantage will continue but slowing China poses risks Recognize the uncertainties but know that the fundamental case for emerging market investing remains intact Economy ECONOMY Pg 18
PUTTING MARKETS IN PERSPECTIVE | 2Q14 We continue to find selective opportunities in emerging market countries with sound fundamentals. Emerging market debt FINANCIAL MARKETS Pg 19
PUTTING MARKETS IN PERSPECTIVE | 2Q14 Pg 20 FINANCIAL MARKETS Flows into EM have sharply reversed … Source: J.P. Morgan. Data through February J.P. Morgan Emerging Markets Bond Index Global. J.P. Morgan Government Bond Index- Emerging Markets
PUTTING MARKETS IN PERSPECTIVE | 2Q14 … but country analysis shows select opportunities remain Pg 21 FINANCIAL MARKETS Source: J.P. Morgan. Data through 10 February 2014.
PUTTING MARKETS IN PERSPECTIVE | 2Q14 Credit Improving fundamentals have led to tighter credit spreads but we continue to see opportunities for return. Pg 22 FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 2Q14 The stock market has delivered strong returns... Pg 23 FINANCIAL MARKETS Source: Bloomberg. Data through 31 March 2014.
PUTTING MARKETS IN PERSPECTIVE | 2Q14... influencing enterprise value and credit spreads Pg 24 FINANCIAL MARKETS Source: Capital IQ, Markit. Data through 12 December 2013.
PUTTING MARKETS IN PERSPECTIVE | 2Q14 We continue to find attractive risk-adjusted opportunities for income in non- agency MBS and discounted assets sold by deleveraging European banks. Income Pg 25 FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 2Q14 U.S. non-agency MBS market continues to provide an attractive source of income Pg 26 FINANCIAL MARKETS Source: PIMCO. Data through 31 December Hypothetical example for illustrative purposes only. Non-agency MBS loss- adjusted yields are based on pricing from PIMCOs survey on the market. Loss-adjusted yields represent the yield earned after expected losses on a specific mortgage bond, across a variety of scenarios. PIMCOs loss-adjusted yield calculation currently factors in the default risk level. The two-year home price appreciation axis illustrates the different home price depreciation and appreciation levels (e.g., -10% represents 10 percent depreciation).
PUTTING MARKETS IN PERSPECTIVE | 2Q14 New opportunities may come from European bank deleveraging Pg 27 FINANCIAL MARKETS Source: PIMCO, BIS, Morgan Stanley, CEIC, SNL Financial, FDIC. Data through 30 September 2013.
PUTTING MARKETS IN PERSPECTIVE | 2Q14 Supply pressures and headline risk will feed market volatility, creating buying opportunities for research-based managers. Municipals Pg 28 FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 2Q14 Primary market supply is low … Pg 29 FINANCIAL MARKETS Source: Bond Buyer, data through 19 March 2014.
PUTTING MARKETS IN PERSPECTIVE | 2Q14 … and changes in secondary supply conditions are increasing market volatility Pg 30 FINANCIAL MARKETS Source: Lipper for flows, Thomson Reuters Municipal Market Data for yields. Data through 19 March 2014.
PUTTING MARKETS IN PERSPECTIVE | 2Q14 Key topics PIMCOs outlook Implications Emerging market debt Continue to find selective opportunities in emerging market countries Favor countries with strong fundamentals and limited susceptibilities to investment flows Credit Improving fundamentals have led to tighter credit spreads but we continue to find opportunities Focus on credits with improving fundamentals Income Continue to find opportunities in non-agency MBS and high quality, discounted assets from European bank deleveraging Favor active managers with the size and expertise to access opportunities Municipals Supply pressures and headline risk will feed volatility, creating buying opportunities Take a long-term perspective and focus on independent credit research Financial markets Pg 31 FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 2Q14 Any questions? Pg 32
PUTTING MARKETS IN PERSPECTIVE | 2Q14 Past performance is not a guarantee or a reliable indicator of future results. FORECAST Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve. HYPOTHETICAL EXAMPLE Hypothetical and simulated examples have many inherent limitations and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated results and the actual results. There are numerous factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results. No guarantee is being made that the stated results will be achieved. INVESTMENT STRATEGY There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. OUTLOOK Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice. RISK Investing in the bond market is subject to certain risks, including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed. Bank loans are often less liquid than other types of debt instruments. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations and economic and political risks, which may be enhanced in emerging markets. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the markets perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations. Investing in securities of smaller companies tends to be more volatile and less liquid than securities of larger companies. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Certain U.S. government securities are backed by the full faith of the government. Obligations of U.S. government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. Investing in distressed companies (both debt and equity) is speculative and may be subject to greater levels of credit, issuer and liquidity risks, and the repayment of default obligations contains significant uncertainties; such companies may be engaged in restructurings or bankruptcy proceedings. Entering into short sales includes the potential for loss of more money than the actual cost of the investment, and the risk that the third party to the short sale may fail to honor its contract terms, causing a loss to the portfolio. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Diversification does not ensure against loss. Pg 33 Appendix