1. Capital Market Presentation July 2011: Giving money away
Hans-Jörg Naumer, Dennis Nacken, Stefan Scheurer
Not for circulation to
private investors

2. Giving money away
Nominal and real return of government bonds in Europe, USA and Japan (5-year maturity).
5-year
5-year
5-jährige
German Bundesanleihe
US-treasuries
Japanese government note
2,50%
2,00%
1,50%
1,00%
2,16%
1,55%
0,50%
0,42%
0,12%
0,00%
-0,54%
-2,02%
Real return
-0,50%
-1,00%
Giving Money Away
The markets are going through a paradoxical phase at the moment. While some countries, such as Greece, are desperately seeking funds, others seem to be giving away their money. This is the only way to explain the current low interest rates on 5-year German and US bonds, because bond investors are actually incurring losses (after accounting for inflation).
But why would they do that?
-1,50%
-2,00%
-2,50%
Nominal return
Source: Datastream; Allianz Global Investors Capital Market Analysis

3. Fear of escalation of European debt crisis
Risk premia of 10y European government bonds vs. German government bonds (-2 years)
There does not seem to be a rational reason behind this behaviour. Investors are apparently doing it out of fear: fear that the debt crisis in Europe will worsen and worries that the global economy will slip back into recession.
At the same time, the capital markets seem to have already discounted the fear factor. In the bond segment, Greece's high risk premiums (about 14% compared to German bonds) reflect a haircut of about 67%. This seems excessive, as it would make Greece’s debt level fall below the European average.
Source: Datastream; Allianz Global Investors Capital Market Analysis

4. Debt reduction in Europe: „Nothing‘s impossible!“
Europe: Successful debt reduction in the past 30 years (Debt/GDP ratio)
Dass wir kein Szenario wie 1929 erleben
Die 20 führenden Industrie- und Schwellenländer (G20) wollen ihre nationalen Konjunkturmaßnahmen bis zu einer nachhaltigen Erholung der Weltwirtschaft fortzusetzen. Die Finanzminister und Notenbankchefs einigten sich bei ihrem Treffen in London auch darauf, Banken zu verpflichten, ihre Eigenkapitalausstattung zu erhöhen, um Risiken besser vorzubeugen.
Trend der letzten 20 Jahre
Globales Wachstum angeführt von Industrienationen; USA als Wachstumsmotor
Globale Disinflation
Deregulierung und Erhöhung des Leverage im Finanzsektor
Verschuldung der Privathaushalte
Anhaltende langfristige Verlagerung
Schwellenländer übernehmen Rolle als Wachstumsmotor
Längerfristiger Inflationsdruck dürfte zunehmen
(sich beschleunigender) Entschuldungsprozess, schnell gefolgt von stärkerer Regulierung
Ebenfalls Entschuldungsprozess, der sich beschleunigen dürfte
-> Große Veränderungen führen zu politischen Reaktionen und Marktvolatilität
Ü: Was macht mich und uns so zuversichtlich, dass wir uns auch dieses Mal völlig “überraschend“ erholen werden bzw. welche Anzeichen sehen wir schon, bzw. welche Fakten stärken unsere Erwartungen? 4
Source:: ECB, "Major Public Debt Reductions. Lessons From The Past, Lessons For The Future", Working Paper 09/2010, Allianz GI Capital Market Analysis 4

5. Central banks: Lender of last resort?
Treasury holdings of the FED and major foreign creditors (in USD billions)
While the developments in Greece are a cause for concern, and policies are anything but coordinated, the basic economic trend has every appearance of continuing to be positive.
Source: Federal Reserve, US Treasury Departement; Allianz Global Investors Capital Market Analysis

6. Fear of subsequent recession
Sentiment indicators point to a cooling but still suggest expanding economic growth.
It is true that the global Purchasing Managers Indices have weakened recently, but they remain in the expansion zone in almost every country.
Source: Datastream; Allianz Global Investors Capital Market Analysis

7. Germany is becoming the economic driving force
Global economic engine is firing on (almost) all cylinders.
Germany, in particular, could prove to be the driving force in Europe, carrying the economies of the peripheral countries along with it. The recent increases in key interest rates in China and India are another expression of the economic power of the emerging countries.
* May 2011
Source: Datastream; Allianz Global Investors Capital Market Analysis

8. The turnaround in monetary policy has taken place.
Central banks will continue to tighten monetary policy, especially in the emerging markets.
But the attractive valuations of equities compared to bonds, the increase in global M&A 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.
Source: Datastream; Allianz Global Investors Capital Market Analysis

9. When will the capital markets react?
Yields of German, Japanese and US 10-year government bonds (30 years and 1 year)
Euro Bonds -
The fiscal crisis in the Eurozone has worsened again in the wake of the debate about private investor participation in a second rescue package for Greece.
Although yields on German government bonds have recently been driven further down by increased risk aversion, negative factors for the market will be the dominant theme over the medium term: continued strong economic figures from the Eurozone (especially Germany), rising inflation expectations and a more restrictive ECB, which will presumably make its next interest-rate adjustment in July.
In addition to shortening duration, it seems advisable to make use of flexible bond strategies that could profit from rising interest rates.
Source: Datastream; Allianz Global Investors Capital Market Analysis

10. Investment theme: Flexible bond strategies
The longer the maturity, the deeper the fall. If the rates go up, prices come down
interest rates
bond price
Price movements of bonds when interest rates rise by x basis points (theoretical)
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
+100Bp
-1,96
-2,90
-3,81
-4,65
-5,45
-6,21
-6,92
5,70
3,85
+200Bp
-3,85
-5,70
-7,44
-9,03
-10,54
-11,96
-13,27
Duration2
Duration2
Investment Theme: Flexible Bond Strategies
The generally robust economic picture, a tense inflation environment, the ending of quantitative easing (QE2), the continued historically low level of real interest rates and growing doubts about the efforts to achieve fiscal consolidation (especially in the US) all indicate that interest rates on the bond market will turn around in the near future.
Rising inflation at a time of low real interest rates should lead to rising nominal interest rates, exposing the bond segment to price risks.
In this environment, it pays to pursue flexible bond investment strategies that also benefit from rising interest rates and bond yields, with an added potential for risk premiums in the spread segments.
Interest rates
bond prices
It is possible to gain from a rise in interest rates: short duration
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.

11. Valuations are still in favour for equities
Sharpe Ratio (excess return in relation to risk) has never been so high since 1989 for US-stocks.
And on the equity markets, the price/earnings ratio of less than 10 for European equities also reflects a great deal of scepticism. This level is a good 30% lower than the multi-year average.
While uncertainty is poisonous for the markets, it can offer opportunities for bold investors. For example, insiders, like corporate board members, are already buying up large quantities of shares in their own companies. This means it could very well pay off to purchase shares during a weak phase
Source: Datastream; Allianz Global Investors Capital Market Analysis

12. Decisive Insights:
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 Europe’s 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.
Equities should strategically remain overweight compared to bonds.

14. Disclaimer
This presentation has been issued and approved by Allianz Global Investors Europe GmbH, a subsidiary of Allianz Global Investors AG (part of the Allianz Group). Allianz Global Investors Europe GmbH is a limited liability company incorporated under the laws of the Federal Republic of Germany with its registered office at Mainzer Landstrasse 11-13, D Frankfurt/Main. Allianz Global Investors Europe GmbH is licensed in the Federal Republic of Germany as a provider of financial services (Finanzdienstleistungsinstitut); for the conduct of its business activities, Allianz Global Investors Europe GmbH is subject to the supervision of the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin).
Allianz Global Investors GmbH has established branches in Switzerland (Zürich), Italy (Milan), United Kingdom (London), Spain (Madrid) and the Netherlands (Utrecht). Allianz Global Investors GmbH also has established representative offices in the Kingdom of Bahrain (Bahrain), Portugal (Lisbon) and Sweden (Stockholm). For these branches and representative offices additional local laws and regulation may be applicable.
This document is meant to provide a broad overview for discussion and/or information purposes. Furthermore, this document was not prepared with the intention of providing legal or tax advice. The views and opinions expressed in this document, which are subject to change, are those of Allianz Global Investors Europe GmbH and its affiliated companies at the time of publication. The duplication, publication, or transmission of the contents of this document to unauthorised persons, irrespective of the form, is not permitted.
While some of the data provided herein is derived from various published and unpublished sources, and is assumed to be correct and reliable, it has not been independently verified. Therefore, Allianz Global Investors Europe GmbH does not guarantee the accuracy or completeness of all data/information and will not accept any liability for any direct or consequential losses arising from its use.
The investment opportunities described herein are not guaranteed by Allianz Global Investors Europe GmbH or affiliated companies within the Allianz Group. This document does not constitute an offer or solicitation to buy securities. Statements made to recipients of this document are subject to the provisions of any underlying offer or contract that may have been, or will be, made or concluded. As with all investment products, no guarantee can be given that past performance will be repeated in the future; consequently, there is no assurance that a portfolio will match the returns shown in this document.
This documentation must be seen as confidential.
This document is marketing material according to Art. 19 European Directive 2004/39/EC (MiFiD) and § 31 section 2 German Securities Trading Act (Wertpapierhandelsgesetz).
Internet: