1. business and industrial

Capital Market Presentation
July 2011:
Giving money away
Hans-Jörg Naumer, Dennis Nacken,
Stefan Scheurer
Not for circulation to
private investors
Giving money away
Nominal and real return of government bonds in Europe, USA and Japan (5-year maturity).
5-year
German Bundesanleihe
5-year
US-treasuries
5-jährige
Japanese government note
2,50%
2,00%
1,50%
1,00%
2,16%
1,55%
0,50%
0,12%
0,42%
0,00%
-0,50%
-0,54%
-1,00%
-2,02%
-1,50%
-2,00%
-2,50%
Nominal return
Source: Datastream; Allianz Global Investors Capital Market Analysis
Real return
2
Fear of escalation of European debt crisis
Risk premia of 10y European government bonds vs. German government bonds (-2 years)
2 8 /0 6 /1 1
1 6
1 6
1 4
1 4
1 2
1 2
1 0
1 0
8
8
6
6
4
4
2
2
0
0
J
A
S
O
N
D
S p re a d I t a l y - G e rm a n y
S p re a d S p a i n - G e rm a n
S p re a d G re e c e - G e rm a
J
F
(1 0 y )
y
n y
Source: Datastream; Allianz Global Investors Capital Market Analysis
M
A
M
J
J
A
S
S p re a d
S p re a d
S p re a d
O
N
D
J
P o rt u g a l - G e r
Ire l a n d - G e rm
B e l g i u m
- G e r
F
m a
a n
m a
M
n y
y
n y
A
M
J
3
Debt reduction in Europe: „Nothing‘s impossible!“
Europe: Successful debt reduction in the past 30 years (Debt/GDP ratio)
160,0
140,0
134,2
120,0
100,0
84,0
80,1
76,1
80,0
72,1
66,8
60,0
52,4
50,5
36,2
40,0
38,0
33,3
26,8
20,0
0,0
Belgium
Denmark
Netherlands
Spain
Sweden
UK
1994-2007
1994-2007
1996-2002
1997-2007
1996-2008
1985-1990
before debt reduction
after debt reduction
Source:: ECB, "Major Public Debt Reductions. Lessons From The Past, Lessons For The Future", Working Paper 09/2010, Allianz GI Capital Market Analysis
4
Central banks: Lender of last resort?
Treasury holdings of the FED and major foreign creditors (in USD billions)
1800
Purchases since August 2010
1600
1400
1200
1000
800
600
400
200
y
m
an
G
er
ur
g
m
bo
xe
Lu
C
an
a
da
nd
er
la
g
on
g
H
Sw
itz
Ko
n
ia
us
s
R
an
iw
Ba
n
ia
ar
ib
C
Ta
nk
s
il
Br
az
po
rte
Ex
gd
O
il
Ki
n
d
ni
te
U
rs
om
n
pa
Ja
C
hi
n
*
U
SFE
D
-200
a
0
Source: Federal Reserve, US Treasury Departement; Allianz Global Investors Capital Market Analysis
5
Fear of subsequent recession
Sentiment indicators point to a cooling but still suggest expanding economic growth.
2 8 / 6 /1 1
1 4 0
1 4 0
1 3 0
1 3 0
1 2 0
1 2 0
1 1 0
1 1 0
1 0 0
1 0 0
9 0
9 0
8 0
8 0
7 0
7 0
6 0
6 0
5 0
5 0
4 0
4 0
3 0
3 0
2 0 0 2
ifo
ifo
ifo
W
W
W
o r ld
o r ld
o r ld
2 0 0 3
E c o n o m
E c o n o m
E c o n o m
2 0 0 4
ic
ic
ic
S u r v
S u r v
S u r v
Source: Datastream; Allianz Global Investors Capital Market Analysis
2 0 0 5
e y :
e y :
e y :
2 0 0 6
2 0 0 7
2 0 0 8
B u s in e s s C lim a te
C u r r e n t A s s e s s m e n t
B u s in e s s E x p e c ta tio n s
2 0 0 9
2 0 1 0
2 0 1 1
S o u rc e : T h o m s o n D a t a s t r e a m
6
Germany is becoming the economic driving force
Global economic engine is firing on (almost) all cylinders.
15
13,3
9,6
10
6,3
5,2
4,7
5
3,7
3,4
2,6
-0,1
0
-1,1
-1,2
-5
-10
-12,3
n
Ja
pa
ai
n
Sp
K
U
il
Br
az
ce
Fr
an
SA
*
U
ly
Ita
ia
us
s
R
ro
z
on
e
ia
Eu
In
d
y
m
an
G
er
C
hi
n
a*
-15
Industrial production April 2011 vs. previous year (in % )
* May 2011
Source: Datastream; Allianz Global Investors Capital Market Analysis
7
The turnaround in monetary policy has taken place.
Central banks will continue to tighten monetary policy, especially in the emerging markets.
2 8 /6 /1 1
1 6
1 6
1 4
1 4
1 2
1 2
1 0
1 0
8
8
6
6
4
4
2
2
0
2 0 0 6
2 0 0 7
E C B
S h o rt T e rm
R e p o R a te
F e d F u n d s T a rg e t R a te
J a p a n T a rg e t R a te
Source: Datastream; Allianz Global Investors Capital Market Analysis
0
2 0 0 8
2 0 0 9
2 0 1 0
C h i n a T a rg e t R a te
B ra z i l T a rg e t R a t e
S o u rc e : T h o m
2 0 1 1
s o n
D a ta s t re a m
8
When will the capital markets react?
Yields of German, Japanese and US 10-year government bonds (30 years and 1 year)
28/6/11
28/6/11
14
14
4.00
4.00
12
12
3.50
3.50
10
10
3.00
3.00
8
8
2.50
2.50
6
6
2.00
2.00
4
4
1.50
1.50
2
2
1.00
1.00
0
0.50
0
81 83 85 87 89 91 93 95
Yield 10y German government bond
Yield 10y US government bond
Yield 10y Japanese government bond
97
99
01
03
05
07
09
Source: T homson Datastream
Source: Datastream; Allianz Global Investors Capital Market Analysis
J
A
S
O
N
D
Yield 10y German government bond
Yield 10y US government bond
Yield 10y Japanese government bond
0.50
J
F
M
A
M
J
Source: T homson Datastream
9
Investment theme: Flexible bond strategies
The longer the maturity, the deeper the fall.
If the rates go up, prices come down
bond
price
interest
rates
Price movements of bonds when interest rates rise by x basis points (theoretical)
Duration2
-3
-2
-1
1,47
0,99
0,50
2,90
1,96
5,70
3,85
Interest
rates
Duration2
Interest
rate rise1
+1
+2
+3
+4
+5
+6
+7
+8
+50Bp
-0,50
-0,99
-1,47
-1,93
-2,36
-2,77
-3,16
-3,53
0,99
+100Bp
-0,99
-1,96
-2,90
-3,81
-4,65
-5,45
-6,21
-6,92
1,96
+200Bp
-1,96
-3,85
-5,70
-7,44
-9,03
-10,54
-11,96
-13,27
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.
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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.
2 8 / 6 /1 1
0 .3 0
0 .3 0
0 .2 5
0 .2 5
0 .2 0
0 .2 0
0 .1 5
0 .1 5
0 .1 0
0 .1 0
0 .0 5
0 .0 5
0
0
- 0 .0 5
- 0 .0 5
- 0 .1 0
- 0 .1 0
- 0 .1 5
- 0 .1 5
8 9
9 0
S h a r p e
9 1
R a tio
9 2
9 3
9 4
9 5
U S -S to c k s
9 6
9 7
((S to c k
9 8
9 9
r e tu r n
0 0
0 1
0 2
- 1 0 y . U S
0 3
0 4
0 5
0 6
0 7
0 8
0 9
1 0
Tr e a s u r ie s )/V IX )
S o u rc e : T h o m s o n D a t a s t r e a m
Source: Datastream; Allianz Global Investors Capital Market Analysis
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Decisive Insights:
 Bond investors seem to be paying a high price for the flight to “safe havens”. Real returns on 5year 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.
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