capital market presentation july 2011: giving money away hans-jörg naumer, dennis nacken, stefan...
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Capital Market Presentation July 2011:
Giving money away
Hans-Jörg 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-jährige 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
28/06/11JASONDJFMAMJJASONDJFMAMJ0246810121416Spread Italy - Germany (10y)Spread Spain - GermanySpread Greece - GermanySpread Portugal - GermanySpread Ireland - GermanySpread Belgium - Germany0246810121416
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Europe: Successful debt reduction in the past 30 years (Debt/GDP ratio)
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Debt reduction in Europe: „Nothing‘s 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
Japa
n
United
Kin
gdom
Oil Exp
orte
rs
Brazil
Caribi
an B
anks
Taiwan
Russia
Hong
Kong
Switzer
land
Canad
a
Luxe
mbo
urg
Germ
any
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
28/6/11200220032004200520062007200820092010201130405060708090100110120130140ifo World Economic Survey: Business Climateifo World Economic Survey: Current Assessmentifo World Economic Survey: Business Expectations30405060708090100110120130140Source: 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 3,4 2,6
-0,1
-1,1 -1,2
-12,3-15
-10
-5
0
5
10
15
China*
Germ
any
Indi
a
Euroz
one
Russia Ita
ly
USA*
Franc
eBra
zil UKSpa
in
Japa
n
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
28/6/112006200720082009201020110246810121416ECB Short Term Repo RateFed Funds Target RateJapan Target RateChina Target RateBrazil Target Rate0246810121416Source: Thomson Datastream
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When will the capital markets react?
28/6/1181838587899193959799010305070902468101214Yield 10y German government bondYield 10y US government bondYield 10y Japanese government bond02468101214Source: Thomson Datastream Yields of German, Japanese and US 10-year government bonds (30 years and 1 year)
Source: Datastream; Allianz Global Investors Capital Market Analysis
28/6/11JASONDJFMAMJ0.501.001.502.002.503.003.504.00Yield 10y German government bondYield 10y US government bondYield 10y Japanese government bond0.501.001.502.002.503.003.504.00Source: Thomson Datastream
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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
bondprices
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
28/6/1189909192939495969798990001020304050607080910-0.15-0.10-0.0500.050.100.150.200.250.30Sharpe Ratio US-Stocks ((Stock return - 10y. US Treasuries)/VIX)-0.15-0.10-0.0500.050.100.150.200.250.30Source: 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 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.
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www.allianzglobalinvestors.de/capitalmarketanalysis
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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-60329 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).
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