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The Outlook for the U.S. Economy and Its Financial Markets, and Investment Strategy

Tony Crescenzi

November 2013

Agenda

Today’s two main topics and overriding themes:

1) Rising rates 2) “Stable disequilibrium”

Focusing on these themes, we will discuss:

The outlook for interest rates, the U.S. economy, and monetary policy Overview of Japan, Europe, and China and implications for the financial

markets Investment strategy

The Interest Rate Outlook

September 18th FOMC Meeting Outcome Demonstrates Fed’s Patience on Policy Reversal

At the last FOMC meeting, the Fed persuasively demonstrated its patience toward normalizing its accommodative stance on monetary policy by:

1. Delaying tapering2. Strengthening its forward guidance3. Projecting a 2% federal funds rate at the end of 2016

VariableCentral tendency

for the end of 2016

Longer run

Unemployment 5.4 to 5.9 5.2 to 5.8

Personal consumption expenditures inflation 1.7 to 2.0 2.0Federal funds rate1 2.0 4.0

It’s a New Normalization – For Fed Policy

The Fed’s projection for a 2% policy rate at the end of 2016 contrasts sharply with past rate hike cycles

Multiple Fed Rate Hikes are Priced In

Interest Rate Outlook

4.0% Ceiling based on 0% fed funds rate

-1.0% Impact of Fed purchasing programs and forward guidance

-0.8% Impact of potentially diminished GDP growth related to: • Demographic influences• Global debt dynamics • Economic and political uncertainty throughout the world

=2.2% Fair value. Yields are likely to fluctuate in a range between 2.5% to 3.0% until a clearer picture emerges on economic growth in 2014

PIMCO’s assessment of fair value, yield range forecast, and fundamentals driving 10-year yields

Chart shows month-end spreads as of 30 June 2013. Source: Bloomberg

Treasuries tend to trade at a limited distance to the fed funds rate

The Fed’s economic thresholds remain elusive

2cs_TR_review_05 8

As of 31 July 2013Source: Haver Analytics, BEAInflation data is current as of 31 July 2013 and reflect recently released comprehensive revisions to the national income and product accounts published by the BEA every five years to more accurately portray the evolving U.S. economy given improved methodologies and newly available data.

* Year-over-year percentage change in the core personal consumption expenditure deflator

2% inflation target

6.5% Fed policy target

QE1 QE2 Operation Twist and QE3

Jun '07 Jun '08 Jun '09 Jun '10 Jun '11 Jun '12 Jun '13

Unemployment rate (LHS) Current inflation (RHS)*

6.5% 2.0%

Interest Rate Outlook – Taper Terror

The tale of the taper terror is tame, from a technical perspective, owing to a decline in issuance of both MBS and Treasuries

Pimco calculations

As of 31 December 2012Source: U.S. Census Bureau, Decennial Census

Baby Boomers began turning 65 in 2011

Numbers of Americans 65 and over

The older people get, they more they tend to favor low volatility in their investments. The working-age population will also grow more slowly and reduce the economy’s growth potential

The shrinking pool of safe assets

Pick up the Pennies

Stay cool! Bond market declines have been small and short-lived compared to stock market declines

Core bond funds historically provide:

• Capital preservation

• Steady income

• Potential capital gains

• Liquidity

Why bonds now? Hypothetical illustration demonstrates how quickly bond investors get back to even when rates rise

• The Citigroup BIG Index yield to maturity is 2.27%, well above yields of like-duration treasuries

• Reinvestment of income and proceeds at higher yields offsets initial capital loss if rates rise

• For an intermediate bond portfolio, hypothetical seven-year horizon returns generally similar in variety of interest rate scenarios

• Positive impact of reinvesting and compounding in rising rate environment may result in higher returns for long-term investors as compared with stable or falling rate scenarios, given the current low levels of interest rates

• Active management can help enhance returnsSOURCE: Citigroup Yield BookNote: The simulation assumes that for any period observed, the change in rates is spread over that period.

1 Citigroup Broad Investment Grade (BIG) Bond Index, is market capitalization weighted and includes fixed-rate Treasury, Government-sponsored, mortgage, asset-backed and investment-grade issues (BBB-or Baa3) with a maturity of one year or longer. Citigroup Broad Investment Grade (BIG) Bond Index benchmark analysis as of 30 June 2013; Index composition as of 30 June 2013; Index prices, yield to maturity (2.27%) and duration (5.36 years) as of 30 June 2013. The indices and illustrations do not reflect fees that will be charged by PIMCO.

2 Assumes that with no change in interest rates, index return equals initial yields plus estimated impact of “roll-down”.Hypothetical example for illustrative purposes only. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. Hypothetical or simulated performance results have several inherent limitations. Unlike an actual performance record, simulated results do not represent actual performance and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated performance results and the actual results subsequently achieved by any particular account, product, or strategy. In addition, since trades have not actually been executed, simulated results cannot account for the impact of certain market risks such as lack of liquidity. There are numerous other 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. The simulation assumes the index portfolio is static despite interest rate movements.It is not possible to invest directly in an unmanaged index.This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2013, PIMCO.

CHANGE IN INTEREST

RATES1-YEAR 2-YEAR 3-YEAR 4-YEAR 5-YEAR 7-YEAR 10-YEAR 30-YEAR

+200 bps (5.78) (0.73) 0.97 1.80 2.27 2.77 3.08 3.36

+100 bps (1.58) 0.99 1.83 2.23 2.46 2.69 2.83 2.90

0 bps2 2.85 2.73 2.69 2.66 2.64 2.61 2.57 2.44

–100 bps 6.82 4.28 3.53 3.17 2.98 2.78 2.65 2.42

–200 bps 9.90 5.50 4.20 3.60 3.27 2.94 2.73 2.41

For use in client servicing SEPARATE ACCOUNT presentations only

2cs_pimco_outlook_11

HYPOTHETICAL ILLUSTRATION OF ANNUALIZED INDEX RETURNS OVER VARIOUS TIME HORIZONS (%)1

Beyond duration: Diversified sources of carry

Credit

Currency

VolatilityYield curve

Duration

Carry is the rate of interest earned by holding the respective securities.

“This may be the most important conceptual change I have ever written about in an Investment Outlook.”– BILL GROSS

Pick up the Pennies

Like loose change that falls from your pocket, losses in bonds tend to be small. Replace the pennies lost when rates rise by actively managing the following risk factors:

1. Duration2. Curve3. Volatility4. Credit5. Currency and foreign exposures

Illustration of “picking up the pennies” through yield curve strategy:

Step one: Purchase 5-year T-note yielding 1.55%Step two: Capture price gains from “roll down”: As the security ages, it will “roll down” the yield curve, where rates are lower, resulting in a yield decline/price gainResult: Total return of over 3% (1.55% YTM + 1.50% gain from roll down)

Bottom-line: Diversify sources of “carry” and de-emphasize duration

)EM valuations have changed

As of 3 October 2013 SOURCE: Bloomberg

IS THERE VALUE IN FIXED INCOME TODAY?

Brazil local 5-year yields

PIMCO's fixed income views today

As of 11 March 2013Treasury Inflation-Protected Securities (TIPS); commercial mortgage-backed securities (CMBS); Build America Bonds (BAB)Refer to Appendix for additional investment strategy, outlook and risk information.

3cs_asset_allocation_strat_02

U.S. TREASURIES

CURRENCY

NON-U.S. DEVELOPED MARKETS

EMERGING MARKETS

MORTGAGE-BACKED SECURITIES

INVESTMENT GRADE CREDIT

HIGH YIELD

High Allocation

Minimal Allocation

U.S. Treasuries: Underweight nominal U.S. Treasuries; seek to offset with exposure to real U.S. duration through intermediate to long-term TIPS

Municipals: Maintain existing positions while realizing that tax-exempt municipals reverted to fair value during 2012. Retain existing BABs positions as attractive supply/demand dynamics persist in this market

High Yield: Anticipate increased default risk as Eurozone growth remains weak. Move up the capital structure and seek high quality yield

Mortgage-Backed Securities: Fed buying has contributed to full pricing of Agencies. Position neutral to benchmark and continue to pursue relative value opportunities. Hold non-Agencies and CMBS for additional yield

Currency: Focus short exposure on developed market countries with central banks pursuing QE and focus long exposure on EM

Emerging Markets: Focus on strong balance sheets, positive real yields and countries with scope for further rate declines. Allocate to select emerging markets (EM) corporates and quasi-sovereigns

Curve Positioning: Favor intermediate securities where roll-down potential is most pronounced. Underweight nominal duration at long end of curve

Investment Grade Credit: Underweight the sector and acknowledge the increasing differentiation between credits in terms of default risk

MUNICIPALS

CURVE POSITIONING

Non-U.S. Developed Markets: Focus on countries with healthier balance sheets and independent monetary policy

Refer to Appendix for additional investment strategy and risk information.

Finding the sweet spot in corporate bonds

What to own today

U.S. housing

Building materials

U.S. autos

U.S. energy

Asia gaming

U.S. specialty finance

China gas distribution

What to avoid today

Industries vulnerable to rising shareholder activism

Metals and mining

Pharmaceuticals

Telecommunications

Utilities

Longer maturity bonds

Pick up the PenniesAlternative approaches to portfolio construction

To fight rising rates and capitalize on the best opportunities, consider absolute return strategies that choose investments on the merits rather than because they are tied to a benchmark index

Emphasize:

• An unconstrained approach that provides latitude for a portfolio manager to choose the most attractive investment opportunities

• Investments having fewer ties to traditional stocks and bonds, including volatility strategies and long/short positions, for example

• Smarter, more dynamic benchmarks that place greater emphasis on fundamentals

• More explicit hedging strategies to combat rising correlations between assets

Latest Developments in Japan, Europe, and China

China’s growth rate is slowing from its usual 8% to 10% pace

A new model of growth is emerging and it is necessary for China to avoid the “middle-income trap”

As of 30 June 2013SOURCE: China National Bureau of StatisticsRefer to the Appendix for additional outlook information.

China’s transition from an export-oriented economy is on a grand scale

#1. President Xi named military commander-in-chief vs. outgoing President Hu.

#2. President Xi & Premier Li poised to be only members serving full 10 year term.

#3. Politburo Standing Committee reduced from 9 to 7 members.

PolitburoStandingCommittee XiXi

LiuLiuZhangZhang YuYu WangWang ZhangZhang

President Xi

As of December 2012SOURCE: Recent announcements by China

Dec‐93

Dec‐94

Dec‐95

Dec‐96

Dec‐97

Dec‐98

Dec‐99

Dec‐00

Dec‐01

Dec‐02

Dec‐03

Dec‐04

Dec‐05

Dec‐06

Dec‐07

Dec‐08

Dec‐09

Dec‐10

Dec‐11

Dec‐12

Japan Consumer Price IndexYear‐over‐year % change

Japan moving from deflation tolerance to inflation targeting

Japan joins the money-printing reflation bandwagon

As of 31 December 2012Source: Japan Ministry of Internal Affairs, Bloomberg

Europe

The ECB’s money printing has alleviated Europe’s debt problem but it can’t solve it

To create debt sustainability, Europe must address its cash flow problem by implementing structural reforms and restoring its:

Growth Competitiveness External balance

Absent actions taken to restore the above, Europe faces continuous risk from these three “R’s”:

Rating Rollover Restructuring

Refer to the Appendix for additional outlook information.

The U.S. Economic Outlook –View from the Optimists

Fiscal headwinds will diminish

August 2013

The crux of the optimists’ view: If the U.S. economy is growing at ~2% with a ~2% fiscal drag, then why wouldn’t it grow faster in 2014 with <1% fiscal drag?

Household net worth has rebounded

As of 31 March 2013SOURCE: Federal Reserve

Productivity may rebound

Diminishing drag – state and local government

Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

State and Local Employment(in thousands of workers)

Household payment obligations are at their lowest since 1981

Household Financial Obligation Ratio

As of 31 December 2012SOURCE: Federal Reserve

Housing is recovering

As of 31 December 2012SOURCE: Federal Reserve

Shadow household demand

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Co-Owners or Co-RentersAdult Offspring 30 or Over

Housing: Fundamentals favor increased demand for shelter, including from “mama’s boys”

The rate of new household formations is reverting back to pre-crisis levels of 1.0M -1.5M households per year

The crisis created an additional 800k new households with adult offspring older than 30 years old living with parents, and 1.2M new co-owner or co-renter households

As of 31 December 2011Source: Census, American Housing Survey

Myth: Banks aren’t lending

As of March 2013SOURCE: Federal Reserve

Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13

All Loans & Leases at U.S. Commercial Banks(in billions of dollars)

Time for a new car?

CREDIT CONDITIONS HAVE IMPROVEDCARS ARE OLDER

As of 30 September 2011SOURCE: R.L. Polk, Experian Automotive © Edmunds.com, Inc.

753755

762766

773774 775775 776

772769

767766762

1Q 2008 1Q 2009 1Q 2010 1Q 2011

AVERAGE CREDIT SCORES –NEW AUTO LOANS

Average Age of U.S. Passenger Cars

Quarterly bank profits Return on bank assets

Bank capital

Source: FDIC Quarterly Banking Report

Private-sector deleveraging has advanced

Headwinds to Economic Activity

Big negatives remain:

Headwinds to U.S. growth

WEALTH DESTRUCTION INCOME GROWTH

As of March 31, 2013Source: Federal Reserve and the Bureau of Labor Statistics

Credit growth remains impaired

The Do-Nothing Congress

Latest session

(2011-2012)

*Note: The 80th session of Congress was in 1947

SOURCE: Washington Post

-$15-$65

-$70-$30 -$10

2010 2011 2012 2013 2014 2015 2016

Estimated Fiscal drag (calendar years)

Expiration of payroll tax cut

Tax increases on upper earnings

Obamacare taxes

Net spending cuts¹

Fiscal drag will decrease, but declines in government spending will remain a headwind

SOURCE: Congressional Budget Office (CBO), PIMCO1 As measured by changes in discretionary spending, which include the net collective impact from the sequester, spending caps and changes in war spending; also includes

cuts to mandatory spending related to the sequester. PIMCO estimates that spending on military operations declines at a faster rate than what the CBO estimates2 Includes multiplier effects; assumes a fiscal multiplier of 0.9 for payroll tax cut, 0.4 for taxes on upper earners, and 1 for spending cuts, which are in line with Congressional

Budget Office and Moody’s estimates

-1.25%

-0.05%-0.20%

-0.45%

% of GDP2

% of D

Spending% of GDP40-year historical averageProjected discretionary spending assuming sequester remains

If sequester and spending limits remain, discretionary spending will fall to near historic lows

SOURCE: Congressional Budget Office (CBO), PIMCO

8.3%: 40-year average

Fiscal Policy: Breaking generational promises is difficult, to say the least; For the developed world, it is the transformation of a century

Source: U.S. Library of Congress

The Migrant Mother, 1936 Protestors at the Hellenic Parliament in Athens, Greece, June 2011

The Federal Reserve: Objectives, Risks, and Necessity of Current Activism

Federal Reserve

Main objectives and investment implications of the Fed’s activist policy regime, which is geared toward smoothing the deleveraging process:

Objectives:

1. Flatten the forward curve2. Reduce interest rate volatility and therefore the term premium in bonds3. Compel investors to move out the risk spectrum

Tools:

I. Zero interest ratesII. Asset purchasesIII. Communications strategies

Risks (from asset purchases):

Remittances – losing money!Market functioning – being too big a player in marketsFinancial stability – spurring excessive risk taking

The Fed: “Screaming” for investors to take risk and bid up asset prices

Munch’s “The Scream”$120 million

Babe Ruth’s 1920 road jersey$4.4 million

Source: PIMCO

Fed Outlook: Inflation outlook

Q: What do the Fed and Yucca Mountain have in common?

A: They both store toxins

Pottersville: What would the world be like if the Fed didn’t exist?

Federal Reserve

The nine woeful elements of Irving Fisher’s debt deflation theory of depressions (1933):

1. Debt liquidation leads to distressed selling, which leads to 2. Contraction of the money supply, thereby resulting in3. A fall in the level of prices, and 4. A still greater fall in the net worths of businesses, precipitating bankruptcies and 5. A fall in profits that lead to6. A reduction in output, employment, and trade, all of which lead to7. Pessimism and loss of confidence, and then8. Money hoarding 9. All of the above then result in scarcity of money and therefore an increase in real

interest rates

Appendix

Past performance is not a guarantee or a reliable indicator of future results.

RISKInflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise.

All investments are subject to risk including possible loss of principle

FORECASTS 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.

OUTLOOKStatements concerning financial market trends 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.

HYPOTHETICAL EXAMPLEHypothetical 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.

This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest for a long-term especially during periods of downturn in the market. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Alllianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2013, PIMCO.

The products and services provided by PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, Ontario, Canada M5L 1G2, 416-368-3350) may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose.

PIMCO Canada has retained PIMCO LLC (Pacific Investment Management Company LLC , 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626) as sub-adviser. PIMCO Canada will remain responsible for any loss that arises out of the failure of its sub-advisor.

Global Economics & Strategy

Allianz GIobalInvestorsInvestment and Strategy Outlook

November 2013

AGI-2013-11-01-8165

Investment Themes

2Juni 2012

Government Deleveraging Will be A Multi-Year Process

Source: IMFAs of: October 2013Past performance is no guarantee of future results. Foreign markets may be more volatile, less liquid, less transparent and subject to lessoversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets. Forecasts and estimateshave certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

Government Debt-to-GDP Ratios (Actual and Forecasted)*

The debt crisis that has enveloped the developed world was years in the making and it is historic in scale.

For many countries, it will be difficult to bring debt below 90% of GDP—a level above which economic growth is typically impaired.

Three Main Themes of the Global Economy: Financial Repression

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Japan Greece Italy United States Spain Emerging markets

*Solid lines are actual. Dotted lines are IMF forecasts

Financial Repression is Global In Scope

4Source: FactSet. Bond prices will normally decline as interest rates rise. The impact may be greater with longer-duration bonds.*Europe yields are Germany.

Central Banks Around The World Have Eased Monetary Conditions

Today, with monetary intervention driving both long and short rates to record-low levels, central banks have embarked upon unconventional monetary policy. This has been focused on resurrecting economic growth and it has helped to reduce government financing costs.

Three Main Themes of the Global Economy: Financial Repression

Monetary Easing Should Result In Higher Longer-term Inflation

5Sources: Labor Department; University of Michigan; Allianz Global Investors

US Consumer Price Index

Average inflation over the past 99 years is more than double current levels.

Given the degree of post-crisis monetary easing in the US and abroad, it is unlikely today’s inflation environment will persist longer-term.

Three Main Themes of the Global Economy: Long-run Inflation

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

1.523.303.34

Actual vs Expected Inflation

99-Year Average Consumer Expectations (next 12 months) Consumer Price Index

Economic Indicators Suggest Continued Uneven Global Growth

Global Purchasing Manager Indexes: Manufacturing and Service Sector

Monthly purchasing manager indexes (PMIs) are a fair proxy for broader economic activity.

Indicators for global manufacturing and services output remain in expansionary territory, suggesting continued economic growth.

Service Sector Total Manufacturing

Expansion

Contraction

xThree Main Themes of the Global Economy: Uneven Global Recovery

Source: Factset

Economic Outlook for the US

US Macro: Current SituationHousing is leading the recovery, with home sales 24% above December 2007 levels. GDP is more than 4% bigger than it was in December 2007. Industrial production and nonfarm payrolls have yet to return to pre-crisis levels.

Source: Datastream

Dec-07 Feb-09 Apr-10 Jun-11 Aug-12 Oct-13

100100

110110

120120

Economic Recovery: Progress Map

Existing Home SalesRetail Sales (nominal)

Consumer PricesGDP (real)

Industrial ProductionNonfarm Payrolls

US HousingThe summer QE ‘taper tantrum’ led to the one of the swiftest spikes in mortgage rates in 2 decades. Affordability and mortgage apps have come down sharply. Further monetary support may be needed.

Source: Datastream

2004 2006 2008 2010 2012

30 Year Mortgage Rate (Left) National Housing Affordability Index (Right)

1985 1990 1995 2000 2005 2010

Housing Affordability Index

Housing Affordabil ity Index

2002 2004 2006 2008 2010 2012-20

Home Prices Last: 12.82 (Aug-13)

S&P/Case-Shi l ler - 20 City Price Index

The Housing Recovery has Slowed Amid Higher Prices and Mortgage Rates

While housing has been at the forefront of the US economic recovery, higher prices and mortgage rates are weighing on affordability.

Economic Outlook by Region: USIn

Source: Factset

US Manufacturing and ServicesUS manufacturing and service sector PMIs remain in expansion territory. Manufacturing conditions are the healthiest since April 2011.

Source: Datastream

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

ISM Report on Business Launch full data release

ISM (NAPM) Purchasing Managers Index - United States ISM (NAPM) Non-Manufacturing Index - United States

Recession Periods - United States

US ManufacturingManufacturing has been stronger in the US than other countries for most of the past two years. Comparably cheap energy and labor should provide continued support.

Source: Datastream

2006 2008 2010 201260

UK Germany France Spain Japan Italy

US Manufacturing Labor Costs Have Become More Competitive

Global natural gas prices

Global manufacturing PMIs underscore US strengthWorld Japan UK Eurozone US Brazil China

Aug‐11 51.2 51.9 49.6 49.0 53.9 46.0 49.9Sep‐11 50.5 49.3 51.1 48.5 53.7 45.5 50.0Oct‐11 50.7 50.6 48.8 47.1 53.6 46.5 51.0Nov‐11 49.6 49.1 47.8 46.4 53.4 48.7 47.7Dec‐11 50.3 50.2 49.1 46.9 53.9 49.1 48.7Jan‐12 51.0 50.7 50.6 48.8 54.3 50.6 48.8Feb‐12 51.2 50.5 50.9 49.0 53.6 51.4 49.6Mar‐12 51.6 51.1 51.9 47.7 56.0 51.1 48.3Apr‐12 51.3 50.7 50.2 45.9 56.0 49.3 49.3May‐12 50.3 50.7 46.7 45.1 54.0 49.3 48.4Jun‐12 49.7 49.9 48.7 45.1 52.5 48.5 48.2Jul‐12 48.8 47.9 45.4 44.0 51.4 48.7 49.3Aug‐12 48.7 47.7 49.5 45.1 51.5 49.4 47.6Sep‐12 48.7 48.0 48.6 46.1 51.1 49.8 47.9Oct‐12 48.8 46.9 47.5 45.5 51.0 50.2 49.5Nov‐12 49.6 46.5 48.9 46.2 52.8 52.2 50.5Dec‐12 50.0 45.0 50.9 46.1 54.0 51.1 51.5Jan‐13 51.5 47.7 50.7 47.9 55.8 53.3 52.3Feb‐13 50.9 48.5 48.0 47.9 54.3 52.5 50.4Mar‐13 51.2 50.4 49.2 46.8 54.6 51.8 51.7Apr‐13 50.4 51.1 50.5 46.7 52.1 50.8 50.4May‐13 50.6 51.5 52.0 48.3 52.3 50.4 49.2Jun‐13 50.6 52.3 52.9 48.8 51.9 50.4 48.2Jul‐13 50.8 50.7 54.6 50.3 53.7 48.5 47.7Aug‐13 51.7 52.2 57.2 51.4 53.1 49.4 50.1

*Readings above 50 indicate expansion

US Labor MarketWhile the jobless rate has fallen, the decline is partly due to discouraged unemployed workers exiting the labor market. The labor participation rate is at levels last seen during the Carter Administration.

Source: Datastream

1970 1980 1990 2000 2010

Unemployment and Labor Participation

Unemployment Rate (Left) Labor Participation Rate (Right)

1980 1985 1990 1995 2000 2005 201010

Household Debt Service Ratio

Max: 14.01 (Sep-07)Min: 10.32 (Dec-12)

Last: 10.49 (Mar-13)

Household Debt Service Ratio Average

1950 1960 1970 1980 1990 2000 20100

Total Household Debt (Percent of GDP)

US Household Debt

Consumers have made progress deleveraging. Total debt is at a 9-year low. The debt service ratio—the amount of income required to cover debt costs—is near a record low.

This is a huge relief for consumers, freeing up money for other purposes and offsetting some of the impact from higher payroll taxes.

Consumer Deleveraging has Freed Up Cash For Other Uses

Economic Outlook by Region: US

78% (10-year low)

Average

Source: Factset

US ConsumerPurchase plans remain standard deviations above normal

Source:Datastream

1970 1975 1980 1985 1990 1995 2000 2005 20100

3.405.907.61

US consumer durable good purchase plans are near record highs

Major appliance Average Vehicle Average Home Average

US Government ShowdownEquity investors are either complacent or don’t believe headline threats of a US default are real/material. The next round of policy hurdles hits next year: on January 15 (federal government funding) and around February 7 (debt ceiling).

Source: Datastream

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-130

Debt limit debate results in S&P downgrade for US from AAA to AA+

(August 5, 2011)

Congress passes deal to avert the 'Fiscal Cliff'

(January 1, 2013)

US Credit Risk and Stock PerformanceCorrelation: -0.78

5-Year CDS Spread (Left) S&P 500 (Right)

US Government ShowdownIf US default is a real and systemic threat, CDS rates in China, Japan and Germany should also be rising. They are not.

Source: Datastream

2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

Credit Default Swap Spreads (5-Year)

China Japan United States Germany

3.08average quarterly GDP since 4q632.67average 4Q GDP since 4Q632.15average quarterly GDP during periods impacted by a gov shut down!

US Government ShowdownGov shutdowns typically hit GDP harder than share prices. This is particularly notable in light of optimistic expectations for 4Q13 earnings and the not-fully reported damage from the summer spike in borrowing costs.

Source: Datastream

Government shutdowns tend to have a greater impact on GDP

than share prices

US Government ShowdownFiscal stress will likely continue. The Congressional Budget Office projects US budget deficits for the foreseeable future. The US debt-to-GDP ratio may remain near historic highs. Investors should prepare for a long period of financial repression.

Source: Datastream

2012 2014 2016 2018 2020 2022

Annual Budget Deficit Forecasts*

2012 2014 2016 2018 2020 2022Pe

t of G

(Net) Debt Forecasts*

*Note: Assumes full sequester comes into force

US Monetary PolicyMost Fed policymakers don’t anticipate the first increase in the fed funds target rate until 2015 (as of September 17-18 FOMC meeting)

Source: Datastream

US Monetary PolicyThe Fed’s balance sheet continues to increase to new highs as QE progresses. The Fed is now the largest single owner of US public debt. The IMF has identified QE unwinding as a global threat. When it occurs, interest rates may rise, putting bond investors at risk.

Source: Datastream

S&P 500 Earnings Update3Q13 estimates are down $0.42 since June 28. Estimates for 4Q13 are at record highs and starting to come under pressure. If share prices don’t fall in tandem, lower estimates make shares look more expensive.

Source: DataStream

Big earnings increase projected for 4Q13So far, 3Q13 earnings

have come in 1.4% above estimates. This is the

weakest since 4Q08 and largely due to legal expense charge at JPMorgan Chase.

Companies are in Better Shape from a Leverage Perspective

While the federal government has been levering up following the financial crisis, the private sector has been delevering and stockpiling cash on its balance sheets.

Source: Factset, Datastream; Allianz Global Investors Economics & Strategy as of 12/31/12

US Macro: ForecastWe expect the US to grow 2.5% in 2014. That is faster than any other developed economy except the UK. Inflation should remain tame and long Treasury rates should continue a slow climb to 3.25% by the end of 2014.

Source: Datastream

Economic Outlook for the Globe

Fears Have Eased But Risks Remain

While new flare-ups are possible, systemic threats to Europe’s currency union have eased.

A big jump in German bank holdings is reversing, as investors become more comfortable keeping assets in Spain and Italy.

Target2 Bank Balances

Source: Factset

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

Spreads: 10-year government bonds to German Bunds

Portugal Spain Italy Greece (rhs) Ireland

Europe is Out of Recession, But Not Out of the Woods

The euro zone’s longest recession ended this summer. Yet challenges remain. Unemployment regionally is at 12%. Joblessness in Spain and Greece is comparable to levels seen during the Great Depression in the US.

Austerity appears to have had a negative impact on economic growth.

Unemployment Rates

Retail Sales

Source: Factset

2004 2005 2006 2007 2008 2009 2010 2011 2012 20135

Greece Spain Italy Germany

Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13-20

Germany France Ireland Italy Spain Greece

Japan is The Frontline In Global Monetary Easing

Japan Monetary Policy

In December 2012, Prime Minister Shinzo Abe won national elections in Japan.

His pro-growth economic platform, ‘Abenomics’, has resulted in higher stock prices, a weaker yen and plans to more than double the size of the Bank of Japan’s asset purchase program (QE).

2012 Elections - Impact on Nikkei and Yen

Source: Factset

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

Prime Minister Noda announces plans for

new elections

2012 Elections - Impact on Nikkei and Yen

Nikkei 225 Index US Dollar per Yen

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12-40

Exports Retail Sales Industrial Production

China remains comparably healthy

China remains the fastest-growing large economy in the world. While exports have slowed, as of September 30, retail sales and industrial production were growing at a more than 10% annual pace.

The country’s new leadership has said it will continue pursuing pro-growth policies.

Real GDP Growth/Contraction

Economic Indicators

Source: Factset

2000 2002 2004 2006 2008 2010 2012

China India United States Japan Germany Brazil United Kingdom

Portfolio Positioning

Score overview: Our portfolio positioning

Source: Allianz GI, portfolio positioning can change on a regular basis. We assume no obligation to update any forward-looking statement. 31

User guide:

Score can be positive (right from the red neutral line, max. +4) or negative (left, max. -4).

Scores for trend, economics and valuation are determined across asset classes as a starting point for determination of single asset class scores.

Single asset class scores should be interpreted as an assessment of the absolute attractiveness of an asset class compared to its historic risk/return profile.

The portfolio score (right column) is the result of an optimization process and should be interpreted as active weights which sum up to zero across a multi asset portfolio.

Yellow shades. Direction of most recent changes.

We stick to overweight positions in developed equities and high yield bonds.

As of October 4, 2013

Important InformationInvesting involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Stocks can be volatile and, unlike bonds, do not offer a fixed rate of return. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. High‐yield or “junk” bonds have lower credit ratings and involve a greater risk to principal. Convertible securities involve the added risk that securities must be converted before it is optimal. This is a marketing communication. It is for informational purposes only. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

Allianz Global Investors is the marketing name of our global asset management business, which operates through affiliated entities worldwide. Allianz Global Investors affiliated entities include: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Europe GmbH, an investment company in Germany, authorizedby the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); RCM (UK) Ltd., which is authorized and regulated by the Financial Services Authority in the UK; Allianz Global Investors Hong Kong Ltd. and RCM Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by the Financial Supervisory Commission in Taiwan

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