putting markets in perspective | 2q14. bank of america corporation (bank of america) is a financial...
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PUTTING MARKETS IN PERSPECTIVE | 2Q14
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 PIMCO’s process Cyclical insights
EconomyGlobal U.S. Europe Emerging markets
Financial markets Emerging market debt Credit Income Municipals
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PUTTING MARKETS IN PERSPECTIVE | 2Q14
PIMCO’s Cyclical Forums take place three times a year and distill extensive analysis into the market views highlighted in this presentation.
PIMCO’s 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 firm’s views
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PUTTING MARKETS IN PERSPECTIVE | 2Q14
— Saumil H. Parikh
Managing Director
Cyclical Forum Leader
“The global economy will likely experience steady broad-based growth in 2014. The key question now is whether this period of tranquility can last for more than just one year.”
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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 Q3 2013. 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 2014. *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 2014. 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 2014. 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 2014. 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 PIMCO’s 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 20FINANCIAL MARKETS
Flows into EM have sharply reversed …
Source: J.P. Morgan. Data through February 2014. 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 21FINANCIAL 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 22FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 2Q14
The stock market has delivered strong returns ...
Pg 23FINANCIAL MARKETS
Source: Bloomberg. Data through 31 March 2014.
PUTTING MARKETS IN PERSPECTIVE | 2Q14
... influencing enterprise value and credit spreads
Pg 24FINANCIAL 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 25FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 2Q14
U.S. non-agency MBS market continues to provide an attractive source of income
Pg 26FINANCIAL MARKETS
Source: PIMCO. Data through 31 December 2013. Hypothetical example for illustrative purposes only. Non-agency MBS loss-adjusted yields are based on pricing from PIMCO’s survey on the market. Loss-adjusted yields represent the yield earned after expected losses on a specific mortgage bond, across a variety of scenarios. PIMCO’s 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 27FINANCIAL 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 28FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 2Q14
Primary market supply is low …
Pg 29FINANCIAL 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 30FINANCIAL MARKETS
Source: Lipper for flows, Thomson Reuters Municipal Market Data for yields. Data through 19 March 2014.
PUTTING MARKETS IN PERSPECTIVE | 2Q14
Key topics PIMCO’s 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 31FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 2Q14
Any questions?
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PUTTING MARKETS IN PERSPECTIVE | 2Q14
Past performance is not a guarantee or a reliable indicator of future results.
FORECASTForecasts, 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 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.
INVESTMENT STRATEGYThere 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.
OUTLOOKStatements 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.
RISKInvesting 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 market’s 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.
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Appendix
PUTTING MARKETS IN PERSPECTIVE | 2Q14
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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. Forecasts, estimates and certain information contained herein are based upon proprietary research 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.
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