Transcript Client or prospect name

PIMCO Outlook and Investment Ideas
Kevin Curtiss
May 2016
Disclosures
This material is to be used for one-on-one separate account presentations to institutional investors and not for any other purpose.
Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 949.720.6000
CMR2016-0415-180442
pg 1
Cyclical outlook:
Calmer C’s ahead? China, Commodities, and
Central banks
pg 2
The 3 Cs weighed on markets in early 2016
Going negative not a positive
Tail wags dog?
Q1
1st Half* 10yr avg 2nd Half*
Full
-1.2%
-1.9 s
1.9%
0.6%
B.
Crude oil (Brent)
-19.4%
-1.7 s
31.7%
6.2%
C.
U.S. 10yr Treasury
-61
-1.9 s
11
-50
D.
U.S. 10yr Breakeven rate (TIPS)
-37
-1.5 s
42
5
E.
U.S. High Yield spreads
179
1.5 s
-183
-4
F.
MSCI World equities
-11.7%
-2.0 s
12.2%
-0.9%
D
E
A,C
F
-4
-3
-2
-1
0
1
Standard deviations from mean
2
3
128
310
BoJ policy
announcement
(29 Jan'16)
125
290
122
270
119
250
116
230
113
210
110
Sep '15
Oct '15
Nov '15
Dec '15
Jan '16
Feb '16
190
Mar '16
Uncertainty around China, oil prices, and central bank effectiveness accelerated risk aversion
early in the year
*
As of 31 March 2016.
Q1-1st Half: 31Dec’15 to 11Feb’16. Q1-2nd Half: 12Feb’16 to 31Mar’16.
SOURCE: Bloomberg, PIMCO
Refer to Appendix for additional outlook and risk information.
4cs_intl_review_01
pg 3
Spread (bps)
CNY Spot
wider
A.
B
USDJPY Curncy
US IG Financial OAS (sub debt)
Q1
depreciation
Asset
Relative to
USD JPY
Q1
…but a better tone in fundamentals and dovish central banks helped
drive a dramatic turn in sentiment
Coordinated easing?
Striking a better tone
When less is more
Forecast: end 2016
10
Cumulative # hikes (median forecast)
PIMCO Economic Surprise Index
1.0
0.5
0.0
-0.5
-1.0
When more is more
Forecast: end 2017
70
6
6
4
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar
'14 '14 '14 '14 '14 '14 '15 '15 '15 '15 '15 '15 '16 '16
80
60
60
50
40
30
2
2
20
10
0
0
-1.5
Monthly Purchases (€bil)
80
8
8
4
90
€ (billion)
1.5
FOMC
Dec'15 Mtg
FOMC
Mar'16 Mtg
ECB
Dec'15 Mtg
ECB
Mar'16 Mtg
Despite the initial swoon, sentiment improved sharply on the back of a steady fundamental
backdrop and supportive central banks
As of 31 March 2016
SOURCE: Bloomberg, Barclays, PIMCO
Refer to Appendix for additional outlook and risk information.
4cs_intl_review_02
pg 4
Financial conditions tightened at the end of 2015/start of 2016
Source: Bloomberg, PIMCO. Data as of 31 March 2016.
PIMCO’s Financial Conditions Index includes variables such as the fed funds rate, bond yields, credit spreads, equity prices, oil prices and the USD. The weights of
these variables are determined by simulations with the Federal Reserve’s FRB/U.S. model.
pg 5
An ageing U.S. expansion, but expansions don’t die of old age
Duration of U.S. expansions post-1945 (months, trough to peak)
March 1991
120
February 1961
106
November 1982
92
Starting month
Current: June 2009
80
November 2001
73
Average
58
March 1975
58
October 1949
45
May 1954
39
October 1949
37
November 1970
36
April 1958
24
July 1980
12
0
20
40
60
80
100
120
140
PIMCO does not seen the normal catalysts (over-investment, over-consumption, oil price
shocks, and Fed tightening) that have historically been associated with the ending of an
expansion
As of 31 March 2016
SOURCE: NBER, PIMCO calculations
pg 6
Probability of a recession is low despite recent headlines
100%
90%
Recession probability
80%
70%
60%
50%
40%
30%
20%
10%
0%
1962
1968
1974
1980
1986
Periods of U.S. recession
1992
1998
2004
2010
2016
Recession probability
As of 29 February 2016
SOURCE: PIMCO calculations based on Bloomberg data
Refer to Appendix for additional forecast, outlook and risk information.
pg 7
PIMCO’s cyclical outlook
U.K.
1.75% GDP
CHINA
6.00%
GDP
0.75% Inflation
Net exports and further
fiscal tightening may restrain
growth, with risks skewed to
the downside as the “Brexit”
referendum approaches.
U.S.
EUROZONE
2.00% GDP
1.25% Inflation
Capital outflows headline
ongoing challenges, but
policymakers should be able
to avoid disruptive currency
devaluations.
JAPAN
1.25% GDP
1.25% Inflation
A successful handoff from
job growth to wage gains
should underpin
consumption as the key
driver of solid, if
uninspiring, growth.
0.50% GDP
0.25% Inflation
BRIM
1.00% GDP
7.00%
0.50% Inflation
Given persistently low
inflation, the ECB may add
to easing, emphasizing
steps that spur domestic
credit growth.
The BoJ may add to asset
purchases as inflation and
growth are likely to run
below expectations.
Inflation
Idiosyncratic political
factors and challenging
growth dynamics continue
to plague Brazil and Russia
while India and Mexico
should lead in growth.
PIMCO forecast as of 23 March 2016. BRIM is Brazil, Russia, India and Mexico
Real GDP and inflation projections reflect the midpoints of PIMCO’s forecasts for 2016.
Refer to Appendix for additional forecast, outlook and risk information.
Mk_4cs_intl_outlook_01
pg 8
Improving labor market has supported economic growth
The U.S. economy has remained resilient, if underwhelming, despite bouts of recession fears
and consequent volatility
pg 9
With still-contained inflation and global influences weighing, the Fed
may be more measured
Run it hot
Turning trend?
Core PCE
3.0
ISM Manufacturing
65
expanding
60
Fed's
target
2.5
55
2.0
PMI
Year over year change (%)
Core CPI
50
45
1.5
40
1.0
0.5
Jan '06
contracting
35
30
Jan '08
Jan '10
Jan '12
Jan '14
Jan '16
2000
2002
2004
2006
2008
2010
2012
2014
2016
The Fed may be more tempered in its hiking cycle as it faces increasing global influences and
still below-target inflation
As of 31 March 2016
SOURCE: Bloomberg, Haver, PIMCO
Refer to Appendix for additional outlook and risk information.
4cs_intl_outlook_04
pg 10
Key swing factors: Calmer Cs ahead?
Moderation ahead?
Crude oil (Brent) (LHS)
70
106
60
104
50
102
40
100
30
98
20
Jan '15
96
Mar '15
May '15
Jul '15
Sep '15
Nov '15
Jan '16
CNY Currency Basket Index
Price per barrel ($)
CNY Currency Basket Index (RHS)
Mar '16
More stable currencies and oil prices coupled with still beneficial—if diminishing—impact from
central bank support should underpin a continuation of bumpy, below-par and brittle (BBB)
As of 31 March 2016. SOURCE: Barclays, Bloomberg, PIMCO
growth
CNY Currency Basket Index calculated by PIMCO to reflect the CNY using China’s preferred currency basket (as provided by CFETS).
Refer to Appendix for additional outlook and risk information.
4cs_intl_outlook_02
pg 11
Overall views across multi-asset portfolios
12:30pm
UNDER
OVER
OVERALL RISK
11am
UNDER
12pm
OVER
UNDER
EQUITIES
-3
OVER
+2
+1
0
Emerging markets
Securitized
Emerging markets
+3
-1
0
Emerging markets
USD
Commodities
Euro
0
REITs
0
OVER
CURRENCIES
Inflation-linked bonds
High yield
0
UNDER
REAL ASSETS
Investment grade
Japan
OVER
0
+2
0
UNDER
11am
+3
+1
Europe
Japan
OVER
CREDIT
U.S.
Europe
1pm
+3
-2
+1
UNDER
RATES
U.S.
+2
1:30pm
Gold
Yen
0
Emerging markets
As of 31 March 2016
SOURCE: PIMCO
Refer to Appendix for additional outlook and risk information.
pg 12
Case for credit
pg 13
Fundamentals:
Growth outlook supportive for credit
Too cold
Too hot
The sweet spot
Credit spreads* vs. real GDP yoy growth (bps)
500
450
400
Current (Mar 2016)
350
Max spread (bps)
300
Mean spread (bps)
250
Min spread (bps)
200
150
100
Less than -1%
-1% to 1%
1% to 3%
3% to 5%
5%+
Overall
Real GDP growth % yoy
As of 31 March 2016
SOURCE: Federal Reserve Board, Bureau of Economic Analysis, Haver. 1967-current, quarterly data
* Credit spreads are measure using Moodys’ BAA 20 year corporate spreads
Refer to Appendix for additional investment strategy, outlook and risk information.
mk_GIGC_outlook_04
pg 14
 Companies have increased issuance
ahead of Fed tightening but it
should slow down
 Low / negative global gov’t bond
yields should support demand for
credit assets
New issuance of investment
grade corporate bonds,
in $billions
Technicals: Supportive for flows into credit
1,400
High issuance of new corporate bonds
1,200
1,000
800
600
400
200
0
2000
Q1'2015
2003
2006
2009
Yields < 0%
2012
Q1'2016
Yields > 1%
Yields >1%
2015
Yields <0%
Yields 0-1%
Yields 0-1%
As of 31 March 2016
SOURCE: JPMorgan, Barclays
Past performance is not a guarantee or a reliable indicator of future results. For illustrative purposes only.
Refer to appendix for additional investment strategy and risk information.
Government bonds in the
Barclays Global Aggregate Index
pg 15
Valuations: credit spreads are one of the few risk premiums above
historical averages
560
500
440
OAS
380
320
260
200
140
80
Mar '00
Mar '02
Mar '04
Mar '06
Mar '08
Mar '10
Mar '12
Mar '14
Mar '16
As of 31 March 2016
SOURCE: JP Morgan US Liquid Index
Refer to Appendix for additional index, investment strategy, outlook, OAS and risk information.
pg 16
Spread change 6 months after Fed hike, in
basis points
Spreads should tighten alongside a hike in rates
0
BBB spread change post Fed rate hike
-4
-10
-20
-12
-19
-13
-15
-30
-31
-40
-41
-50
-60
-59
-70
-80
-81
-90
Mar '72
Dec '76
May '83
Dec '86
Mar '88
Feb '94
Jun '99
Jun '04
Average
As of 31 December 2004 (date of last Fed hike)
SOURCE: PIMCO calculations, Moody's Investor Service
Refer to Appendix for additional outlook information.
pg 17
High yield performance after spread widening
HY Performance After Spreads Cross 800bps
16
14
Frequency of Observations
14
12
10
8
6
6
4
5
3
3
2
2
1
0
< 0%
0% - 10%
10% - 20%
20% - 30%
30% - 40%
40% - 50%
> 50%
12 Month Forward HY Return as Spreads cross 800bps
Over the last 30+ years, HY spreads have reached or exceeded 800bps at the end of a month
34 times; in 31 out of the 34 cases, returns were positive 12 months later
As of 31 March 2016. SOURCE: BofA Merrill Lynch
Past performance is not a guarantee or a reliable indicator of future results.
HY OAS represented by BofA Merrill Lynch US Cash Pay High Yield Index,
Refer to appendix for additional risk information
high_yield_review_70
pg 18
Fundamental deterioration mostly tied to
declining commodities
Energy and metals & mining have significantly undeperformed
22
US HY Energy
US HY Metals/Mining
US HY Ex Energy & Metals/Mining
Yield to Worst (%)
20
18
16
14
13.7
12
11.0
10
8
7.2
6
4
Mar '14
Sep '14
Mar '15
Sep '15
Mar '16
As of 31 March 2016
SOURCE: Barclays
Past performance is not a guarantee or a reliable indicator of future results.
U.S. HY energy, U.S. HY metals/mining/ U.S. HY ex energy and metals/mining are subsectors of Barclays U.S. High Yield Index .
Refer to Appendix for additional investment strategy, index, outlook and risk information.
pg 19
High yield bonds are compelling equity substitutes
S&P Free Cash Flow Yield
10.5%
US HY Yield to Worst
9.5%
Percent (%)
8.5%
7.5%
6.5%
5.5%
4.5%
Mar '13
Sep '13
Mar '14
Sep '14
Mar '15
Sep '15
Mar '16
As of 31 March 2016. SOURCE: BofA Merrill Lynch, Bloomberg
Past performance is not a guarantee or a reliable indicator of future results.
Notes: Yield to Worst represented by the BofA Merrill Lynch US High Yield Constrained Index,
Refer to Appendix for additional index, investment strategy, outlook and risk information.
high_yield_review_70
pg 20
Yield (%)
Investor’s dilemma – where to invest?
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
7.2%
5.4%
2.2%
3.1%
1.2%
-0.3%
Germany 5yr
-0.2%
Japan 5yr
UST 5yr
U.S. equity U.S. IG Credit
dividend yield
U.S. Bank
Loans
U.S. HY (ex
energy /
metals &
mining)
As of 31 March 2016
SOURCE: Bloomberg and Barclays
Equity Dividend Yield represented by S&P 500 Dividend Yield, US Investment Grade Credit represented by Barclays US Credit Index, US Bank Loans represented by Credit
Suisse Inst. Leveraged Loan Index, and US HY ex Commodities represented by Barclays HY Ex-Energy and Metals/Mining Index
Past performance is not a guarantee or a reliable indicator of future results. For illustrative purposes only.
Refer to appendix for additional investment strategy and risk information.
pg 21
Appendix
Past performance is not a guarantee or reliable indicator of future results.
FORECAST
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. There is no guarantee that results will be achieved.
OUTLOOK
Statements 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, 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.
RISK
Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies
are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond
prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute
to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. 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. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Mortgage- and assetbacked securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or
private guarantor, there is no assurance that the guarantor will meet its obligations. 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.
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. Statements concerning
financial market trends are based on current market conditions, which will fluctuate. 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 is a
trademark of Allianz Asset Management of America L.P. in the United States and throughout the world.Pacific Investment Management Company LLC, 650 Newport Center
Drive, Newport Beach, CA 92660, 800-387-4626. ©2016, PIMCO
It is not possible to invest directly in an unmanaged index
CMR2016-0420-181571
!mk_LDI_Trends_Appendix
pg 22