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PUTTING MARKETS IN PERSPECTIVE | 01.12
Your Global Investment Authority
01.12
PUTTING MARKETS IN PERSPECTIVE | 01.12
Introduction PIMCO’s process Insights from the December 2011
Cyclical Forum
EconomyGlobal economy U.S. economy European economy Emerging economies
Financial markets Sovereign debt Investment grade corporates Dividend-paying stocks Cash
Pg 2
Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information is contained in the fund’s prospectus and summary prospectus, if available, which may be obtained by contacting your financial advisor, visiting pimco.com/investments or calling 888.87.PIMCO. Please read them carefully before you invest or send money.
PUTTING MARKETS IN PERSPECTIVE | 01.12
PIMCO’s Cyclical Forums take place four times a year and distill extensive analysis into the market views highlighted in this presentation. The most recent forum was in December 2011.
Pg 3
PIMCO’s unique investment process: Getting ahead of change
Long-term secular inputs and analysis to set guardrails, and short-term cyclical inputs to help set near-term strategy
Forums
Develop and implement trade strategies, combining top-down and bottom-up analysis to actively manage portfolios
Portfolio Managers
Investment Committee
Distills insights from across PIMCO into specific investment guidelines
BOTTOM UP
TOP DOWN
PortfoliosManaged
within mandated parameters and
consistent with the firm’s views
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 4
— Saumil Parikh
Managing Director and
Leader, Cyclical Forum
“As goes the eurozone deleveraging, so goes the global economy over the next six to 12 months.”
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 5
Global economy
PIMCO expects real global economic growth of 1%–1.5% in 2012, with substantial downside risk if Europe’s debt problems spiral into a broaderglobal crisis.
ECONOMY
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 6
Global economy has improved but faces considerable challenges
Source: IMF World Economic Outlook, September 2011. Projections begin in 2011.
Chan
ge in
glo
bal r
eal G
DP
6%
5
2001
4
3
2
1
0
-1
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F
ECONOMY
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 7
Global economy will feel impact as distressed eurozone banks reduce foreign loans
Sources: BIS, ESCB, Bank of England, Federal Reserve, ECB, Barclays Capital and Citi. Data through December 2011.
Geographic breakdownof eurozone bank loans:
Domestic – 67%
Non-domestic eurozone – 16%
North America – 7%
Asia – 4%
Other – 4%
South America – 1%
Other Central andEastern Europe – 1%
ECONOMY
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 8
U.S. economy
Despite some recently improved economic statistics, PIMCO continues to forecast U.S. real GDP growth of 0%–1% in 2012.
ECONOMY
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 9
U.S. recovery continues, but the trend may not be sustainable
Source: Haver Analytics. Data through 30 September 2011. Fourth quarter 2011 GDP is estimated by Bloomberg as of 11 January 2012.
Annu
alize
d qu
arte
r-ove
r-qua
rter c
hang
e in
real
GDP
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F
10%
8
6
4
2
0
-2
-4
-6
-8
-10
ECONOMY
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 10
Consumption was fueled by decrease in savings, not increase in wealth
Sources: Bloomberg, Haver Analytics. Data through 30 September 2011.
Net w
orth
to in
com
e ra
tio in
verte
d12
/31/85
12/31
/05
4
5
6
7
Net worth ratio
Savings rate
09/30
/8712
/31/87
09/30
/8912
/31/89
09/30
/9112
/31/91
09/30
/9312
/31/93
09/30
/9512
/31/95
09/30
/9712
/31/97
09/30
/9912
/31/99
09/30
/0112
/31/01
09/30
/0312
/31/03
09/30
/05
09/30
/0712
/31/07
09/30
/0912
/31/09
09/30
/11
Savings rate
9%
8
7
6
5
4
3
2
1
ECONOMY
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 11
European economy
PIMCO is forecasting that the eurozone economy will shrink 1%–1.5% in 2012, with significant risk of an even worse recession.
ECONOMY
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 12
Governments are deleveraging through reduced spending
Source: IMF World Economic Outlook, September 2011. Projections begin in 2011.
Year
-ove
r-yea
r cha
nge
in d
efici
t
2008 2009 2010 2011F 2012F
10%
5
0
-5
-10
FranceGermany Italy
Greece SpainPortugal
ECONOMY
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 13
Eurozone banks have barely begun deleveraging
Source: Citigroup. Data through December 2011.
140%
135
125
120
115
110
105
2006
Eurozone bank loans to GDP
130
2007 2008 2009 2010 2011
ECONOMY
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 14
Emerging economies
PIMCO expects emerging economies to continue to deliver attractive growth relative to developed economies, but at a slower pace than we have seen in recent years.
ECONOMY
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 15
Emerging economies have delivered strong but slowing growth
Source: IMF World Economic Outlook, September 2011. Projections begin in 2011.
Year
-ove
r-yea
r cha
nge
in G
DP
10%
8
6
4
2
0
-2
-4
2000 2004 2011F
Developed economiesEmerging economies
2001 2002 2003 2005 2006 2007 2008 2009 2010 2012F
ECONOMY
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 16
Policy changes underway to combat potential economic slowdown
Sources: Bloomberg: Brazil Selic Target Rate Index; Russia Refinancing Rate Index; Bank Indonesia Reference Interest Rate.Haver Analytics: China’s Reserve Requirement Ratio. Data through 31 December 2011.
Shor
t-ter
m ra
tes
14%
12
10
8
6
4
0Brazil Indonesia
2
Russia China
30 June 201131 December 2011
Bank reserve requirements
25%
20
15
10
30 June 201131 December 2011
ECONOMY
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 17
PIMCO’s outlook Implications
Global economy Real global economic growthof 1%–1.5% in 2012
Consider a global allocationwith broad diversification andactive management
U.S. economy Real GDP growth of 0%–1%in 2012
Favor a strategy with a quality focus, broad diversification and a forward-looking macroeconomic view
European economy Economy will shrink 1%–1.5%in 2012
Consider a fund supportedby extensive country andsecurity analysis
Emerging economies Continued growth, albeit ata slower pace
Favor an actively managedfund with exposure acrossthe capital structure
Economy
ECONOMY
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 18
PIMCO has taken a defensive approach to the European sovereign debt market, but still finds relatively attractive opportunities in select developed and emerging economies.
Sovereign debt
FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 19
Falling prices show investors have little interest in at-risk sovereign debt
Source: Bloomberg. Data through 30 September 2011.
03/31
/10
05/31
/10
07/31
/10
09/30
/10
11/30
/10
01/31
/11
03/31
/11
05/31
/11
07/31
/11
09/30
/11
GreecePortugalSpain
Italy Ireland
Bond
pric
e (in
eur
os)
01/31
/10
120€
100
80
60
40
20
0
11/30
/11
12/31
/11
FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 20
Italy and Spain have substantial debt maturing in 2012
Source: Bloomberg. Data through 31 December 2011. Monthly totals include bills and bonds.
Bond
deb
t mat
urin
g (in
billi
ons
of e
uros
)
01/12
60€
50
40
30
20
0
Italy Spain
10
02/12 03/12 04/12 05/12 06/12 07/12 08/12 09/12 10/12 11/12 12/12
FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 21
Balance sheets are solid for many large corporations, which have benefited fromU.S. government stimulus. As a result, PIMCO is finding select opportunities in higher-rated, senior corporate debt.
Investment grade corporates
FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 22
Investment grade (IG) corporate bonds offer greater yield potential than Treasuries
Source: Barclays Capital U.S. Aggregate Index. Data through 31 December 2011.
Yiel
d to
wor
st
2000
5.0%
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
U.S. IG corporate bonds/U.S. Treasuries
FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 23
Corporates benefit from solid fundamentals
Source: J.P. Morgan JULI Index. Data through 30 September 2011.Charts are provided for illustrative purposes and are not indicative of the past or future performance of any PIMCO product.
Cash
bal
ance
s (in
billi
ons)
$900
800
700
600
500
400
300
ProfitabilityCash balance
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
100
0
200
25.0%
24.5
24.0
23.5
23.0
22.5
22.0
21.5
21.0
Profit margins
FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 24
Dividend-paying stocks
The low yield environment has created challenges for investors seeking ways to sustain and enhance their income. One opportunity may be dividend-paying stocks in sectors with relatively stable cash flows.
FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 25
Dividend-paying stocks offer attractive yield relative to Treasuries
Source: Bloomberg. Dividend yield is shown as MSCI World Index. Data through 30 September 2011.
Yiel
d
1995
8%
7
6
5
4
3
2
1
0
10-year TreasuriesDividend-paying stocks
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 26
Potential for dividend increases
Source: Bloomberg. Cash is shown as MSCI World Index. Payout ratio refers to percent of annual earnings paid out through dividendsand other distributions. Data through 30 September 2011.
Cash
and
sho
rt-te
rm in
vest
men
ts p
er s
hare
$450
400
350
300
250
200
150
100
50
0
Dividend payout ratioCash balance per share
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
45%
40
35
30
25
20
15
10
5
0
Payout ratio
FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 27
PIMCO expects the Fed to hold rates low beyond their stated commitment. As a result, liquidity will be very costly.
Cash
FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 28
Volatility has many investors turning to cash
Source: CBOE Market Volatility (VIX) Index. Data through 30 December 2011.
VIX
Inde
x clo
sing
price
01/11
60
50
40
30
20
10
0
03/11
05/11
07/11
09/11 11/11
12/11
FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 29
Negative after-inflation yields on Treasuries make cash a costly option
Source: Bloomberg. Expected real return is represented by Treasury Inflation-Protected Securities (TIPS). Data through 31 December 2011.
3-month 1-year 3-year 5-year 8-year 10-year 30-year
-2
Yiel
d
4% U.S. Treasuries
3
2
1
0
-1
Maturity
Expected real return (yield after inflation)
FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 30
PIMCO’s outlook Implications
Sovereign debt Take a defensive approach toEuropean sovereign debt
Select a global strategy thatemploys in-depth, country-by-country analysis
Investment gradecorporates
Cautious but finding selectopportunities
Select a fund with both a top-down, macroeconomic strategyand bottom-up analysis ofindividual securities
Dividend-paying stocks
Low yield environment hascreated challenges to sustainand enhance income
Seek to augment income-generating potential withglobal dividend-paying stocks
Cash Liquidity will be costly Consider an actively managedshort-term strategy to increasereturn potential
Financial markets
FINANCIAL MARKETS
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 31
Any questions?For more information, visit pimco.com/investments/puttingmarketsinperspective
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 32
Each sector of the bond market entails risk. The guarantee on Treasuries, TIPS and government bonds is to the timely repayment of principal and interest. Shares of mutual funds that invest in them are not guaranteed. Mortgage-backed securities are subject to prepayment risk. With corporate bonds there is no assurance that issuers will meet their obligations. High yield bonds typically have a lower credit rating than other bonds. Lower-rated bonds generally involve a greater risk to principal than higher-rated bonds. Investing in non-U.S. securities may entail risk as a result of foreign economic and political developments; this risk may be enhanced when investing in emerging markets. In an environment where interest rates may trend upward, rising rates will negatively impact most bond funds, and fixed income securities held by a fund are likely to decrease in value. Bond funds and individual bonds with a longer duration (a measure of the expected life of a security) tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations. Equity portfolios are subject to the basic stock market risk that a particular security, or securities in general, may decrease in value. Actively managed funds are subject to the risk that the investment techniques and risk analyses applied by PIMCO will produce the desired results and that legislative, regulatory or tax developments may affect the investment techniques available to PIMCO and the individual portfolio manager in connection with managing the fund. Certain funds invest in other PIMCO funds and performance is subject to underlying investment weightings, which will vary. Costs of investing in these funds will generally be higher than the cost of investing in a fund that invests directly in individual stocks and bonds. Non-diversified funds may invest assets in a smaller number of issuers than a diversified fund. There is no guarantee that the investment objective of the funds will be achieved. 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.
A word about risk
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 33
31526
How can I learn more?
For more information, talk to your financial advisor or visit pimco.com/investments/puttingmarketsinperspective.
IMPORTANT INFORMATION
Past performance is no guarantee of future results.
Index definitions:
Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis.
J.P. Morgan JULI Index encompasses fixed rate high grade coverage in the U.S. CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P
500 stock index option prices. MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the
equity market performance of developed markets. The MSCI World Index consists of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The index represents the unhedged performance of the constituent stocks in U.S. dollars.
It is not possible to invest directly in an unmanaged index.
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. ©2012 PIMCO.
PIMCO advised funds are distributed by PIMCO Investments LLC.