PIMCO Europe Ltd. February 2015 For professional use only - PowerPoint PPT Presentation

PIMCO Europe Ltd. February 2015 For professional use only

Important information For professional use only The services and products described in this communication are only available to professional clients as defined in the Financial Conduct Authority's Handbook. This communication is not a public offer and individual investors should not rely on this document. Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. PIMCO Europe Ltd (Company No. 2604517), PIMCO Europe Ltd Amsterdam Branch (Company No. 24319743), and PIMCO Europe Ltd – Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (25 The North Colonnade, Canary Wharf, London E14 5HS) in the UK. The Amsterdam and Italy Branches are additionally regulated by the AFM and CONSOB in accordance with Article 27 of the Italian Consolidated Financial Act, respectively. PIMCO Europe Ltd services and products are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany) is authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The services and products provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 31a para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. (Presented in the UK) 1

Biographical information Mike Amey Mr. Amey is a managing director and portfolio manager in the London office. He is responsible for sterling portfolios, the European insurance (ex Germany) and the European LDI (liability-driven investing) portfolio management groups. Prior to joining PIMCO in 2003, he was head of U.K. fixed income at Rothschild Asset Management and after their merger, at Insight Investment. Prior to joining Rothschild in 1994, Mr. Amey spent two years tutoring in the Department of Economics at the University of Durham. He has 21 years of investment experience and holds undergraduate and master's degrees in corporate and international finance from the University of Durham. Mr. Amey is also a member of the U.K. Society of Investment Professionals. 2

Government bond yields at historic lows Three centuries of long-term yields in the UK 16 14 12 10 Yield (%) 8 6 4 2 0 1713 1763 1813 1863 1913 1963 2013 The high interest rates of the 70s and 80s, not today’s low yields, were the aberration As of 20 January 2015 SOURCE: Bloomberg, Bank of England 3 3cs_intl_outlook_02

The New Neutral in a nutshell Aging population, weak productivity growth, debt overhang and muted inflation Slow growth (real and nominal) Low interest rates 4

New Neutral in practice United States policy rate, adjusted for inflation US real policy rate Average 7 6 5 4 3 Rate (%) 2 1 - (1) (2) (3) '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 As of 31 January 2015 SOURCE: Bloomberg 2cs_euro_outlook_02 5

New Neutral is not just a US phenomenon Germany's policy rate, Historical Average Forwards adjusted for inflation 12 10 8 6 Rate (%) 4 2 0 -2 -4 1875 1890 1905 1920 1935 1950 1965 1980 1995 2010 2025 Euro Reichsmark Deutsche Mark Goldmark Papiermark Rentenmark (1924-48) (since 1999) (1875-1914) (1914-23) (1923-24) (1948-2002) UK's policy rate, adjusted for inflation 15 10 5 Rate (%) 0 -5 -10 -15 1945 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 As of 31 December 2014. SOURCE: Bundesbank, Eurostat, PIMCO 6

PIMCO’s cyclical outlook: increased divergence ahead U.K. U.S. 2.75% China 3% GDP 6.5% GDP 1.25% GDP 1% Inflation 2% Inflation Inflation Eurozone Japan 1% 1.5% GDP BRIM GDP 0.75% 2% 1% Inflation GDP Inflation 5.75% Inflation * PIMCO Forecast as of 31 December 2014 BRIM is Brazil, Russia, India, Mexico. Refer to appendix for further outlook information. Real GDP and inflation projections represent PIMCO’s forecasts for the four quarters ending Q4 2015 4cs_intl_outlook_01 7

Rate hikes – what are the markets telling us? Rate hikes priced into markets: USD GBP EUR Money market futures yields minus 3m spot Libor rates 250 225 200 175 150 Basis points 125 100 75 50 25 0 As of 11 February 2015 Source: PIMCO Refer to appendix for further outlook information. 8

Low interest rates plague the insurance industry Source: Spence Johnson “IAM European Insurance Asset Management 2013”. For illustrative purposes only 9

Outer perimeter assets have been well-rewarded  Global central bank policies will continue to support demand for high quality, income- producing assets  Future success will likely depend on bottom-up analysis and discerning regional differences 9 8 PIMCO’s concentric circles 7 6 1) Fed funds O/N repo 5 2) 3-month T-bills + commercial paper + 2-year T-notes 4 3 3) Intermediate + long Treasuries 2 4) GSE mortgages + swaps + government futures+ TIPS+ agencies 1 5) Bank debt + bank capital + national champions + AAA asset-backed 6) High quality EM + munis + investment grade 7) High quality CMBS 8) High yield + bank loans + subprime mortgages + low quality EM 9) Equities + real estate SOURCE: PIMCO Refer to Appendix for additional investment strategy and outlook information. 10

Duration risk: Markets already pricing in the New Neutral Global developed markets 5yr. 5yr. interest rate forwards 7 U.S. German Japan Australia Canada 6 5 4 Rate (%) 3 2 1 0 2007 2008 2009 2010 2011 2012 2013 2014 As of 31 December 2014 SOURCE: Bloomberg 11 mk_4cs_income_review_02

Credit risk: Investors are getting paid for taking credit risk over duration risk Corporate yields remain low but the gap between corporate and government yields remain wide  Credit compensation represents around 48% of the overall yield compared to 13% in 2007  Global credit spread as % of yield Average Global credit spread as % of yield OAS (RHS) 80% 500 70% 400 60% Spread as % of yield 50% 300 OAS (bps) 40% 200 30% 20% 100 10% 0% 0 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 As of 31 December 2014 SOURCE: PIMCO Refer to Appendix for additional investment strategy, OAS, outlook and risk information mk_GIGC_outlook_10 12

Credit fundamentals: US companies continue to see moderate revenue growth while Europe lags behind the US in the credit cycle Revenue growth US Europe Net debt / EBITDA US Europe 30% 3.0x 20% 2.5x 10% 2.0x 0% 1.5x -10% 1.0x -20% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 As of 30 September 2014 SOURCE: CapitalIQ. US represented by issuers in CDX IG and Europe represented by issuers in iTraxx Main Refer to Appendix for additional investment strategy, outlook and risk information mk_GIGC_outlook_04 13

Long-dated spreads have become more attractive Barclays Long U.S. Corporate OAS Sterling Non-Gilts 10+ Barclays Long U.S. Corporate Average OAS Sterling Non-Gilts 10+ Average OAS 600 500 400 OAS (bps) 300 200 100 0 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 2cs_euro_outlook_03 As of January 2015. SOURCE: PIMCO Refer to Appendix for further outlook, OAS, investment strategy and isk information. 14

PIMCO believes non-agency MBS offer attractive risk/reward profiles across a variety of housing scenarios Non-Agency MBS provide positive returns across a range of home price scenarios¹ 10 Upside potential if home prices exceed market 9 expectations PIMCO’s Base Case: National house prices increase by 8 4-8% over the next two years 7 Loss-Adjusted Yield (%) 6 5 4 3 2 Downside resilience in 1 weaker housing scenarios 0 -10% -5% 0% 5% 10% 15% 2 – year national home price depreciation / appreciation² As of 5 January 2015 SOURCE: PIMCO * Based on non-agency MBS loss adjusted yields (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 is currently at the same range with an addition of factoring in the default risk level. ** The 2 Yrs. Home Price Appreciation axis illustrates the different home price depreciation and appreciation level (i.e., -10% represents 10 depreciation). Refer to Appendix for additional forecast and risk information. 4cs_DI_outlook_03 15