2. Introduction
PIMCO’s process
Insights from the December 2011
Cyclical Forum
Economy
Global economy
U.S. economy
European economy
Emerging economies
Financial markets
Sovereign debt
Investment grade corporates
Dividend-paying stocks
Cash
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 Pg 2
3. PIMCO’s unique investment process:
Getting ahead of change
PIMCO’s Cyclical Forums
take place four times a TOP DOWN
year and distill extensive
analysis into the market
views highlighted in this Investment
presentation. The most Forums Committee
recent forum was in Long-term
secular inputs and Portfolios
Distills insights
from across
December 2011. analysis to set Managed
within mandated
PIMCO into
guardrails, and short- specific
term cyclical inputs
Portfolio parameters and
investment
to help set near-term
Managers consistent with
guidelines
the firm’s views
strategy Develop and
implement trade strategies,
combining top-down and
bottom-up analysis
to actively manage
portfolios
BOTTOM UP
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 3
4. “As goes the eurozone
deleveraging, so goes
the global economy
over the next six to
12 months.”
— Saumil Parikh
Managing Director and
Leader, Cyclical Forum
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 4
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 broader
global crisis.
PUTTING MARKETS IN PERSPECTIVE | 01.12 ECONOMY Pg 5
6. Global economy has improved but faces
considerable challenges
6%
5
Change in global real GDP
4
3
2
1
0
-1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F
Source: IMF World Economic Outlook, September 2011. Projections begin in 2011.
PUTTING MARKETS IN PERSPECTIVE | 01.12 ECONOMY Pg 6
7. Global economy will feel impact as distressed eurozone
banks reduce foreign loans
Geographic breakdown
of eurozone bank loans:
Domestic – 67%
Non-domestic eurozone – 16%
North America – 7%
Asia – 4%
Other – 4%
South America – 1%
Other Central and
Eastern Europe – 1%
Sources: BIS, ESCB, Bank of England, Federal Reserve, ECB, Barclays Capital and Citi. Data through December 2011.
PUTTING MARKETS IN PERSPECTIVE | 01.12 ECONOMY Pg 7
8. U.S. economy
Despite some recently
improved economic
statistics, PIMCO
continues to forecast
U.S. real GDP growth
of 0%–1% in 2012.
PUTTING MARKETS IN PERSPECTIVE | 01.12 ECONOMY Pg 8
9. U.S. recovery continues, but the trend may not be sustainable
10%
Annualized quarter-over-quarter change in real GDP
8
6
4
2
0
-2
-4
-6
-8
-10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F
Source: Haver Analytics. Data through 30 September 2011. Fourth quarter 2011 GDP is estimated by Bloomberg as of 11 January 2012.
PUTTING MARKETS IN PERSPECTIVE | 01.12 ECONOMY Pg 9
10. Consumption was fueled by decrease in savings,
not increase in wealth
4 Net worth ratio 9%
Savings rate
8
Net worth to income ratio inverted
7
5
6
Savings rate
5
4
6
3
2
7 1
Sources: Bloomberg, Haver Analytics. Data through 30 September 2011.
PUTTING MARKETS IN PERSPECTIVE | 01.12 ECONOMY Pg 10
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.
PUTTING MARKETS IN PERSPECTIVE | 01.12 ECONOMY Pg 11
12. Governments are deleveraging through reduced spending
10% France Greece Spain
Germany Italy Portugal
Year-over-year change in deficit
5
0
-5
-10
2008 2009 2010 2011F 2012F
Source: IMF World Economic Outlook, September 2011. Projections begin in 2011.
PUTTING MARKETS IN PERSPECTIVE | 01.12 ECONOMY Pg 12
13. Eurozone banks have barely begun deleveraging
140% Eurozone bank loans to GDP
135
130
125
120
115
110
105
2006 2007 2008 2009 2010 2011
Source: Citigroup. Data through December 2011.
PUTTING MARKETS IN PERSPECTIVE | 01.12 ECONOMY Pg 13
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.
PUTTING MARKETS IN PERSPECTIVE | 01.12 ECONOMY Pg 14
15. Emerging economies have delivered strong
but slowing growth
10% Developed economies
Emerging economies
8
Year-over-year change in GDP
6
4
2
0
-2
-4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F
Source: IMF World Economic Outlook, September 2011. Projections begin in 2011.
PUTTING MARKETS IN PERSPECTIVE | 01.12 ECONOMY Pg 15
16. Policy changes underway to combat potential
economic slowdown
14% 30 June 2011 30 June 2011 25%
31 December 2011 31 December 2011
12
Bank reserve requirements
10
20
Short-term rates
8
6
15
4
2
0 10
Brazil Russia Indonesia China
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.
PUTTING MARKETS IN PERSPECTIVE | 01.12 ECONOMY Pg 16
17. PIMCO’s outlook Implications
Economy Global economy Real global economic growth Consider a global allocation
of 1%–1.5% in 2012 with broad diversification and
active management
Real GDP growth of 0%–1% Favor a strategy with a quality focus,
U.S. economy in 2012 broad diversification and a forward-
looking macroeconomic view
Economy will shrink 1%–1.5% Consider a fund supported
European economy in 2012 by extensive country and
security analysis
Continued growth, albeit at Favor an actively managed
Emerging economies a slower pace fund with exposure across
the capital structure
PUTTING MARKETS IN PERSPECTIVE | 01.12 ECONOMY Pg 17
18. Sovereign debt
PIMCO has taken a
defensive approach to the
European sovereign debt
market, but still finds
relatively attractive
opportunities in select
developed and emerging
economies.
PUTTING MARKETS IN PERSPECTIVE | 01.12 FINANCIAL MARKETS Pg 18
19. Falling prices show investors have little interest
in at-risk sovereign debt
120€ Italy Ireland Greece
Spain Portugal
100
Bond price (in euros)
80
60
40
20
0
Source: Bloomberg. Data through 30 September 2011.
PUTTING MARKETS IN PERSPECTIVE | 01.12 FINANCIAL MARKETS Pg 19
20. Italy and Spain have substantial debt maturing in 2012
60€ Italy Spain
Bond debt maturing (in billions of euros)
50
40
30
20
10
0
01/12 02/12 03/12 04/12 05/12 06/12 07/12 08/12 09/12 10/12 11/12 12/12
Source: Bloomberg. Data through 31 December 2011. Monthly totals include bills and bonds.
PUTTING MARKETS IN PERSPECTIVE | 01.12 FINANCIAL MARKETS Pg 20
21. Investment grade
corporates
Balance sheets are
solid for many large
corporations, which
have benefited from
U.S. government
stimulus. As a result,
PIMCO is finding
select opportunities in
higher-rated, senior
corporate debt.
PUTTING MARKETS IN PERSPECTIVE | 01.12 FINANCIAL MARKETS Pg 21
22. Investment grade (IG) corporate bonds offer greater yield
potential than Treasuries
5.0% U.S. IG corporate bonds/
U.S. Treasuries
4.5
4.0
3.5
Yield to worst
3.0
2.5
2.0
1.5
1.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Barclays Capital U.S. Aggregate Index. Data through 31 December 2011.
PUTTING MARKETS IN PERSPECTIVE | 01.12 FINANCIAL MARKETS Pg 22
23. Corporates benefit from solid fundamentals
$900 Profitability 25.0%
Cash balance
800 24.5
700
Cash balances (in billions)
24.0
600
Profit margins
23.5
500
23.0
400
22.5
300
200 22.0
100 21.5
0 21.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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.
PUTTING MARKETS IN PERSPECTIVE | 01.12 FINANCIAL MARKETS Pg 23
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.
PUTTING MARKETS IN PERSPECTIVE | 01.12 FINANCIAL MARKETS Pg 24
25. Dividend-paying stocks offer attractive yield
relative to Treasuries
8% 10-year Treasuries
Dividend-paying stocks
7
6
5
4
Yield
3
2
1
0
Source: Bloomberg. Dividend yield is shown as MSCI World Index. Data through 30 September 2011.
PUTTING MARKETS IN PERSPECTIVE | 01.12 FINANCIAL MARKETS Pg 25
26. Potential for dividend increases
$450 Dividend payout ratio 45%
Cash balance per share
Cash and short-term investments per share
400 40
350 35
300 30
Payout ratio
250 25
200 20
150 15
100 10
50 5
0 0
Source: Bloomberg. Cash is shown as MSCI World Index. Payout ratio refers to percent of annual earnings paid out through dividends
and other distributions. Data through 30 September 2011.
PUTTING MARKETS IN PERSPECTIVE | 01.12 FINANCIAL MARKETS Pg 26
27. Cash
PIMCO expects the Fed
to hold rates low beyond
their stated commitment.
As a result, liquidity will
be very costly.
PUTTING MARKETS IN PERSPECTIVE | 01.12 FINANCIAL MARKETS Pg 27
28. Volatility has many investors turning to cash
60
50
VIX Index closing price
40
30
20
10
0
Source: CBOE Market Volatility (VIX) Index. Data through 30 December 2011.
PUTTING MARKETS IN PERSPECTIVE | 01.12 FINANCIAL MARKETS Pg 28
29. Negative after-inflation yields on Treasuries
make cash a costly option
4% U.S. Treasuries
Expected real return (yield after inflation)
3
2
Yield
1
0
-1
-2
3-month 1-year 3-year 5-year 8-year 10-year 30-year
Maturity
Source: Bloomberg. Expected real return is represented by Treasury Inflation-Protected Securities (TIPS). Data through 31 December 2011.
PUTTING MARKETS IN PERSPECTIVE | 01.12 FINANCIAL MARKETS Pg 29
30. Financial PIMCO’s outlook Implications
markets Sovereign debt Take a defensive approach to
European sovereign debt
Select a global strategy that
employs in-depth, country-by-
country analysis
Cautious but finding select Select a fund with both a top-
Investment grade opportunities down, macroeconomic strategy
corporates and bottom-up analysis of
individual securities
Low yield environment has Seek to augment income-
Dividend- created challenges to sustain generating potential with
paying stocks and enhance income global dividend-paying stocks
Liquidity will be costly Consider an actively managed
Cash short-term strategy to increase
return potential
PUTTING MARKETS IN PERSPECTIVE | 01.12 FINANCIAL MARKETS Pg 30
31. Any questions?
For more information, visit pimco.com/investments/
puttingmarketsinperspective
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 31
32. A word about risk
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.
PUTTING MARKETS IN PERSPECTIVE | 01.12 Pg 32
Thank you all for joining me today to review Putting Markets in Perspective. This content is PIMCO’s current thinking on key trends driving the global economy and financial markets, and will hopefully be valuable as you advise and guide your clients through these challenging times.
I want to start today by giving you a little background on PIMCO’s unique investment process, and how that informs our cyclical outlook.Obviously we can’t go into detail on every aspect of our outlook so we will focus on eight topics that we consider particularly important, and that will no doubt be of importance to your clients.We will go over the four economic topics listed here, and then four financial market topics. In each case, I will share with you PIMCO’s analysis and outlook, as well as the implications that outlook could have on an investor.
PIMCO has been managing client portfolios through a range of market and economic environments for 40 years. Our most important tool over these years has been our investment process – a circle that links top-down macroeconomic thinking with bottom-up credit analysis and research.Critical to the process are our economic forums. Each year, we hold a Secular Forum, where we spend three days discussing and debating the global landscape for the next three to five years. Three times a year, we also hold Cyclical Forums, where we test and refine our thinking against current facts on the ground, and upcoming trends likely to influence the next six to 12 months.If our secular outlook tells us which direction the freeway is headed, then our cyclical outlook reads more immediate conditions so we know which lane to drive in, how fast to go and what other drivers around us are doing.It is this cyclical outlook that we are going to discuss today.
PIMCO’s outlook has always been global in nature, recognizing that the economic, political and demographic conditions in one part of the world can have a profound impact elsewhere. That interconnectivity is more pronounced now than ever.As this quote from PIMCO Managing Director and Cyclical Forum leader Saumil Parikh makes clear, what’s happening in Europe is going to directly affect the U.S. and the global economy as a whole. For that reason, Europe’s evolving debt crisis will be featured prominently in our discussion today.
Let’s start by look at the big picture. In PIMCO’s view, the global economy will slow in 2012, growing 1% - 1.5% after accounting for inflation. While that is already a modest growth forecast, PIMCO believes there is a very real chance that growth could be slower if Europe’s debt problems worsen, causing a broader global crisis.
This slide shows just how conservative PIMCO’s forecast is, compared to say the IMF’s. As I said, these lower expectations are due primarily to what is happening in Europe, and how that situation will influence the rest of the global economy.Consider for example what is happening in the European banking system. Eurozone banks have been the primary buyers of eurozone sovereign debt. Much of this debt has fallen considerably in value, putting the banks at risk. One way to cover these losses and improve their balance sheets is for the banks to pull back on outstanding loans.
This slide will help you understand how this bank deleveraging will impact the rest of the global economy. You are looking at a geographical breakdown of eurozone bank loans. The big light blue section represents loans within a home country. All the other colors, which together make up 33% of outstanding loans, are foreign loans. In all likelihood, these banks will reduce their foreign loans first, causing ripples around the world.What does that mean for investors? It means that we are looking at very uncertain conditions and the very real possibility that Europe’s problems will become problems for others. It will be important in this environment for investors to favor a global allocation strategy that has a forward-looking view. They will also want to look for a strategy that offers broad diversification, active management and active risk hedging. Of course there are no guarantees that diversification or risk hedging strategies will generate a profit or prevent losses.
Now let’s take a closer look at what PIMCO sees happening here in the U.S.Despite some recently improved economic data, PIMCO does not believe gains are sustainable. As a result, we are continuing to forecast real GDP growth of 0 – 1% in the U.S.
Based on this chart, you can see why some investors might be feeling a bit more optimistic about the U.S. economy. We’ve seen slow but steady GDP growth in 2011. But what is driving that growth?Fourth quarter numbers were boosted in part by increased consumer spending. That makes sense, because consumption has always been a significant part of GDP. But in PIMCO’s view, the recent increase isn’t sustainable, because it is being fueled by a decrease in savings, rather than an increase in wealth.
This chart tracks the U.S. savings rate, as seen here by the green line, and the ratio of net worth to income, as seen by the blue line.We’ve flipped the net worth ratio data in the chart, so that an increase in net worth is seen by the blue line going down. I know that’s a bit confusing, but we thought it would help you see more clearly the historical relationship between these two factors. In the past, when net worth increased, people felt richer, and therefore saved less. You can see this in the period from 2002 to 2007. The stock market was strong, the housing market was strong and unemployment was low. Net worth to income grew as seen by the falling blue line. As you would expect, the savings rate fell during this period, as seen by the falling green line. Then came the sub-prime crisis, driving down net worth and spurring consumers to save more. But look at what we are seeing now. The net worth and savings lines are diverging. Consumers are less wealthy and yet savings went down. The reason? Because they were drawing on their savings to support spending. But, obviously this trend can’t continue. So what should investors do? We believe the U.S. is still facing long-term underlying problems that will take time to correct. In this difficult environment, investors will want to focus on quality. And as I said before, they will want to look for strategies that maintain a broad diversification and invest according to a forward-looking macroeconomic view.
That brings us to the European economy – which as I’ve said, is driving so much of what we are seeing around the globe right now.PIMCO is forecasting a eurozone recession, with the economy shrinking by 1%-1.5% in 2012. But, the recession could be much worse than that, depending on how the European Union handles the combined deleveraging of the governments and the banks.
Let’s start with what is going on at the government level. Many eurozone governments are trying to improve their balance sheets by cutting spending. Look at 2010 through 2011, when France, Germany, Greece, Italy, Spain and Portugal all instituted belt-tightening programs. And forecasts from the IMF are calling for more of the same in 2012.The eurozone economy is struggling to absorb these austerity programs, and the banks haven’t even started their deleveraging programs.
This chart shows what’s going on at the banks. You are looking at the ratio of bank loans to GDP for all of the eurozone, from 2006 to 2011. As you can see, the ratio increased steadily through 2010. As we talked about earlier, the eurozone banks will need to reduce loans to improve their balance sheets. But that process has barely begun. From 2010 to 2011, loans to GDP fell less than 1%. In contrast, consider what happened with U.S. banks during the Great Depression. From 1932–1947, U.S. banks reduced their loan to GDP ratio by more than 60%.Based on that, it seems that the eurozone banks have a long way to go. But what will be the consequences of this deleveraging on the already weak European economy? In PIMCO’s view, it could be significant. If the bank deleveraging is disorderly, PIMCO believes the European recession could be much worse than forecasted, and the implications to the rest of the global economy would be substantial.This makes for a very challenging environment for investors. If they are going to invest in the eurozone, they will want to consider a strategy that places a premium on quality. They will also want to invest with a manager who conducts extensive country and security analysis, and that has the resources to monitor the fluid dynamics. It is important to remember that there can be additional risks when investing in non-U.S. securities.
For our last economic topic, we’ll take a look at what is happening in emerging economies.This has been an area of strength in 2011, so the question is, will that continue in 2012?PIMCO expects attractive growth this year, compared to developed economies, but at a slower pace than what we’ve see in recent years.
Here is a side-by-side look at growth rates for emerging economies, as seen by the lighter blue bars, and developed economies, the darker blue bars.Emerging economies have been strong, but how long can that growth continue if the developed countries are getting weaker? Historically, emerging economies have been sellers while developed economies have been buyers. What happens when the buyer doesn’t have enough money to keep buying?It looks like many of the emerging economies themselves are worried about this, as evidenced by policy changes.
Here are a few examples. The blue bars show how Brazil, Russia and Indonesia have all cut short-term rates over the last six months in an effort to spur economic activity. The green bars show how China cut its bank reserve requirements recently. While this was a small change, it is the first time they have cut the requirement in three years. Lower reserve requirements should provide easier access to money, which in turn should support economic growth.While these policy changes are worth noting, they don’t change the fact that emerging economies still represent more growth potential than developed economies. Investors considering an investment in emerging economies should consider adding exposure through an actively managed strategy that invests across the capital structure. It is important to note that investing in emerging economies could entail additional economic and political risks.
This is a summary of what we’ve talked about so far - it is PIMCO’s outlook and the implications for each of the four economic topics we discussed.With this backdrop in mind, let’s turn now to what PIMCO expects from a few areas of the financial markets.
After what we’ve discussed so far, it is no surprise to hear that PIMCO is taking a conservative and defensive approach to European sovereign debt, but we are still finding relatively attractive opportunities in select developed and emerging market debt.
First we’ll look at Europe. This slide shows market prices for 10-year bonds from Italy, Spain, Ireland, Portugal and Greece. Yes these prices have rallied somewhat recently, on the hopes of some comprehensive plan to save the eurozone, but overall, these low prices show that investors have little appetite for at-risk sovereign debt.
That is particularly bad news for countries such as Italy and Spain, which have large amounts of debt maturing in 2012. This chart shows the bonds maturing each month of this year. As these bonds come due, the countries will need to issue new debt. Not an easy task given current conditions.That is not to say, however, that investors should steer clear of sovereign debt altogether. As I said before, PIMCO still sees relatively attractive opportunities in select developed countries, such as the U.S., Canada and Germany. We are also finding opportunities in select emerging markets, including Brazil, China and Mexico. Investors interested in this space should focus on a strategy that is actively managed to adapt to the rapidly changing conditions. In addition, they should look for a strategy that employs in-depth, country-by-country analysis, rather than relying on traditional perceptions of creditworthiness.
Next I’d like to talk about investment grade corporate bonds.Many U.S. corporations have made good use of the last few years, improving their balance sheets and building up cash reserves. As a result, PIMCO is finding select opportunities in higher-rated, senior corporate debt.
Investors have seen good results from investment grade corporates over the last few years. For example, in 2011, the sector returned 7.2%, with higher yields than Treasuries. In fact, as this chart shows, investment grade corporates are currently yielding three times as much as comparable maturity Treasuries.
But can corporations continue to deliver in the face of uncertain economic and market conditions? Maybe. As this chart shows, many companies have built up strong fundamental. The blue line shows improved profitability and the green line shows steadily increased cash balances. These factors can help corporations withstand periods of little or no economic growth.Nonetheless, PIMCO is taking a cautious approach to the sector. Investors may want to do the same. They might consider a strategy that can provide access to the credit market through a tested process, including both a top-down, macroeconomic view and bottom-up analysis of individual securities.
On the subject of yield, let’s talk for a minute or two about dividend-paying stocks.Today’s low yield environment has created challenges for income-seeking investors. Dividend-paying stocks may offer an attractive opportunity for investors who are comfortable with the associated risks.
This green line is probably all too familiar to you. It is the declining yield on 10-year Treasuries, which reached historic lows in the last year. In contrast, look at the blue line, which is the dividend paid by stocks in the MSCI World Index. You can see here in the last year that this dividend was climbing while Treasury yields fell sharply.
And as this chart shows, many companies are in a good position to increase dividends. The green bars show corporate cash levels per share each year. These cash balances reached record levels in 2011. But, dividend payout ratios have not increased, as seen by the blue line. PIMCO believes this dynamic creates great potential for dividend payments to shareholders who demand greater participation of company earnings.So, investors seeking yield may want to augment their income-generating holdings with a strategy that provides exposure to dividend paying equities. Of course, it is important to remember that equities may decline in value due to both real and perceived general market, economic and industry conditions, so investors will need to understand the risks and be comfortable with them.
For the last topic today I’d like to talk about cash.PIMCO believes the Fed will keep rates low beyond its stated commitment. As a result, liquidity will be very costly for investors.
If investors aren’t making money on cash, why hold it? One reason is that many investors have been put off by increased market volatility. This first chart shows stock market volatility in 2011. The sudden and sometimes severe spikes make investors nervous, which leads many of them to pull out of the financial markets and hold cash. But cash may not be the safe haven these investors think it is.
Take a look at the blue line in this chart, which shows the yields on U.S. Treasuries at various maturities. As you can see, investors who focus on the 3 – 6 month range, which is considered cash-equivalent, would make close to nothing. The situation is even worse when you take inflation into account. The green line is the after-inflation yield. At these real rates, investors would need to go out 10 years to earn a positive return.Of course investors are still going to hold cash in their portfolios. But, at today’s low rates, they will want to give careful consideration to how they allocate excess cash and why. If they are moving to cash to provide liquidity, they may want to consider a more actively managed short-term strategy.
Here is a look back at what we just covered for the financial markets, including PIMCO’s outlook and the implications.That was a lot of information, and yet it touches on only a portion of what PIMCO discusses at our Cyclical Forum. I encourage you to visit our website and access the extensive thought-leadership PIMCO publishes on these and other topics to learn more.
In the meantime, I am happy to take any questions that you may have.
