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Capital Market Presentation

July 2011:

Giving money away

Hans-Jrg Naumer, Dennis Nacken,

Stefan Scheurer

Not for circulation to

private investors

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Giving money away

Nominal and real return of government bonds in Europe, USA and Japan (5-year maturity).

Source: Datastream; Allianz Global Investors Capital Market Analysis

2,16%1,55%

0,42%0,12%

-2,50%

-2,00%

-1,50%

-1,00%

-0,50%

0,00%

0,50%

1,00%

1,50%

2,00%2,50%

5-year

German Bundesanleihe

5-year

US-treasuries

5-jhrige

Japanese government note

Nominal return

-0,54%

-2,02%

Real return

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Fear of escalation of European debt crisis

Risk premia of 10y European government bonds vs. German government bonds (-2 years)


28/06/11

J A S O N D J F M A M J J A S O N D J F M A M J

0

2

4

6

8

10

12

14

16

Spread Italy - Germany (10y)Spread Spain - GermanySpread Greece - Germany

Spread Portugal - GermanySpread Ireland - GermanySpread Belgium - Germany

0

2

4

6

8

10

12

14

16

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Europe: Successful debt reduction in the past 30 years (Debt/GDP ratio)

4

Debt reduction in Europe: Nothings impossible!

Source:: ECB, "Major Public Debt Reductions. Lessons From The Past, Lessons For The Future", Working Paper 09/2010, Allianz GI Capital Market Analysis

134,2

80,1 76,166,8

72,1

52,4

84,0

26,8

50,5

36,2 38,0 33,3

0,0

20,0

40,0

60,0

80,0

100,0

120,0

140,0

160,0

Belgium Denmark Netherlands Spain Sweden UK

1994-2007 1994-2007 1996-2002 1997-2007 1996-2008 1985-1990

before debt reduction after debt reduction

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Central banks: Lender of last resort?

Treasury holdings of the FED and major foreign creditors (in USD billions)

Source: Federal Reserve, US Treasury Departement; Allianz Global Investors Capital Market Analysis

-200

0

200

400

600

800

1000

1200

1400

1600

1800

US-FED*

China

Japan

UnitedKingdom

OilExporters

Brazil

CaribianBanks

Taiwan

Russia

Hong

Kong

Switzerland

Canada

Luxembourg

Germany

Purchases since August 2010

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Fear of subsequent recession

Sentiment indicators point to a cooling but still suggest expanding economic growth.


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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

30

40

50

60

70

80

90

100

110

120

130

140

ifo World Economic Surv ey: Business Climate

ifo World Economic Surv ey: Current Assessmentifo World Economic Surv ey: Business E xpectations

30

40

50

60

70

80

90

100

110

120

130

140

Source: Thomson Datastream

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Germany is becoming the economic driving force

Global economic engine is firing on (almost) all cylinders.

* May 2011


13,3

9,6

6,35,2 4,7

3,7 3,42,6

-0,1

-1,1 -1,2

-12,3-15

-10

-5

0

5

10

15

China*

Germany

India

Eurozone

Russia

Italy

USA*

France

Brazil

UKSpain

Japan

Industrial production April 2011 vs. previous year (in % )

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The turnaround in monetary policy has taken place.

Central banks will continue to tighten monetary policy, especially in the emerging markets.


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2006 2007 2008 2009 2010 2011

0

2

4

6

8

10

12

14

16

ECB Short Term Repo Rate

Fed Funds Target RateJapan Target Rate

China T arget Rate

Brazil Target Rate

0

2

4

6

8

10

12

14

16


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When will the capital markets react?

Yields of German, Japanese and US 10-year government bonds (30 years and 1 year)


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81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

0

2

4

6

8

10

12

14

Yiel d 10y German government bond

Yield 10y US government bondYield 10y Japanese government bond

0

2

4

6

8

10

12

14


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J A S O N D J F M A M J

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Yield 10y German government bond

Yield 10y US government bondYield 10y Japanese government bond

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Source: Thomson D atastream

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Investment theme: Flexible bond strategies

Interest

rate rise1

-3 -2 -1 +1 +2 +3 +4 +5 +6 +7 +8

1,47 0,99 0,50 +50Bp -0,50 -0,99 -1,47 -1,93 -2,36 -2,77 -3,16 -3,53

2,90 1,96 0,99 +100Bp -0,99 -1,96 -2,90 -3,81 -4,65 -5,45 -6,21 -6,92

5,70 3,85 1,96 +200Bp -1,96 -3,85 -5,70 -7,44 -9,03 -10,54 -11,96 -13,27

The longer the maturity, the deeper the fall.

If the rates go up, prices come down

Interest

rates

bond

prices

It is possible to gain from a rise in interest rates:

short duration

Price movements of bonds when interest rates rise by x basis points (theoretical)

Duration2 Duration2

Assumption: parallel shift of the yield curve based on Bund-yields by X basis points.

2 Macaulay Duration; In this example bond price movements are determined by the change of the fair value (present value of future cash flows) with an initial face and market

value of 100 and different Macaulay durations. A success of the strategy can not be guaranteed and losses are not excluded.

interest

rates

bond

price

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Sharpe Ratio (excess return in relation to risk) has never been so high since 1989 for US-stocks.

Valuations are still in favour for equities


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89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

-0.15

-0.10

-0.05

0

0.05

0.10

0.15

0.20

0.25

0.30

Sharpe Ratio US-Stocks ((Stock return - 10y. US Treasuries)/V IX)

-0.15

-0.10

-0.05

0

0.05

0.10

0.15

0.20

0.25

0.30


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Decisive Insights:

Equities should strategically remain overweight compared to bonds.

Bond investors seem to be paying a high price for the flight to safe havens. Real returns on 5-

year German and US bonds have recently slipped into negative territory.

While the markets will presumably continue to be held in thrall by Europes debt crisis for a while

yet, the basic global economic trend seems to be upwards.

In view of the continued high levels of uncertainty on the markets, it could be advisable to maintain

a somewhat more defensive portfolio orientation.

But the attractive valuations of equities compared to bonds, the increase in global Merger &

Acquisitions speculation, the prevailing desperation of investors to find a home for their money and

the risk of a turnaround in interest rates, all still point to a recommendation to stay slightly

overweight in equities.

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www.allianzglobalinvestors.de/capitalmarketanalysis

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Disclaimer

This presentation has been issued and approved by Allianz Global Investors Europe GmbH, a subsidiary of Allianz Global Investors AG (part of the Allianz Group).

Allianz Global Investors Europe GmbH is a limited liability company incorporated under the laws of the Federal Republic of Germany with its registered office at

Mainzer Landstrasse 11-13, D-60329 Frankfurt/Main. Allianz Global Investors Europe GmbH is licensed in the Federal Republic of Germany as a provider of

financial services (Finanzdienstleistungsinstitut); for the conduct of its business activities, Allianz Global Investors Europe GmbH is subject to the supervision of the

German Bundesanstalt fr Finanzdienstleistungsaufsicht(BaFin).

Allianz Global Investors GmbH has established branches in Switzerland (Zrich), Italy (Milan), United Kingdom (London), Spain (Madrid) and the Netherlands

(Utrecht). Allianz Global Investors GmbH also has established representative offices in the Kingdom of Bahrain (Bahrain), Portugal (Lisbon) and Sweden

(Stockholm). For these branches and representative offices additional local laws and regulation may be applicable.

This document is meant to provide a broad overview for discussion and/or information purposes. Furthermore, this document was not prepared with the intention ofproviding legal or tax advice. The views and opinions expressed in this document, which are subject to change, are those of Allianz Global Investors Europe GmbH

and its affiliated companies at the time of publication. The duplication, publication, or transmission of the contents of this document to unauthorised persons,

irrespective of the form, is not permitted.

While some of the data provided herein is derived from various published and unpublished sources, and is assumed to be correct and reliable, it has not been

independently verified. Therefore, Allianz Global Investors Europe GmbH does not guarantee the accuracy or completeness of all data/information and will not

accept any liability for any direct or consequential losses arising from its use.

The investment opportunities described herein are not guaranteed by Allianz Global Investors Europe GmbH or affiliated companies within the Allianz Group. This

document does not constitute an offer or solicitation to buy securities. Statements made to recipients of this document are subject to the provisions of any underlying

offer or contract that may have been, or will be, made or concluded. As with all investment products, no guarantee can be given that past performance will be

repeated in the future; consequently, there is no assurance that a portfolio will match the returns shown in this document.

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