Goi ngi tal one: Ca nt heusdec oupl ef r om t hegl oba l E c onomy? Gr egmei er I nv es t ments t r a t eg i s t Al l i a nzgl oba l I nv es t or s Ma r c h30, 2015 Unde r s t a nd. Ac t.
Agenda A Call for Stronger Growth First Derivative: A Stronger Dollar Second Derivative: Fallout From the Dollar Rally Market Implications Conclusions 2
A Call for Stronger Growth 3
IMF: The Best Year for US Growth Since 2003 IMF GDP Forecasts 15 Percent Change (Annual) 10 5 0 6.76 3.57 1.16 0.65-5 1985 1990 1995 2000 2005 2010 2015 China United States Euro Zone Japan Source: IMF. As-of: 10/8/14. 4
Engines of the Recovery: Labor Market Gains Unemployment has Fallen Quicker than Expected 8.5% Unemployment Rate 7.5% 6.5% 5.5% *Lower band of Federal Reserve forecast range Sources: Federal Reserve; US BLS. As-of: 3/19/15. 5
Engines of the Recovery: Labor Market Gains The employment gap the difference between actual unemployment and the rate at which inflation starts to accelerate should close soon. The US Employment Gap is Closing Fast Percent 2 0-2 -3.64 (2009) -0.14 (2008) -4.02 (2010) -1.91 (2013) -2.55 (2012) -3.37 (2011) -0.76 (2014) -0.12 (2015) 0.10 (2016) -4 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: OECD. As-of: 3/19/15. 6
Engines of the Recovery: The Consumer Balance Sheet Consumers have gone through an unprecedented degree of deleveraging. This is a financial stress-reliever, freeing up resources for spending, saving or investment. An Historic Drop in Consumer Debt Debt/GDP: Max: 95.23 (Q1-09) Debt/Service: Max: 13.17 (Q4-07) Debt as % of GDP 80 60 40 20 0 1950 1960 1970 1980 1990 2000 2010 Debt/GDP (Left) Debt/Service (Right) 76.25 9.92 13 12 11 10 9 Debt as % of Disposable Income Sources: Federal Reserve; US BEA. As-of: 4Q14. 7
Engines of the Recovery: Cheaper Energy The drop in gasoline prices from $3.75/gallon last July to $2.57/gallon in March 2015 amounts to a savings of $447 million per day for US drivers. Oil and Gasoline Prices are Tightly Correlated Correlation: 0.98 Dollars per gallon 4 3.5 3 2.5 2 1.5 140 120 100 80 60 40 Dollars per barrel 1 20 1993 1996 1999 2002 2005 2008 2011 2014 Retail gasoline (Left) WTI Oil (Right) Sources: FactSet; US DOE. As-of: 3/13/15. 8
Engines of the Recovery: Real Wage Growth Real Earnings vs. Real Spending 1965-2011 Correlation: 0.65 9 Real Earnings vs. Real Spending 2011 to Current Correlation: 0.87 4 Percent change (annual) 6 3 0-3 -6 Percent change (annual) 2 0-9 1970 1980 1990 2000 2010 Real Weekly Earnings Real Consumer Spending (PCE) -2 2011 2012 2013 2014 Real Weekly Earnings Real Consumer Spending (PCE) 2015 Source: US BEA. As-of: 1/31/15. 9
Engines of the Recovery: Reduced Fiscal Drag The drag from fiscal consolidation is reversing, as the outlook for public finances (temporarily) improves. This may continue in 2015, reducing pressure on public sector hiring, wages and spending. Public Payrolls and the Federal Budget Change in Payrolls (1000s of Jobs) 400 200 0-200 -400 Correlation: 0.80-10 1995 1998 2001 2004 2007 2010 2013 Public Payrolls (Left) Federal Budget (Right) 10 5 0-5 Deficit/Surplus (% of GDP) Sources: CBO; US DOL. As-of: 12/31/14. 10
Engines of the Recovery: Low Interest Rates With the economy improving, the Fed is considering the first rate hike since 2006. Even when rates rise, policy should stay easy for some time. Monetary Policy is Light Years From "Normal" Max: 20.00 (25-FEB-80) Min: 0.25 (16-DEC-08) Percent 20 15 10 5 5.57 0 0.25 1975 1980 1985 1990 1995 2000 2005 2010 2015 Fed Funds Target Rate Average Source: Federal Reserve. As-of: 3/18/15. 11
First Derivative: Faster Growth + Policy Tightening = A Stronger US Dollar 12
Divergent Global Prospects Have Kept US Yields High Other central banks are massively easing while the Fed shifts toward tightening. This is widening the spread between US and foreign bond yields. 10-Year Government Bond Yields Percent 5 4 3 2 1 1.97 0.33 0.16 0 2005 2007 2009 2011 2013 2015 US Japan Germany Source: FactSet. As-of: 3/18/15. 13
Yield-Seeking Investors are Bidding Up the US Dollar 10-Year Yields vs. USD 1986 to Current Correlation: 0.40 Treasury Yield 10 9 8 7 6 5 4 3 2 1 Jan-86 Jan-94 Jan-02 Jan-10 US Dollar Index (Right) 10-year Treasury Yield (Left) 120 110 100 90 80 70 US Dollar Index 10-Year Yields vs. USD Last 12 Months Correlation: -0.88 Treasury Yield 2.8 2.6 2.4 2.2 2 1.8 1.6 Apr-14 Jul-14 Oct-14 Jan-15 US Dollar Index (Right) 10-year Treasury Yield (Left) 100 95 90 85 80 US Dollar Index Source: FactSet. As-of: 3/18/15. 14
Second Derivative: Fallout From the Dollar Rally 15
Dollar Rally Fallout: Weaker US Exports Exports have added on average 0.6 percentage points to quarterly GDP since 2010, accounting for roughly ¼ of total US growth. Exports Should Contribute Less to US GDP 1947 to Present 4Q14 Last 5 Years 0.00% 0.20% 0.40% 0.60% Average Contribution to Quarterly GDP Source: US BEA. As-of: 4Q14. 16
Dollar Rally Fallout: Weaker Corporate Earnings Foreign Exposure: US GDP Exports as % GDP Domestic Economy Foreign Exposure: S&P 500 Domestic Revenue Foreign Revenue 13% 37% 87% 63% Sources: Standard & Poor s; FactSet. As-of: 3/18/15. 17
Dollar Rally Fallout: Cheaper Consumer Goods Dampened by cheaper input and transportation costs, prices of consumer durables are sinking. Combined with labor market gains and the improved consumer balance sheet, this may further bolster spending. Consumer Durable Goods Prices (PCE) Max: 11.91 (Apr-75) Min: -4.32 (Oct-03) Percent Change (Annual) 12 10 8 6 4 2 0-2 -4-6 1959 1965 1971 1977 1983 1989 1995 2001 2007 2013-2.79 Source: US BEA. As-of: 1/31/15. 18
Dollar Rally Fallout: Cheaper Commodities Prices Factors ranging from the US shale oil boom to slowing growth in China have sent commodity prices lower. Add US dollar strength to the list. The US Dollar vs. Commodity Prices Index 120 100 80 Correlation: -0.69 700 600 500 400 300 200 Index 1990 1995 2000 2005 2010 2015 US Dollar Index (left) Reuters CRB Index (right) Source: FactSet. As-of: 3/18/15. 19
Market Implications 20
Market Implications: Downward Price Pressures The deflationary impact of the 2014 energy market bust is compounded by cheaper prices on imports and other commodities. Headline consumer prices may dig deeper into deflationary territory before recovering. The Inflation Rate may Fall Further Annual Change 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% 239 236 233 Deflation Risk Zone 230 Index US CPI (Annual Change; Left) US CPI (Index; Right) Sources: US DOL; Allianz Global Investors. As-of: 2/28/15. 21
Market Implications: A Slower Fed Rate Hike Cycle Bets on the fed funds rate liftoff date continue to get pushed back. We think the Fed will move later this year, but unexpectedly weak growth or inflation could further delay/slow the pace of policy normalization. Fed Rate Hike Expectations Odds of a Rate Hike Mar-14 Jun-14 Dec-14 18-Mar-15 100% 80% 60% 40% 20% 0% FOMC Meeting Dates Sources: CME; Allianz Global Investors. As-of: 3/18/15. 22
Market Implications: Flattening of the Yield Curve Massive QE by the ECB and the Bank of Japan should help keep a lid on global long-term yields. If/When the Fed hikes, the US yield curve could flatten further. US Yield Curve 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Yield (%) 6M1Y2Y3Y 5Y 10Y 15Y 20Y 30Y 0.0 Now One Month Ago One Year Ago Source: FactSet. As-of: 3/18/15. 23
Market Implications: More Volatility As policymakers change gears from record easing to the first rate hike since 2006 market volatility will likely rise. Monetary Policy vs. S&P 500 Volatility August 1, 1990 to July 1, 1995 Correlation: 0.60 Standard Dev. Weekly Returns (%) 3 2.5 2 1.5 1 0.5 1991 1992 1993 1994 1995 Equity Market Volatility (Left) Fed Funds Target Rate (Right) Sources: FactSet; Federal Reserve. As-of: 3/18/15. 8 7 6 5 4 3 Percent 24
Market Implications: US Earnings Adjustments Earnings forecasts have come down across all S&P 500 sectors since the start of the year. Corners of the market with the least foreign revenue exposure have taken less of a hit. US Revenue Base Change in 1Q15 Earnings Forecasts (Since 12/31/14) S&P 500 63% -8.7% Tech 41% -5.6% Materials 51% -17.3% Energy 57% -34.0% Health Care 61% -4.2% Industrials 62% -6.7% Consumer Staples 64% -6.2% Consumer Disc. 69% -7.9% Financials 80% -2.5% Utilities 96% -0.9% Telecom 99% -1.9% Source: FactSet. As-of: 3/13/15. 25
Market Implications: Foreign Currency Challenges For investors in foreign markets, local asset returns could be swamped by currency market performance. MSCI Benchmark YTD % Return (Local) YTD % Return (USD) Difference (Currency Loss) Brazil 3.99 (12.55) (16.54) Denmark 25.38 13.06 (12.32) Ireland 22.15 10.30 (11.85) Portugal 21.89 10.07 (11.83) Germany 21.41 9.63 (11.78) Italy 19.79 8.17 (11.62) Netherlands 19.72 8.10 (11.62) Belgium 19.37 7.79 (11.58) France 18.48 6.99 (11.50) Finland 18.09 6.63 (11.46) Austria 16.93 5.58 (11.34) Spain 10.86 0.11 (10.76) Source: MSCI. As-of: 3/23/15. 26
Market Implications: Potential for an EM Crisis Rouble per USD 70 60 50 40 30 20 10 Russia - FX & Reserves 1995 1999 2003 2007 2011 Roubles per USD (Left) Reserves (Right) 600,000 500,000 400,000 300,000 200,000 100,000 0 Millions of USD Bolivares per USD 6 5 4 3 2 1 Venezuela - FX & Reserves 0 1995 1999 2003 2007 2011 Bolivars per USD (Left) Reserves (Right) 45 40 35 30 25 20 15 10 Millions of USD Source: FactSet. As-of: 3/13/15. 27
Conclusions 28
Unexpected Headwinds = Fragile Recovery 2011: Greek crisis, Fukushima, US debt downgrade 2012: Euro crisis & recession, Japan recession 2013: Euro crisis & recession, Fed taper tantrum 2014: US winter storms, Japan recession, oil bust The Post-Crisis Recovery has been Weak Averge Since 1950: 3.28% Percent Change 10 8 6 4 2 0 2015: US port strike & -2 winter storms, EM -4 crisis? 1950 1960 1970 1980 1990 2000 2010 Annual GDP Source: US BEA. As-of: 4Q14. Average Since 2010: 2.21% Average 29
The IMF Record The IMF has overestimated GDP in 7 of the past 10 years. The economic collapse in 2008 and 2009 was completely missed. Actual Annual US GDP vs. IMF Forecasts Percent Change (Annual) 4 3 2 1 0-1 Actual GDP -2 IMF Forecast -3 Sources: IMF; US BEA. As-of: 4Q14. 30
End Greg Meier Investment Strategist Allianz Global Investors March 30, 2015 Understand. Act.
Appendix 32
Appendix: The Fed s Dual Mandate Fed Unemployment & Inflation Targets Unemployment: Max: 10.80 (Nov-82). Min: 2.50 (May-53) PCE: Max: 11.58 (Oct-74). Min: -1.18 (Jul-09) 12 10 Percent 8 6 4 2 0 5.83 5.50 0.22-2 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 Inflation (Headline PCE) Unemployment Rate Average Unemployment (since 1948) Source: US BLS. As-of: 2/28/15. 33
Appendix: The Fed vs. the Bank of Japan & ECB QE as % GDP (Quarterly) 8 QE as % GDP (Cumulative) 70 Percent of GDP 6 4 2 0-2 5.08 0.28 Percent of GDP 60 50 40 30 20 62.20 25.48 22.23-4 10-6 1990 1996 2002 2008 2014 Fed Bank of Japan 0 1990 1996 2002 2008 2014 Bank of Japan Fed ECB Source: FactSet. As-of: 4Q14. 34
Appendix: US vs. German Yield Curve US Yield Curve 6M1Y2Y3Y5Y 10Y 15Y 20Y 30Y 0.0 Now One Month Ago One Year Ago 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Yield (%) German Yield Curve 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5 6M1Y2Y3Y5Y 10Y 15Y 20Y 30Y -1.0 Now One Month Ago One Year Ago Yield (%) Source: FactSet. As-of: 3/18/15. 35
Appendix: The Negative Yield Club Two-Year Government Bond Yields Percent 1 0.5 0-0.5-1 UK Italy Spain France Austria Finland Netherland German Sweden Denmark Switzerland Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Source: FactSet. As-of: 3/18/15. 36
Appendix: US 10-Year Yield 10-Year Treasury yields 16 Max: 15.84 (30-SEP-81) Min: 1.39 (24-JUL-12) 12 Percent 8 6.03 4 1.92 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 10-year Treasury yield Average Source: FactSet. As-of: 3/18/15. 37
Appendix: Stock Valuations (NTM) Last 5 Years Since 1995 25 25 P/E Ratio (IBES, NTM) 20 15 10 16.75 13.69 P/E Ratio (IBES, NTM) 20 15 10 17.08 16.75 5 5 0 2010 2011 2012 2013 2014 S&P 500 Average 0 1996 2000 2004 2008 2012 S&P 500 Average Source: FactSet. As-of: 3/13/15. 38
Appendix: Stock Valuations (NTM) Valuations vs. USD S&P 500 PE 27 24 21 18 15 Correlation: 0.87 120 110 100 90 US Dollar Index Valuations vs. Oil S&P 500 PE 27 24 21 18 15 Correlation: -0.73 160 140 120 100 80 60 Oil Price ($/bbl) 12 9 1996 2000 2004 2008 2012 80 70 S&P 500 P/E (53 Week Lag) (Left) US Dollar Index (Right) 12 9 1996 2000 2004 2008 2012 S&P 500 PE (Left) Crude Oil (Right) 40 20 Source: FactSet. As-of: 3/13/15. 39
Appendix: US Oil Inventories & Rig Counts US Oil Inventories vs. Oil Rig Counts 400 380 360 340 320 300 280 1988 1992 1996 2000 2004 2008 2012 Millions of barrels (1-yr moving avg) US Crude Oil Stocks Ex-SPR (Left) Oil Rigs (Right) 387.37 866.00 1,600 1,400 1,200 1,000 800 600 400 200 Number of Oil Rigs Sources: US DOE; Baker Hughes. As-of: 3/13/15. 40
Disclaimer Past performance is not indicative of future results, which may vary. There is no guarantee that any opinion, forecast, or objective will be achieved. The information herein is provided for informational purposes only and should not be construed as a recommendation of any security, strategy or investment product, nor an offer or solicitation for the purchase or sale of any financial instrument. References to indices, benchmarks or other measures of relative performance are provided for your information only. References to such indices do not imply that managed portfolios will achieve returns, or exhibit other characteristics similar to the indices. Index composition may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, sector exposure, correlations, or volatility, all of which are subject to change over time. Unless otherwise noted, equity index performance is calculated with gross dividends reinvested and estimated tax withheld, and bond index performance includes all payments to bondholders, if any. Index calculations do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index. Index data contained herein (and all trademarks related thereto) are owned by the indicated index provider, and may not be redistributed. The information herein has not been approved by the index provider. This material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts are inherently limited and should not be relied upon as an indicator of future results. References to specific securities, issuers and market sectors are for illustrative purposes only. The asset and industry reports contained herein are unaudited. The summation of dollar values and percentages reported may not equal the total values, due to rounding discrepancies. Unless otherwise noted, Allianz Global Investors U.S. LLC is the source of illustrations, performance data, and characteristics. Allianz Global Investors U.S. LLC ( AllianzGI US ) is an SEC registered investment adviser that provides investment management and advisory services primarily to separate accounts of institutional clients and registered and unregistered investment funds. AllianzGI US manages client portfolios (either directly or through model delivery and wrap fee programs) applying traditional and systematic processes across a variety of investment strategies. AllianzGI US may also provide consulting and research services in connection with asset allocation and portfolio structure analytics.