Fixed income is naturally a good area to be in in a deflationary environment. What other securities, namely equities, would be appropriate? Things that come into mind are companies whose growth outpaces prices declines, or companies with rock-solid pricing power (tobaco?). What else?
^to the extent deflation hurts company earnings, corporates could be a bad idea if default is a risk. same could be said for equities as their asset base is losing value. i gotta think cash is king, no? even if you’re yielding close to zero, your real return ain’t bad relatively speaking.
Look for companies with little to no debt. Econ 101 tells us that inflation benefits borrowers and the reverse with deflation. Apple and Google both have no debt, but there is definite risk that they are overvalued currently.
i think it’s a pretty sure bet that sustained deflation would be coupled with a bad economy so i would stay away from anything risky. just my 2c.
TIPS *peter griffin laugh*
good thread Among equities, I would pick companies with high dividend yields and minimal debt. I would certainly avoid financial institutions with significant long exposure to mortgage and consumer debt. I would prefer Cash and Bonds to equity, though. I would favor high grade bonds over riskier bonds due the aforementioned impact of deflation on company revenues and ability to service debt obligations. I would also stay away from MUNIs because state and local governments are already in trouble. Decreases in sales and income taxes could be devastating. Stay away from commodities and real estate.
TIPS have an embedded put on inflation, so TIPS actually can be good in a deflationary environment, particularly if you have a suspicion that the FED might try to combat deflation by stimulating inflation. In terms of equities, my bet would also be on low debt, stable dividend companies, most likely in staple industries. Possibly low beta stocks too. This assumes that you think deflation will be global. If you think that deflation will be localized, then you’d want to include exporting companies. I agree with JoeMontana about muni bonds. Declines in sales taxes and property taxes mean that the spreads on munis should go way up.
bchadwick Wrote: ------------------------------------------------------- > TIPS have an embedded put on inflation, so TIPS > actually can be good in a deflationary > environment, Learn something new every day!
Yes, TIPS never pay less than PAR=100, even in the case of deflation. However, off-the-run tips that have had their par values adjusted upwards for past inflation can deflate downwards until they get to PAR=100. Usually, nominal treasuries will outperform TIPS in a deflationary environment, but TIPS aren’t necessarily all that bad, and if there is any chance that the government will try to combat deflation by promoting inflation, then TIPS can be better on a risk-adjusted basis.