Please best investments for deflationary environment this error screen to sharedip-107180464. Today we’re laying a loose framework for the best investments during deflation. Because deflationary signals have reared their ugly head as of late. Not to mention, many prominent investment managers have voiced their concern about the dreaded scenario.
We’ve detailed how David Gerstenhaber’s global macro hedge fund Argonaut Capital thinks deflation is the greater risk. Additionally, Broyhill’s Affinity hedge fund has been betting on deflation as of late. PIMCO’s bond king Bill Gross has been buying treasuries in order to combat these fears. While investing during the dreaded ‘D’ word is not impossible, the options to preserve and grow capital are certainly limited. So, what is the best investment for deflation? The phrase “cash is king” is often cliche. It’s not cliche during deflation, it’s rule number one.
Assuredly, cash is one of the few ‘safe’ investments you can make in this scenario. Over the normal course of investing, most investors focus on their return on capital. Again while ‘paying down debt’ doesn’t sound like an investment, it most definitely is during deflation. In a period where literally every single dollar matters, each dollar of debt can become crippling.
Alternative to cash, fixed income is also seen as an option for those who seek protection. US Treasuries are highly coveted here as they are the safest and most in-demand. If one were to go the corporate bond route, seeking high quality bonds is preferred. Traditional investments will start to suffer as underlying companies will see lower margins and losses. Not to mention, highly leveraged companies make ideal short selling targets and certain companies can face the risk of becoming insolvent. Understand that during deflation, equities in general are one of the major investments to avoid. However, high quality stocks could be a potentially dim light in an otherwise dark scenario.
While the majority of companies will lose pricing power and succumb to weak margins, large cap high quality companies that dominate their industries may be able to maintain pricing power. Not to mention, many of these stocks pay dividends which generate valuable cash during deflation. GMO’s Jeremy Grantham recently voiced concern about deflation and one of his few investment recommendations was to buy high quality stocks. For ideas, hedge fund T2 Partners recently issued a presentation on 3 large cap stocks. As such, rent rather than own.
Stand back and let the landlords watch the values of their properties plummet. Deleveraging should be a big theme playing out in the future, environment notwithstanding. As mentioned earlier, short the equity of companies that have poor balance sheets and are highly levered. In deflation, leverage begins to unwind and currency plays can be found. A massive leveraged carry trade in the Yen has taken place over the years and as such would be unwound in deflation, thus benefiting the Yen. Regardless of environment, technology will advance and will be in demand.
The technology sector was highlighted as one of the few areas to possible allocate capital in high quality equities. Companies that have strangleholds on their industry should have an advantage. Conventional wisdom says to avoid precious metals during deflation. During the Great Depression from 1929-1932, commodities in general crashed. The majority of proponents for owning gold during deflation would cite its store of value or hedge against uncertainty. That said, those doing so are mainly seeking inflationary protection.