With inflation slipping down to 0.44% which is a scenario of negative inflation or deflation, the investors are sweating and pulling their pants up inorder to foresee the effects of the same on the economic activities.Inflation drops because of increase in productivity but this is not the situation now.It is because of the fall in demand that prices are falling.But yes if deflation grounds in the economy, the repercussions will be low demand, lower production and weak economic growth.These prevailing conditions will discourage investments.The real interest rate difference between nominal interest rate and inflation becomes very high, making funds costlier. As demand goes down, capacity utilization of manufacturing units declines. This discourages investment in capacity expansion.
With a strong hit, the performances of the companies are surely going to be worsen so the investors need to pre plan while making investment decisions in the deflationary environment.The rule of the thumb suggest that invest in those companies whose products or services are not much affected by fall in demand. So, companies operating in health care, telecommunication and utilities like electricity distribution could be good bet to invest. Services of these companies will remain in demand even if the economy slows down.
Companies operating in sectors like snacks and beverages, health care, utilities and telecommunications can be included in the portfolio as the decline in prices lead to increase in demand in such sectors.Companies with strong balance sheets, which do not have much debt on their books, can also be considered for investment.One has to be cautious and avoid investing in companies that operate in capital goods as the performance of such firms is definitely going to dip further.The real estate companies should also be avoided. In deflation, the general perception is that the prices will further fall resulting in postponement in the purchasing decisions.This will lead to a cash starved situation for the real estate.
Read the report by ET here..
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2 comments:
Neat blog. Times of India has relied on a Citibank report to express these views on investment (It appeared in today's paper)http://economictimes.indiatimes.com/Where-to-invest-in-deflation/articleshow/4290202.cms
Perhaps you forgot to add the url. What are your own views on this.
Hey Mr.Anonymous,your comment is well accepted and the link has been updated.And as for my views on the topic.I completely concur by the report on the sectoral companies mentioned; as the deflationary situation will have minimum impact on the companies of interest as against the companies in the real estate industry and the ones dealing in the capital goods.The details are aptly cited in the article.
Thanks...
Keep visiting and your comments will be well appreciated.
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