Investing in a deflationary world

WE live in an abnormal world of falling consumer prices. The phenomenon is so rare that the US, for instance, saw year-on-year price declines only in one month (this January) in the last 50 years, if we leave out the depths of the financial crisis in 2009. Indeed, deflation fears have been increasing globally since last year, notably in Europe and Japan, and increasingly in China.

Normally, deflation is bad for equity investors as companies lose pricing power, affecting profit margins, which curbs their appetite for investment and growth. Also, consumers delay spending, hoping prices will fall further, hurting demand. The good news is we see the current phase of disinflation as a transitory phenomenon caused primarily by the sharp fall in oil prices (which was led by excess supplies from the US rather than due to deteriorating global demand). If anything, lower energy prices are benefiting consumers, giving them a higher disposable income to either spend or repay debt. This is supporting growth worldwide.

In fact, the world economy is set to accelerate for the fourth successive year. The US economy is, at last, achieving very healthy growth rates. Consensus estimates point to a 3 per cent growth this year, which would be the strongest pace since 2005.