IBTimes UK editor-in-chief George Pitcher speaks to Edmund Shing, global equity portfolio manager at BCS Asset Management, about why deflation is not always deadly for the investor.
When the term deflation is mentioned, the so-called "lost" decade in Japan or the American Great Depression of the 1930s is usually evoked, periods where the economy in question contracted over a long period, resulting in mass unemployment and lower wages. But it is not all dark. As Shing explains, there can be a "good" side to deflation too.
For example, high street prices are on average 1.2% lower than in November 2013. So as far as presents under the Christmas tree are concerned, our money should go further this year than last, a positive facet of deflation that we can all enjoy.
When the economy is growing at above its long-term trend (normally 2.5% or more), so-called "cyclical" sectors which are tied to the prevailing economic trend tend to lead the stock market. These include manufacturers in sectors such as Machinery and Aerospace & Defence, plus service sectors such as Media, Transport and finally selected financial sectors such as Insurance.
Bearing in mind the relatively sharp fall in oil prices since July, at the stock level, Shing recommends focusing within the Transport sector on low-cost airline stocks such as Ryanair and Easyjet, which get a profit boost from lower fuel costs, plus a benefit to sales from higher passenger numbers as UK consumers flock abroad in search of cheap holidays.