Liquidity crunch: When the economy contracts, where should investors invest?

What is deflation and does it really happen?

Deflation (Deflation) sounds like an abstract economic concept, but it is a real phenomenon that can occur in Thailand and around the world. Imagine: if the value of your money keeps increasing while the prices of goods and services decrease, which is the opposite of Inflation (Inflation).

In a deflationary environment, the general price levels of goods and services continuously decline, increasing consumers’ purchasing power. You can buy more with the same amount of money, but this doesn’t mean all benefits are positive.

How does deflation occur?

Once you understand the mechanics of deflation, you’ll see that it results from market imbalances. Several causes can lead the economy into a downward spiral:

Demand Crisis (Demand Crisis)
When people spend less, possibly due to increased debt, decreased income, or an economic crisis (like during COVID-19), consumers tend to save more. As a result, demand for goods and services shrinks.

Supply Shock (Supply Shock)
Sometimes, new technology or efficiency improvements lead to more goods being available to consumers, while demand remains unchanged. Most producers then lower prices to boost purchasing power.

Monetary Policy Failures
If the central bank sets interest rates too high or the government imposes excessive taxes, money circulation in the economy decreases, leading to a money shortage and falling prices.

The dangerous downward cycle: Deflationary Spiral

This is what investors need to watch out for. When deflation occurs, it’s like entering a distorted decision-making world:

1. People expect prices to fall further → They delay purchases
2. Fewer consumers → Producers must lower prices further
3. Producers lose profits → They cut production and lay off workers
4. Unemployment rises → Income drops, leading to even less spending
5. The cycle repeats → The economy sinks deeper into deflation

This situation is similar to what happened during the “Great Depression” in the United States from 1929-1932, where GDP fell by over 15% worldwide, living costs plummeted, and unemployment soared to 23%.

Pros and cons of deflation

Who benefits, who suffers?

During deflation, the value of cash increases. Therefore, those with fixed incomes and creditors gain because their money becomes more valuable. Conversely, debtors and businesses face difficulties, as they need to pay back loans with more valuable money.

Impact on employment
In a deflationary environment, businesses are reluctant to expand employment because profits decline. Some may reduce their workforce, leading to higher unemployment rates.

Does deflation relate to economic recession?

Yes, they often occur together. When GDP contracts for two consecutive quarters, the economy is considered to be in a recession (Recession). In this scenario, people spend less, businesses sell less, prices drop, and deflation follows.

Latest data indicates that the Global Leading Economic Index (Global Leading Economic Index) continues to decline. The global economy in 2023 is projected to grow only 2.7%, below the normal 3%, due to structural inflation, war risks, energy crises, and cost-of-living crises.

Thailand: Is it really entering a deflationary phase?

Good news for Thais is that Thailand has not met all four criteria for deflation. Although the inflation rate turned negative in April 2020 (at -2.99% per year), the country still forecasts an inflation of 1.8% over the next five years, within the target range of 1-3%.

Thailand’s economic growth is expected to rebound from -8.1% in 2020 to 5.0% in 2021, but risks remain if the global economy continues to slow.

When deflation arrives: What should investors do?

Deflation doesn’t close the door to investment; it just changes the rules. Here are some ways investors can profit:

###Bonds(
When central banks cut interest rates, the value of existing bonds increases )because their yields become more attractive compared to new bonds(. Original bondholders are in a good position. Focus on high-creditworthiness bonds to reduce default risk.

)Equities###: Look for strong companies
Although the overall stock market may decline, some companies can maintain leadership. Choose companies that:

• Are essential for daily life (food, beverages)
• Have strong management
• Can generate profits even during economic downturns

(Gold): Safe-haven asset
Gold prices tend to rise during deflation because investors seek stable assets. For those interested in “speculating on both rising and falling markets,” trading CFD gold is an option without holding physical gold.

###Real Estate(: Prices decline during deflation
In a recession, some need to sell property quickly, leading to lower prices. This creates opportunities for “cash-rich” investors to buy land or condos at better prices for future speculation.

)Cash: Sometimes, doing nothing is an investment
During deflation, cash increases in value. Investors holding more cash are in a good position because when real estate and stocks fall, they can buy at better prices.

Strategic tips for investors

1. Diversify holdings: Don’t put all your money into one asset class. Spread across cash, bonds, stocks, and gold.
2. Dollar-cost averaging ###Averaging(: Invest in installments rather than all at once.
3. Research company performance: Focus on earnings, not just stock prices.
4. Short Selling and Put Options: If you can borrow stocks to sell, you can profit from market declines.
5. Have a clear financial plan: Set targets, stop-loss points, and stick to your plan.

Regularly monitor Thailand and global situations

Governments and central banks can mitigate deflation by:

• Lowering interest rates and increasing liquidity
• Reducing taxes to boost consumer spending
• Investing in public projects to create jobs
• Promoting employment and production

Summary

Deflation is a warning sign that every salaried person should understand, as it can impact unemployment, income, and debt levels. But for knowledgeable investors, it presents opportunities, not crises.

The key is to plan ahead, choose appropriate assets, and continuously monitor economic conditions. No matter which way the market moves, you can be a winner.