📝The Era of Deflation: Stability and Defense

The "deflation era" refers to a period when the overall price level of an economy declines over the long term, often accompanied by weak demand, low confidence, and reduced willingness to invest and consume. It is not a short-term drop in prices but a systemic and persistent deflation.

📉 1. Core Characteristics of the Deflation Era

Characteristic	Explanation
1. Insufficient Aggregate Demand	Businesses and households are reluctant to invest and consume, leading to sustained price declines
2. Pressure on Corporate Profits	Product prices fall while costs remain rigid, squeezing profit margins
3. Slower Money Circulation	Society becomes more conservative, making money "more valuable" but less fluid
4. Low or Even Negative Interest Rates	Central banks stimulate the economy with extremely low or even negative interest rates
5. Increased Debt Burden	Actual debt becomes heavier due to deflation, raising default risks
6. Extremely Low Investment Willingness	Risk aversion intensifies, and capital is reluctant to flow into the real economy

📈 2. Which Sectors Might Benefit During Deflation?

While the overall economy is under pressure, some industries have defensive or relatively beneficial attributes, as follows:

✅ 1. Consumer Staples (Necessities)

Characteristics: Daily necessities, food and beverages, etc., must be consumed regardless of economic conditions.
Representative industries: Grain and oil, dairy products, condiments, chain supermarkets.
Core logic: Stable demand, small price fluctuations, and strong moats.
Typical examples: China's Yili, Haitian Flavouring; overseas like P&G, Walmart.

✅ 2. Utilities

Characteristics: Monopolistic industries like electricity, water, and natural gas with stable income.
Reason: Daily use is required regardless of economic conditions.
In a deflationary environment, returns are predictable and less volatile, making them defensive sectors.

✅ 3. Gold and High-Credit Bonds

Characteristics: Deflation represents rising real interest rates, enhancing the value of cash, but if accompanied by monetary easing or economic panic, gold demand may still rise.
Government bonds: In a deflationary era, bond prices rise due to falling interest rates, especially high-credit-rated bonds.

✅ 4. High-Tech and Efficiency-Enhancing Companies

Characteristics: Under deflationary pressure, companies need to improve production efficiency and reduce costs.
Tech companies with "technology substitution + global competitiveness" still have growth momentum.
Examples: Automation, AI, SaaS software, robotics, cloud computing, etc.

✅ 5. Export-Oriented Companies (If Domestic Deflation Is Not Synchronized Globally)

Characteristics: Currency appreciation + lower costs may enhance international competitiveness.
Examples: Manufacturing leaders, ODM/OEM companies may benefit.

❌ 3. Industries to Avoid During Deflation

Industry	Reason
Real Estate	Housing price expectations decline, asset values depreciate, and investment willingness plummets
Discretionary Consumption (e.g., Cars, Travel)	Consumers postpone large expenditures, leading to sales contraction
Raw Materials and Cyclical Sectors	Commodity prices are under pressure, inventories pile up, and demand is weak
Small and Medium Financial Institutions	Asset quality deteriorates, default rates rise, and interest margins narrow

✅ 4. Investment Strategy Recommendations (During Deflation)

Cash is king, but asset safety is more important
- Cash or short-term bond interest rates may be low, but their value is stable;
- Avoid high leverage and risky assets.
Invest in high-quality leaders
- During industry consolidation, leading companies are more resilient and may expand their market share amid industry reshuffles
High-dividend strategy
- Stock price gains are limited during deflation, but companies with stable cash flows and high dividends are more favored
Tech stocks (non-speculative)
- If their income is stable and they provide clear cost-saving and efficiency-enhancing value, they can serve as hedging assets.

In summary:

The deflation era is not without opportunities, but opportunities lean toward "stability, defense, efficiency" and "real value creation."