What to Buy If You Think It’s a Bear

02/11/2010 12:00 pm EST


Gary Shilling

Columnist, Forbes

Gary Shilling, editor of INSIGHT, identifies eight trends from which investors can profit if we go through deflation and an extended bear market.

The slow growth and deflation I foresee in the years ahead portend a secular bear market for US and many foreign equities. 

US consumers are the key, because their 25-year borrowing-and-spending binge has been replaced by a saving spree.

There are a number of investment areas to sell or avoid in the slow economic growth and deflation I foresee over the next decade, but there will be winners.

1. Buy dividend payers such as utilities. Few sectors outside utilities today pay meaningful dividends. The dividend yield on the Standard & Poor’s 500 index is 2%. Under pressure from stockholders, dividend yields are likely to return to 3% or more.

2. [Buy] high-quality bonds, especially Treasuries. Treasuries will continue to be a safe haven in a troubled world and benefit from deflation. A decline in yields from 4.7% at present to 3.0% may not sound like much, but the bond price would appreciate over 30%. On a 30-year zero-coupon Treasury, which pays no interest but is issued at a discount, the total return would be about 60%.

3. I look for dollar strengthening that will persist for years as the buck is again regarded as the safe haven amidst slow economic growth and deflation, a climate that is tougher on foreign economies than on America’s. Furthermore, the greenback will remain the global reserve currency [for] the foreseeable future.
4. [Buy] consumer staples and foods. Items like detergent, bread, and toothpaste are essentials of life that are purchased in good times and bad. Consumer staples producers and food processors also have advantages in deflation. The costs of their raw materials will fall and they may not need to drop their prices commensurately. So, attractive profits growth is possible.

5. Investment advisors and financial planners should be in strong demand in the years ahead. Low investment returns will discourage do-it-yourself investing and encourage the use of professionals. Those benefiting also include trust companies, banks oriented to high-net-worth investors, mutual fund managers, and life insurance companies.

6. Factory-built housing and rental apartments will benefit from the separation of abodes from investments as owners realize that house prices can—and do—fall.

7. Buy selected health care companies. This is a huge sector, accounting for 16% of GDP and growing rapidly. I look for winners among those medical businesses that promote cost containment, outfits that provide home health care services and supplies, and outpatient services and clinics. Also included are manufacturers of noninvasive diagnostic and surgical equipment.

8. Productivity enhancers. In a deflationary environment, increased profits through price and volume increases will be difficult, [and] the current cost-cutting zeal will remain in place.

So, anything that helps customers reduce costs and promote productivity will be in demand. Temporary help companies may thrive as companies increasingly curb costs by using temps only at the time of day or season of the year they’re needed, and avoid paying high benefit costs.

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