Here Are David Rosenberg's 7 Rules For Investing In A Deflationary Environment

Deflated balloon Mauldin

David Rosenberg is pretty confident the economy is going to get worse and may even be headed for a depression.

But right now, his main concern is deflation or a stall in price increases, and he’s preparing investors for such a scenario.

Rosenberg has put together a list of 7 ways investors can prepare for deflation, and where they can put their money.

#1 Safe corporate debt

High-quality corporates (non-cyclical, high cash reserves, minimal refinancing needs). Corporate balance sheets are in very good shape.

Examples (our own): Utilities

#2 Equities

#3 Avoid leveraged companies, stick to companies with good balance sheets.

Whether it be credit or equities, focus on companies with low debt/equity ratios and high liquid asset ratios -- balance sheet quality is even more important than usual. Avoid highly leveraged companies.

Examples (our own): Microsoft, Apple

#4 Hard assets

Even hard assets that provide an income stream work well in a deflationary environment (ie, oil and gas royalties, REITs, etc...).

Examples (our own): Large energy companies. Exxon.

#5 The key sectors

Focus on sectors or companies with these micro characteristics: low fixed costs, high variable cost, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity (utilities, staples, health care -- these sectors are also unloved and under owned by institutional portfolio managers).

Examples (our own): United Health, Aetna

#6 Alternative assets

Allocate significant portion of asset mix to strategies that are not reliant on rising equity markets and where volatility can be used to advantage.

Examples (our own): Farmland, venture capital

#7 Precious metals

A hedge against the reflationary policies aimed at defusing deflationary risks -- money printing, rolling currency depreciations, heightened trade frictions, and government procurement policies.

Examples (our own): Gold, Silver

Don't miss David Rosenberg's 13 signs we're in a depression right now

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