GaveKal Capital thinks there’s a storm brewing in the US economy, and investors are going to feel the brunt of the damage if they don’t get their portfolios right. The research firm sees evidence of a powerful deflationary shock ahead, and implants one major message: in the coming environment investors want their money in cash and counter cyclicals.
The above chart shows the likelihood of investors based in US Dollars outperforming the currency in two different currency environments. It’s clear that with a strong currency behind them, US based investors have a better chance of outperforming, but they need to know where to put their money.
According to the analysts, a weak currency leads to structurally low valuations, while a strong one boosts valuations. For those still unconvinced that the US Dollar is actually deflating, and those unshaken by the recent gold crash, here’s a look at the trade weighted value of the US Dollar.
The chart shows the beginnings of deflation toward the end of 2011, a trend that has slowly continued since then. The dollars relative value now stands above where it was at the onset of the financial crisis. GaveKal Capital thinks that this trend is going to continue. It means that cash and counter cyclicals are going to be the big gainers in 2013.
The chart is a comparison of the valuations of hyper cyclical stocks weighted against those of counter cyclicals. The data only covers the last five years, but it seems clear that the trend has been upward with relative lows early in each year. Counter cyclicals are going up and investors need to get in on the trend.
According to GaveKal Research, deflationary environments have resulted in the same kind of market several times in the last century, so there is evidence about which stocks should be invested in, in order to get the most out of the coming climate. The two big names are Healthcare and Consumer Staples.
Some investors are likely to discard this report as just another theory about what is actually going on, but the weight of evidence suggesting that the United States is entering a period of deflation is growing. The defensiveness of stocks in the Healthcare and Staples arena gives them an allure that other equities do not have.
Investors convinced by the deflation narrative should certainly look to those stocks, the downside is not substantial, and the rewards could be great.
