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Bear Market, Falling Prices Across the Board, Purchasing Power Divided, Customers Not Planning. How to Invest with Minimal Risk? This article will help you understand Deflation happening worldwide and how to prepare from the perspective of an ordinary investor.

What is Deflation?

(Deflation) is not a situation that directly affects savers, but rather a scenario that sneaks in quietly.

It is an economic condition where the overall price level of goods and services continues to decrease. It is the opposite of inflation, where prices rise. When deflation occurs, the value of money increases, allowing it to buy more goods over time. A slight disappointment is that falling prices do not mean all goods are cheaper, but rather the overall average has decreased.

What causes deflation?

Deflation results from the accumulation of several factors, not just economic downturns.

Supply-side causes

When the quantity of goods/services increases faster than demand, for example:

• Increased production efficiency, new technology reduces costs
• Companies can produce more, but customers continue to buy normally
• Effect: retailers must lower prices to clear stock

Demand-side causes

Consumer demand decreases, accumulating various factors such as:

• High household debt making people cautious about spending
• Income reduction due to unemployment
• Uncertainty about the future leading to tighter credit
• Savers wait for prices to fall further, avoiding spending to “see the value increase”

Indicators: Is Thailand really?

In April 2020, Thailand experienced negative inflation (-2.99% YoY) for the first time in 10 years and 9 months, due to COVID-19 impacts and falling oil prices.

However, the current situation in Thailand does not yet qualify as deflation according to the definition, as only 1-2 indicators meet the criteria. Current data:

• General inflation rate for 2021: 0.9% YoY (improved from -1.7%)
• 70% of prices are stable or rising; only some categories have decreased
• Projected inflation over the next 5 years: 1.8% (still within the 1-3% target)

Risks return if the global economy continues to contract.

Deflation and recession go hand in hand

Suppose the market loses value for 2 consecutive quarters: the economic cycle looks like this:

Downturn cycle:

1. Lack of confidence → cautious spending → demand drops
2. Companies see fewer orders → produce less
3. To sell, they lower prices → prices fall
4. If prices still don’t sell, companies lay off workers
5. Unemployment rises → debts increase, income drops → no spending → back to step 1

Connected effects:

• Unemployment soars
• People’s income declines
• Businesses profit less → lending rates increase → harder to invest
• Global economy, if GDP remains negative, often follows with = deflation

Historical example: The Great Depression (1929-1932) in the US

• Global GDP fell >15%
• International trade halved
• US unemployment reached 23%, some countries up to 33%
• Agricultural prices plummeted <60%
• Long-lasting effects led to World War II

Who is hurt, who benefits from deflation?

Beneficiaries

1. Fixed-income earners - Same salary, but money is more valuable, buying more
2. Creditors - Borrowers who lose jobs, making debt more valuable in real terms
3. Cash savers - Cash gains purchasing power

( Victims

1. Entrepreneurs/merchants - Selling at lower prices, profits diminish, some businesses close
2. Debtors - Must pay the same debt with reduced income, making repayment harder
3. Shareholders - Company profits decline, stock prices plummet
4. Unemployed - Increased unemployment, harder to find work

Impact on daily life

Unlike inflation, deflation causes:

• Cash hoarding - Money gains value, so holding cash is advantageous
• Demand reduction - Stores lower prices, but people still prefer to save
• Purchasing power dominance - Those with cash benefit, borrowers find it harder

What to invest in during deflation?

During deflation, you have several options depending on your risk appetite.

) 1. Cash and bonds

When central banks cut interest rates ###deflationary measures### → bond values increase.

Advantages:

• Reduce risk, provide steady returns
• If interest rates fall from high levels, existing bonds increase in price

Caution:

• Choose credible bonds, research issuers thoroughly

( 2. Stocks )equities###

Investing during deflation can yield returns in 2 ways:

a. Capital gains - Buy low, sell high (assess long-term recovery) b. Dividends - Select companies with stable profits that pay dividends

Additional tips:

• Focus on “necessity” businesses - food, beverages, medicine, utilities that consumers still buy even in economic downturns
• People will buy food as usual, even if the economy is weak, ensuring demand

( 3. Real estate

In severe deflation, property prices tend to decline.

Reasons:

• Lack of liquidity, urgent sales
• People hesitant to borrow, higher interest rates discourage purchases

Strategy:

• Buy at lower prices, prepare to sell when the market recovers
• Suitable for those with “cold cash,” as sales may take time

) 4. Gold

Investing in gold during deflation:

• Gold prices may rise or fall depending on global conditions
• Used as a diversification tool ###Hedge###

Popular method: CFD trading

• Speculate on both rising and falling prices
• No need to hold physical gold
• Through brokers with good contracts
• Low deposit, high leverage (Leverage)

Another option: Short selling stocks

• Borrow stocks and sell them
• Wait for prices to drop, then buy back
• Profit from the price difference (another way to profit in a declining market)

Planning to cope with deflation

( Plan 1: Cash reserves Maintain sufficient “cold” cash to:

• Wait for the best buying opportunity
• Cover emergencies during economic downturn

) Plan 2: Timing investments

• Use dollar-cost averaging ###DCA###, avoid lump-sum purchases
• Buy during low prices, sell when recovery begins

( Plan 3: Long-term credit

• Borrow long-term, invest in equities while the economy is still good
• During deflation, interest rates may fall → easier repayment

How does the government address deflation?

To prevent deflation from spreading, the government can:

• Lower interest rates to increase liquidity
• Purchase assets )QE###, central bank injects money into the system
• Reduce taxes to increase people’s disposable income
• Increase public spending (budget deficit) on large projects
• Lower utility costs to ease living expenses
• Promote foreign investment to bring in capital

How to profit during a declining market?

Even in a bear market, investors can profit in several ways:

( 1. Choose “strong” stocks

• Find companies with solid, stable performance even in downturns
• If the company remains profitable, stock prices will eventually reflect fundamentals

) 2. Risk management

• Diversify into cash, allocate investments proportionally
• Cut losses and take profits systematically

3. Short selling / Put options

• Borrow stocks and sell them, buy back at lower prices
• Profit from the decline
• Buy put warrants to speculate on falling prices

4. CFD trading

• Trade CFDs on both upward and downward movements
• Suitable for those who prefer not to hold actual stocks

Summary: What is deflation?

Deflation is not an distant issue; it is an economic condition that may be unavoidable, especially if the global economy continues to contract. The key is to be prepared and plan appropriately to align with your situation and investment goals.

References: TPSO ###Thai Petroleum Storage Public Company Limited###, SCB (Siam Commercial Bank), BluechipThai, Bank of Thailand (BOT), Global Leading Economic Index