Eurozone Deflation Expected to Bring These Four Changes

It appears deflation is becoming entrenched in Europe.

Some observers say that the Eurozone could go the way of Japan, a nation that's been largely mired in deflation for over two decades.

If, indeed, deflation becomes the "norm" in Europe, a London-based financial journalist expects four changes.

Here's an excerpt from an April 15 Marketwatch article titled, "Opinion: 4 ways deflation will change the markets":

If deflation -- or at least zero inflation -- is here to stay, that will have a massive impact on investors. Here are four ways it will change the markets.

First, the markets will have to stop expecting companies to grow automatically. With prices ticking up by 2% or 3% a year, so long as a CEO managed to make a couple of small acquisitions, and open a new factory or a few shops, it wasn't usually too hard to get sales up 5% a year, and that was seen as a good result. With deflation, that is going to be very hard. In fact, a decline of 1% or 2% a year is perfectly respectable in an economy where prices generally have stopped rising. ...

Next, small companies are going to be favored over big. In a deflationary economy, companies that have genuine sales growth will become a lot more valuable. Expansion will be a lot harder, and the few companies that manage to achieve it will be sought out. ...

Thirdly, debt will go out of fashion. With inflation, it made sense for companies, much like individuals, to load themselves up with as much debt as possible. Rising prices would eventually get rid of most of it for you, without too much effort. The private-equity industry made a whole industry out of that, but so did many corporate raiders and conglomerates.

With deflation, debt hurts.

Finally, sectors will start to diverge. Retailers will do better than you might expect. The evidence we have so far suggests that consumers, not very surprisingly, like cheaper stuff, and they are used to constantly changing sticker prices. Manufacturers will find life a lot tougher, and so will natural resources and banks -- which will quickly discover that no one wants their debt any more. ...

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