Is Deflation On the Way?

While the U.S. is unlikely to follow in Japan's footsteps, the Japanese experience over the past 20 years can offer important lessons for investors, explains Michael Hartnett, Chief Global Equity Strategist and Chairman of the Research Investment Committee (RIC).
(Taped on August 10, 2010) 

With global interest rates continuing to drop, the possibility that the U.S. may experience a bout of deflation in the next 18 months needs to be considered, says the Research Investment Committee of BofA Merrill Lynch Global Research in its August RIC Report. But according to Michael Hartnett, Chief Global Equity Strategist and Chairman of the RIC, this country is unlikely to see the widespread deflation that Japan has experienced over the past 20 years.

Still, Japan's example can teach investors a great deal. One lesson, as Hartnett notes, is that deflation tends to keep interest rates low — and across the globe they are already at levels rarely seen in the past 60 years. Another key takeaway from the Japanese experience, Hartnett notes, is that "a scarcity of yield, growth and quality can create true bull markets today" within certain investments such as high-yield and investment-grade bonds, emerging market debt and equities, and best-of-breed stocks. Meanwhile, the RIC maintains its overweight position in equities, underweight in bonds, and neutral weight in cash, as equities should continue to benefit from low interest rates and strong corporate earnings.

Every month, BofA Merrill Lynch Global Research analysts share their insights on markets and other information of value to investors. View this video commentary and read the related research.

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