Effect of different macro trends on different asset classes

Question

Briefly if possible, what are the effects of the following macro environmental trends:

• Above-average / high inflation
• Deflation

On the following asset classes:

• Non-dividend-paying Equities
• Dividend-paying Equities
• Bonds
• Commodities

Answer 1

Among the four asset classes, bonds and dividend paying equities will do relatively well with deflation. Non-dividend paying equities and commodities will do better with inflation.

Bonds pay interest, and the equities pay dividends in CASH. This cash rises in value under deflation, thereby lifting the prices of the related instruments.

For above average inflation, bonds will perform poorly as the value of both the payments and the principal to be paid at maturity all erode with inflation.

With non-dividend payers and commodities, you "let it ride" (reinvest the cash in the underlying instruments). Thus, you suffer less from the devaluation of cash under inflation.