Investors in almost every asset class are likely to be worse off in a deflationary environment, according to Graham Secker, equities strategist at Morgan Stanley. “Deflation is not good news for equities markets generally,” he says. “It is a signal that the economy is very, very weak and that sales and profits are going backwards.”

However, for companies that remain profitable, there will be pressure to maintain dividends, he says. While many companies have a dividend policy of maintaining a pay-out in real terms – ensuring that rises at least keep pace with inflation – they will be under pressure not to reverse themselves in a deflationary environment.

During some of the UK’s most torrid periods of inflation in the 1980s, corporate profits rose strongly because producers could put prices up. In a deflationary environment, the reverse pressures will be in force.

Investors in corporate bonds may find themselves somewhat better off. Interest payments are generally fixed – and even when floating are at a premium to some other interest rates, providing hard cash at a time when prices are falling. However, in a deflationary environment, the companies that issued these bonds are much more likely to default and investors may not get all their principal back.

There are real risks for investors in other asset classes, too. Commercial property, often seen as a risk halfway between equities and bonds, is rapidly falling in value. In the UK, virtually all gains since 2002 have been wiped out, and values are falling in continental Europe and in the US. Those who purchased it for the rental income are feeling the pinch, too; insolvent occupiers cannot pay rents.

Are we facing a U or L downturn ???