This week’s sharp, devastating declines in commodities such as copper, gold and silver, with further drops in oil prices, has hit markets around the world like a nuclear blast. It’s sparked mass selloffs in foreign markets as investors start to fear a more dangerous deflationary trend.

As we have noted in the past, investors are urged to put a portion of their portfolios in utilities as these investments offer strong protection against deflationary spirals. 

In this special report to both Utility Forecaster (UF) and Global Income Edge (GIE) subscribers, I’ll focus on the global issues that underpin these trends and in the subscriber section, I’ll discuss which companies will best protect your portfolio.

Two weeks ago, in a GIE note, I speculated that a global correction could be imminent in reaction to the crash in Chinese stock markets that wiped $3 trillion dollars off the value. I was also reacting to the turbulent bailout negotiations between European Union and Greece that caused further sell offs in the U.S. and elsewhere on concerns the currency union would collapse.  

With gold plummeting to $1,000 an ounce this week, a more than 40% drop from its 2011 peak, as a result of what we believe is a slowing Chinese economy and a stronger dollar, the possibility of a larger deflationary trend, in my mind, has been affirmed.  

Add to this that U.S. oil prices fell below $50 per barrel this week for the first time in three months.  According to the Wall Street Journal, U.S. oil prices have slid 17% this month on renewed concerns that the global glut of oil is continuing to outweigh demand.

And the International Monetary Fund is concerned that the global recovery is at risk. In July the IMF cut global growth forecasts for this year, citing a weaker first quarter in the U.S. and warning that financial-market turbulence from China to Greece clouds the outlook.

To be sure, despite an improving labor and housing market, the continued weakness in U.S. retail and a four-year low in corporate investment have many economists already revising lower their growth estimates for the second half of the year.

We have long believed a long-term deflationary trend has been inevitable based on the amounts of debt that is being held by governments around the world and the fact they are not growing fast enough to pay it down. Greece may be the first of many countries to face a debt crisis.

Utilities for Defense

And with the latest market declines, the long-term and short-term deflationary trends all point to investing in regulated utilities. These can pass on the impact of deflation and profit changes to their customers in the form of higher (or lower) prices. 

And even utilities in unregulated markets may also be good investments during periods of deflation.

Utilities are so resilient because when deflation reduces discretionary, people can’t skimp on electric power. It’s an essential service for which consumers will continue to spend.

In the following section, we highlight for subscribers which domestic and international utility makes the best investments during periods of deflation.

Portfolio

In selecting the ideal international and domestic anti-deflation investment, we chose core Global Income Edge Conservative Holding National Grid (NYSE:NGG), and Southern Company (NYSE: SO) which is a core holding in both Utility Forecaster and GIE.

Both companies are headquartered in countries with good regulation for utility profits. Southern in the United States and National Grid in the United Kingdom.

National Grid offers a stable 5.14% yield with strong international diversification. Based on its operating earnings in 2013, about 65% of its operations are based in the U.K. and 35% are in the U.S, both areas that are expected to drive growth in 2015. With a market cap of $50 billion, it’s one of the largest energy utilities in the world, comparable to America’s biggest utility, Duke Energy.

According to its recent earnings release, operating profit advanced 5% to in the fiscal year through March, while pretax profit climbed 11%. “The dividend grows at 2% this year and will continue to grow in-line with inflation year-on-year,” said Steve Holiday, CEO at National Grid, in a Bloomberg press.  NGG is a Buy below $74.  

Southern Company (NYSE: SO), is the world’s 16^th largest utility company and 4^th largest in the United States.  It is headquartered in Atlanta and operates in Georgia, Alabama, Florida, and Mississippi. The company is involved in generation, transmission, and distribution of electricity through coal, nuclear, oil and gas, and hydro resources. The company also owns renewable energy projects. 

As my colleague Ari Charney noted recently – the company has been in the midst of a large capital spending program including two major projects–the construction of a clean-coal plant in Kemper, Miss., and the expansion of its existing Vogtle nuclear plant in Georgia– that have been repeatedly behind schedule and over budget – testing its relationship with regulators.

Notwithstanding, given the firm’s size and scale, during a deflationary period, we believe Southern Co. would be able to count on its regulatory relationship to continue to deliver earnings where other non-defensive firms would be forced to scale back.   

As we’ve noted, Southern has steadily hiked its dividend, with payout growth averaging 3.7% annually over the past five years

SO is a buy below $55 in Global Income Edge.