Safe Haven Definition

What is a haven of peace?

A safe haven is a type of investment that is expected to maintain or increase its value during times of market turbulence. Investors look for safe havens to limit their exposure to losses in the event of a market decline. However, the assets that are actually considered safe havens can vary depending on the specific nature of the bear market. This means that for an investment to act as a safe haven, investors must do their due diligence.

Understanding Shelters

A safe haven investment diversifies an investor’s portfolio and is beneficial in times of market volatility. Most of the time when the market goes up or down it is for a short period of time. However, there are times, such as during an economic recession, when the market downturn is prolonged. When the market is in turmoil, the market value of most investments drops sharply.

Although such systemic events in the market are inevitable, some investors seek to buy safe-haven assets that are uncorrelated or negatively correlated to the general market in times of distress. While most assets lose value, safe havens maintain or increase in value.

Key points to remember

  • Investing in safe havens offers protection against market downturns.
  • Precious metals, currencies and stocks of particular sectors have been identified as safe havens in the past.
  • Safe havens in one period of market volatility may react differently in another, so there is no consistent safe haven other than portfolio diversity.

Examples of shelters

There are a number of investment securities that are considered safe havens.

Gold

For years, gold has been considered a store of value. As a physical commodity, it cannot be printed like money and its value is not affected by interest rate decisions made by a government. Since gold has historically maintained its value over time, it serves as a form of insurance against adverse economic events. When an adverse event occurs for a period of time, investors tend to stack their gold fundswhich drives up its price due to the increase in demand.

Also, when there is a threat of inflation, the value of gold increases because its price is in US dollars. Other commodities, such as silver, copper, sugar, corn and cattle, are negatively correlated with stocks and bonds and can also serve as safe havens for investors.

Treasury Bills (T-Bills)

These debt securities are backed by the full faith and credit of the US government and, therefore, are considered safe havens even in tumultuous economic climates. Goods of treasure are considered as without risk, because any capital invested is reimbursed by the government when the invoice is due. Investors therefore tend to run to these stocks in times of perceived economic chaos.

Defensive Actions

examples of defensive actions include utilities, healthcare, biotechnology and consumer goods companies. Regardless of the state of the market, consumers will continue to buy food, health products and basic household supplies. Therefore, companies operating in the defensive sector will generally hold their values ​​during times of uncertainty as investors increase their demand for these stocks.

Cash

Arguably, cash is seen as the only real safe haven during market downturns. However, cash offers no real yield or return and is negatively affected by inflation.

Currencies

Some currencies are considered safe havens relative to others. In volatile markets, investors and traders may seek to convert their cash holdings into these currencies to protect themselves.

The Swiss franc is considered a safe haven currency. Given the stability of the Swiss government and its financial system, the Swiss franc generally faces strong upward pressure from increased foreign demand. Switzerland has a large, safe and stable banking sector, a low volatility capital market, virtually non-existent unemployment, a high standard of living and a trade balance The figures.

Switzerland’s independence from the European Union also makes it somewhat immune to any negative political and economic events that occur in the region. Switzerland is also a Fiscal paradise for the wealthy, who take advantage of the country’s high-security and anonymous banking features to evade taxes and hide ill-gotten funds.

Besides the Swiss franc, and depending on the particular challenge the market is facing, the Japanese yen and the US dollar are also considered safe havens. Often, the US dollar is a default safe haven for businesses facing uncertainty over the national currency due to it being the world’s reserve currency and the denomination of many international business transactions.

Each year, Morgan Stanley selects the best safe haven currencies of the year. In 2020, the investment bank chose the US dollar as the best safe haven currency. He also singled out the Japanese yen and Swiss franc as relatively safe bets. In a research note, Morgan Stanley analysts wrote, “We expect the US dollar (USD) to be the best safe-haven currency, especially now that falling US rates make it a more attractive funding currency for investors. carrying operations.

Special Considerations

The assets listed above are not guaranteed to maintain their value during periods of market volatility. Moreover, what constitutes a safe haven evolves over time. For example, if an entire economic sector performs poorly, but a company in that sector performs well, its stock may be considered a safe haven. Investors should exercise due diligence when looking to invest in safe havens because an asset considered a safe haven in a downturn is not necessarily a good investment when stock markets are up.