Safe Haven

What Is a Safe Haven?

A safe haven is a type of investment that is expected to retain or increase in value during times of market turbulence. Investors search out safe havens to limit their exposure to losses in the event of market downturns. Be that as it may, what assets are actually considered safe havens can shift contingent upon the specific nature of the down market. That means for an investment to act as a safe haven, investors must perform adequate due diligence.

Understanding Safe Havens

A safe haven investment broadens an investor's portfolio and is beneficial in times of market volatility. Most times, when the market rises or falls, it is for a short period of time. Nonetheless, there are times, for example, during an economic recession, when the downturn of the market is delayed. At the point when the market is in turmoil, the market value of most investments falls steeply.

While such systemic events in the market are undeniable, a few investors hope to buy safe-haven assets that are uncorrelated or negatively correlated to the general market during times of distress. While most assets are falling in value, safe havens either retain or increase in value.

Instances of Safe Havens

There are a number of investment securities that are viewed as safe havens.

Gold

For quite a long time, gold has been viewed as a store of value. As a physical commodity, it cannot be printed like money, and its value isn't impacted by interest rate choices made by a government. Since gold has historically maintained its value over the long run, it fills in as a form of insurance against adverse economic events. At the point when an adverse event happens that waits for some time, investors tend to heap their funds into gold, which drives up its price due to increased demand.

Likewise, when there is a threat of inflation, the value of gold increases since it is priced in U.S. dollars. Other commodities, like silver, copper, sugar, corn, and livestock, are negatively correlated with stocks and bonds and can likewise act as safe havens for investors.

Treasury Bills (T-Bills)

These debt securities are backed by the full faith and credit of the U.S. government and, subsequently, are viewed as safe havens even in tumultuous economic climates. T-bills are viewed as risk-free, as any principal invested is reimbursed by the government when the bill matures. Investors, therefore, tend to run to these securities during times of perceived economic chaos.

Defensive Stocks

Instances of defensive stocks incorporate utility, healthcare, biotechnology, and consumer goods companies. No matter what the state of the market, consumers are still going to purchase food, health products, and essential home supplies. Therefore, companies operating in the defensive sector will typically retain their values during times of uncertainty, as investors increase their demand for these shares.

Cash

Seemingly, cash is viewed as the main true safe haven during periods of a market downturn. Be that as it may, cash offers no real return or yield and is negatively impacted by inflation.

Currencies

A few currencies are viewed as safe havens compared to others. In volatile markets, investors and currency traders might try to convert holdings of cash into these currencies for protection.

The Swiss franc is viewed as a safe-haven currency. Given the stability of the Swiss government and its financial system, the Swiss franc as a rule faces a strong vertical pressure stemming from increased foreign demand. Switzerland has a large, safe, and stable banking industry, a low-volatility capital market, virtually no unemployment, a high standard of living, and positive trade balance figures.

Switzerland's independence from the European Union additionally makes it somewhat safe to any negative political and economic events that happen in the region. Incidentally, Switzerland is likewise a tax haven for the wealthy, who take advantage of the country's high-security and anonymous banking features to evade taxes and conceal poorly gotten funds.

In addition to the Swiss franc — and contingent upon the particular test the market is facing — the Japanese yen and the U.S. dollar are likewise viewed as safe-haven assets. Often the U.S. dollar is a default safe haven for companies facing any domestic currency uncertainty due to the fact that it is the world's reserve currency and the denomination for some international business bargains.

Consistently, Morgan Stanley picks the year's best safe-haven currencies. In 2020, the investment bank picked the U.S. dollar as the best safe-haven currency. It likewise named the Japanese yen and Swiss Franc as relatively safe bets. In a research note, Morgan Stanley analysts wrote, "We expect the U.S. dollar (USD) to be the best safe-haven currency, especially now that lower U.S. rates make it a more attractive funding currency for carry trades."

Special Considerations

The assets listed above are not guaranteed to maintain their values during periods of market volatility. Furthermore, what constitutes a safe haven changes over the long run. For instance, assuming an entire economic sector is performing ineffectively, but one company within that sector is performing great, its stock could be viewed as a safe haven. Investors ought to carry out due diligence while hoping to invest in safe havens, in light of the fact that an asset that is viewed as a safe haven in a downturn may not really be a wise investment when the stock markets are rising.

Highlights

• Precious metals, currencies, and stocks from particular sectors have been identified as safe havens in the past.
• Safe haven investments offer protection from market downswings.
• Safe havens in a single period of market volatility might react differently in another, so there is no consistent safe haven other than portfolio diversity.