Safe Havens: What are they and why do they matter?

Exposure to safe haven assets provides a mechanism for investors and traders to ride out financial storms, whether through defensive plays in stocks, commodities or currencies.

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What is a safe haven?

The term “safe haven” is used in financial jargon to denote a type of investment that is designed to at least retain a level footing, and in a best-case scenario increase in value at a time when other shares are experiencing unpredictable volatility.

Investment portfolios that are termed “cautious” or generally classified as comparatively low-risk when set alongside other types will feature a high proliferation of safe haven assets.

What makes an asset a safe haven?

A safe haven asset within a portfolio is one a financial adviser will tend to classify as a steady long-term play.

By having safe haven exposure an investor can, given time, ride out both long-term bear markets and short-term market turbulence.

Almost any tradable instrument can be a safe haven, be it a currency, a stock or a commodity. 

Certain assets have a reputation as being reliable safe havens, however investors and traders need to consider the cause behind an individual market downturn before considering what assets are actionable safe havens.

Safe havens are often considerations for traders too. For example, you can make safe haven plays by buying stock or commodity CFDs (also termed going long) when they feel such stocks are ready to rally.

Alternatively, you can sell stock or commodity CFDs in safe havens if you feel the market is set to turn its back on those types of equities and look at other, more dynamic trading opportunities.

What is a safe haven used for?

Safe havens can be used to satisfy a variety of strategies, such as:
  • Long-term investments to reap a profit over several years
  • Reducing overall portfolio exposure to more volatile assets
  • When market conditions require more defensive plays

What is a safe haven currency? 

Some currencies are such revered safe havens that, depending on the performance of their native currencies, some traders and investors consistently seek to convert cash holdings to those established currencies in volatile times.

The Swiss franc is one such play. Given the stability of the Swiss government and its financial system, CHF usually performs well when major economies around the world are struggling.

Switzerland has a deep-rooted, secure and stable banking industry, a low-volatility capital market, no meaningful unemployment, a high standard of living and positive trade balance figures.

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The Alpine nation’s historical independence from the European Union protects it from many geopolitical events.

The US dollar is regularly considered a safe haven for companies facing domestic currency uncertainty because it is the world's reserve currency and the denomination in which so many international business deals are conducted.

The Japanese yen is another relatively safe refuge for currency traders.

The Japanese government’s stiff policy measures introduced after the nation’s late 1990s banking crisis – such as pioneering quantitative easing and enhanced measures to cope with bank failures – mean its currency has a lofty reputation compared to many others.

What is a safe haven investment?

Since the late Bronze Age, gold has been considered a store of value. As a physical commodity, its value is not impacted by interest rate decisions made by a government.

It also retains value by being a finite resource (unlike money which can devalue if an administration increases the rate at which it prints fresh bank notes).

Gold has historically maintained its value over time, and as a classic insurance play against adverse economic events the famous yellow metal is one of the most renowned safe havens.

Sustained stock market crashes and bear markets frequently drive investors to pile their funds into gold, which naturally drives up its price due to increased demand.

Other commodities, such as silver, copper, sugar, corn and livestock, often perform in the opposite direction of stocks and bonds so can also serve as safe havens.

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What are defensive stocks?

Certain equities, including utilities, healthcare, biotechnology, and consumer goods companies, are usually considered reliable safe haven stocks.

After all, whatever the state of the market, people must still buy food, health products, and basic home supplies.

The specific issues at play in the 2020 coronavirus pandemic, in which shares initially collapsed across the board, turned many tech companies into strong defensive stocks as the work-from-home economy mushroomed.

What are the best safe haven investments?

It is not possible to categorically state which the best safe haven assets are. Rather, a careful overall consideration of the state of the market at any given time is required to assess which instruments might offer the greatest security.

Also, there may be times when it is wise to diversify across a range of safe haven assets, and others when traders and investors look to narrow their sights on a relatively small selection.

Treasury bonds, corporate bonds, precious metals and dividend-paying stocks are among the defensive plays many financial advisers are likely to recommend to their clients.

How have safe haven assets performed historically?

Classic safe haven assets like gold tend to perform particularly well when stock markets decline but it needs to be understood that they can produce poor returns during equity bull runs.

For example, gold fell almost 22% against the dollar in the calendar year 1997, but that was in the middle of a period of sustained gains in global stocks. (The Dow Jones enjoyed annual rises every year between 1995 and 1999, from 16% to 33%).

By contrast, gold posted annual rises every year between 2001 and 2012, with six of those rises being in excess of 20%. This coincided with a period that took in plenty of stock market uncertainty, triggered firstly by the attack on the World Trade Center and then the global banking crisis.

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