In times of extreme volatility, investors are looking to put their money in “safe havens” to protect their capital. The term safe haven in investing means an asset class where it has a higher chance of maintaining its value compared to riskier assets. In this article we will list some of the common safe havens.
Yields on Government Bonds have recently fallen. This means that the price of bonds has gone up reflecting the increased demand. Investors are in panic mode and putting their money in bonds to protect their wealth. Bonds are essentially government loans which are paid back to the investor upon maturity. High-quality government bonds are considered safe havens as investors are confident the government will pay back their loan and there is little chance of default. Hence, they feel safe putting their money in government bonds during economically turbulent times. Bonds are considered less risky than equities. However, when equities are ready to bounce, money may leave bonds to go back into the equity market. This could result in a drop in bond prices.
Cash is king in a market where the stock market is selling off. Capital is protected from further downside when it is converted into cash. In a volatile market, investors should consider taking some risk out of their portfolio by selling some of their positions. Cash does not generate high return (if any, nowadays) but it is a low risk investment which is ideal when the economy is shaky.
Defensive stocks are stocks that are not impacted by the economy as much as cyclical stocks. Defensive sectors include stocks in consumer staples, healthcare, and utilities. Companies such as supermarkets like Woolworths (WOW:ASX) and Coles (COL:ASX) are defensive companies as people still need to shop for groceries during economically bleak times. This has been especially true during the panic buying in this coronavirus pandemic. Healthcare is considered defensive as people will still require healthcare regardless of what is happening with the economy. Utilities are also companies which consumers will continue to use despite where we are in the economic cycle.
The US dollar is another asset class considered a safe haven. This is because the US Treasury has a reputation for paying back its investors. As investors are looking to buy US treasury bonds, they need to convert their currency into US dollars which drives the currency up. US bills are considered one of the safest financial instruments.
Investors may also decide to just hold US dollars to weather the volatility in the financial markets. The US dollar is considered the world’s reserve currency so in times of turmoil, investors may see the US dollar as a stable investment.
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Lauren Hua is a private client adviser at Fairmont Equities.
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