What are 'safe haven' investments in stormy markets? (2024)

  • Published

What are 'safe haven' investments in stormy markets? (1)Image source, Thinkstock

By Matthew Wall

Business reporter

These are worrying times for investors.

When the markets opened on Friday in the wake of Britain's decision to leave the European Union, the FTSE 100 plunged hundreds of points in minutes, wiping billions off the value of banks, homebuilders and retailers in particular.

There were similar sell-offs in European, US and Asian markets - a $2 trillion (£1.5tn) haemorrhaging.

Although the FTSE recovered some of those losses by the end of the day, it still ended down more than 3% - a huge fall ordinarily.

Sterling experienced its biggest fall for decades, at one point down more than 11% against the dollar.

For a few hours, it seemed like the sky was falling in.

The market turmoil triggered a "flight to safety", as investors looked for calmer waters elsewhere.

But where are these safer investments?

Gold

Image source, PA

The precious metal has traditionally been the comfort blanket of choice, with investors clinging to its reassuring solidity and comparative rarity - only about 165,000 tonnes of the stuff has ever been mined.

Throughout human history gold has been synonymous with wealth and luxury - a tangible repository of value - and for hundreds of years was used as a currency in its own right.

Major economies even pegged their currencies to the gold standard, because the metal was seen to be such a stable store of value. The Bank of England gave up on the gold standard in 1931, but the US didn't completely give it up until 1971.

So it is not surprising that gold rose nearly 5% to more than $1,310 an ounce on Friday and has risen 12% over the year to date.

Government bonds

Image source, Debt Management Office

Governments raise money from investors by offering to pay a guaranteed level of interest on bonds - effectively IOUs that must be repaid after a set period, which can be months or decades depending on the type of bond.

In the UK these government bonds are called gilts; in many other countries they're called Treasuries.

This type of investment is deemed to be relatively safe because there's less chance of a country going bust than there is of a company going bust.

Bonds can be bought and sold on the open market and so their price fluctuates according to supply and demand, but the annual rate of interest remains the same. So as more people pile into them looking for safety, prices rise, but the yield - the actual amount of interest you receive - falls.

But that's still better than losing lots of money in shares that are tanking on the markets. The price for safety is usually a lower investment return.

So after the Brexit vote, the US 10-year Treasury bond yield fell to 1.56% while the UK 10-year gilt fell to a record low of 1.02% at one point. It was only the prospect of Bank of England intervention that helped the yield recover to 1.09%.

Other currencies

Image source, Thinkstock

The British pound took a kicking on Friday - down nearly 8% against the US dollar, nearly 6% against the euro, and a thumping 11% against the Japanese yen - as currency traders dumped sterling and bought other currencies fearing the economic turmoil that might follow the Brexit decision.

While other currencies may seem like a safer investment, governments can intervene in a number of ways to stop their own currencies from growing too strong or too weak. Raising interest rates is one such measure, which means investors earn more interest on their cash, thereby attracting more investment in that currency.

After investors started buying Swiss francs, pushing the currency up 6.6% against sterling on Friday, the Swiss National Bank intervened immediately, effectively flooding the market with its own currency to manage demand. It didn't want its exporters to suffer from a strong franc.

So if you're searching for safer investments, currency speculation is unlikely to help you sleep much better at night.

Cash

Image source, Thinkstock

Many investors simply sell up and go to cash until a clear picture emerges.

While interest rates are at historic lows - the Bank of England has held the base rate at 0.5% since March 2009 - inflation is also very low at around 0.3%. So investors may be earning miserable rates of interest on cash, but at least high inflation isn't gnawing away at the buying power of that cash.

Of course, selling up has its own risks. You crystallise any losses on your investments and incur dealing charges as well.

But if you think there is more turmoil to come in the markets, stemming your losses may seem like the safest option.

Defensive stocks

Image source, Reuters

When there is a general sell-off in equities (company shares), some sectors are hit harder than others. Housebuilders, for example, took the worst of it in the UK, with Taylor Wimpey crashing 29%, and Barratt, Berkeley and Bellway all falling more than 20%.

Investors assumed a slowdown in economic activity post-Brexit would affect UK construction companies the most.

But other sectors, like mining, bucked the trend as investors sought safety in gold and a weakening pound worked in their favour, given that their earnings are quoted in dollars. Randgold Resources, which operates mainly in Africa, was up 14% on Friday, for example.

Globally spread companies that make a lot of sales abroad, like Unilever, GlaxoSmithKline and Rolls-Royce, for example, are also considered good stocks to cling to in choppy waters.

More on this story

  • What are credit ratings agencies?

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      25 June 2016

  • How will Brexit affect your finances?

    • Published

      24 June 2016

  • Brexit: Five areas to watch on the economy

    • Published

      24 June 2016

  • What next for the world's central banks?

    • Published

      24 June 2016

What are 'safe haven' investments in stormy markets? (2024)

FAQs

What are 'safe haven' investments in stormy markets? ›

Safe havens tend to retain value or even appreciate during market downturns. The lower risk of safe havens usually translates to lower potential returns. Some traditional safe havens historically include gold, government bonds, defensive stocks and cash.

What is safe haven investment? ›

What is a safe haven investment? A safe haven investment is an asset that can be used to offset the risk of an investor's portfolio and limit their exposure​ to negative shocks. In a market downturn, safe haven investments will often outperform the majority of financial markets.

What are considered safe haven assets? ›

Safe-haven assets can include currencies such as the US dollar and Swiss franc, precious metals, defensive stocks, and government bonds. Safe havens in times of market volatility may react differently in different periods.

What is an example of a safe haven? ›

Government Bonds

Developed market sovereign bonds are arguably the most canonical example of a safe-haven asset because of their lower realized volatility relative to stocks and the high expected creditworthiness of their issuers (developed market governments).

What is the safest investment in the market? ›

Here are the best low-risk investments in July 2024:
  • High-yield savings accounts.
  • Money market funds.
  • Short-term certificates of deposit.
  • Series I savings bonds.
  • Treasury bills, notes, bonds and TIPS.
  • Corporate bonds.
  • Dividend-paying stocks.
  • Preferred stocks.
Jul 15, 2024

What are safe havens? ›

A safe haven is a form of supportive housing that serves hard-to-reach homeless persons with severe mental illness who are on the street and have been unable or unwilling to participate in supportive services.

Is Safe Haven a good investment? ›

Lower returns in stable times: While safe haven assets provide security during downturns, they typically offer lower returns compared to equities or other high-risk investments in stable or booming markets. This trade-off can lead to missed opportunities during economic growth periods.

What are the two most valuable assets in a time of crisis? ›

Typically at the onset of a crisis, investors usually decide to move their investments to sectors, industries, and asset classes that are considered to be “safe”. These include technology, utilities, consumer staples, and gold.

Is Dollar a safe haven? ›

The US dollar is the world's primary reserve currency and is widely considered a safe-haven asset due to its global dominance and the United States' economic and political stability.

Is gold still a safe haven? ›

Ultimately, gold is a safe haven, and we are not wrong to think of it as such. There will always be a demand for gold, not least because its value is stable and it can provide protection from inflation and diversification for investors' portfolios.

Is silver considered a safe haven asset? ›

As rates go up, the return investors can get from safe government bonds – such as those issued by the US or UK government – also increases, while gold and silver pay no interest. This means the safe-haven status for gold and silver looks relatively less attractive when income-paying alternatives are considered.

What are disadvantages of the safe haven law? ›

Children are also at a severe disadvantage under safe haven laws. Unlike the traditional adoption process, new parents are much more likely not to know anything about their baby's medical history which makes it more difficult for parents to provide adequate healthcare for their children.

Where is the best place to put cash right now? ›

CDs, high-yield savings accounts, and money market funds are the best places to keep your cash when it comes to interest rates. Treasury bills currently offer attractive yields at the lowest risk. Learn how they compare in terms of yield, liquidity, and guarantees.

What is the safest investment in a recession? ›

Cash and Cash Equivalents

Money market funds and high-yield savings are also places to salt away cash in a downturn. Holding cash provides a safety net, allowing investors to jump on opportunities that may arise during economic downturns, such as purchasing undervalued assets when markets decline.

Where is the safest place to invest $100,000? ›

Bond funds

If you buy bonds from the UK government, known as gilts, these are the safest type of bond investment as you're guaranteed to get all your money back plus interest. Corporate bonds tend to pay higher rates of interest – and the higher the rate the greater the risk.

Is the US dollar a safe haven currency? ›

U.S. Dollar (USD): The USD is the world's reserve currency held by most central banks and institutions as part of their foreign exchange reserves. The U.S.'s dominant economic position and the widespread use of its currency in global trade make the USD a preferred safe haven.

What are the disadvantages of safe investments? ›

  • SAFE agreements are high risk. These investments don't convert to equity unless a liquidity event occurs.
  • The standardization of SAFE agreements inhibits flexibility. This type of investment instrument lends less flexibility than others. ...
  • SAFE contracts can be hard to get out of.

What is an example of a safe haven currency? ›

Safe haven currencies typically strengthen or hold their value in times of global economic uncertainty caused by conflicts, political turmoil, or economic downturns. The Swiss franc, Japanese yen, and US dollar are common examples of safe haven currencies.

What is the average return on a safe investment? ›

A good return on investment is generally considered to be around 7% per year, based on the average historic return of the S&P 500 index, adjusted for inflation. The average return of the U.S. stock market is around 10% per year, adjusted for inflation, dating back to the late 1920s.

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