What are safe-haven assets?

A safe-haven asset is a type of financial instrument likely (but not guaranteed) to retain or increase value during market turbulence.

Understanding safe-haven assets

A safe haven typically refers to something that provides security or an escape from things that a person may find worrying or dangerous. It can come in the form of a place, situation, or object, but in trading, a safe haven comes in the form of investment. Investors seek out safe havens to help limit their exposure to losses if market downturns occur.

Gold & other precious metals

Gold is perhaps the most commonly perceived safe-haven investment. As a physical commodity, it cannot be printed like money, and its value usually won't be seriously impacted by the macroeconomic environment. Gold serves as a form of insurance against adverse economic events, given that its value has remained stable for many years. Other commodities, such as silver, and copper are generally negatively correlated with stocks and can also serve as safe havens for investors.

Gold serves as a form of insurance against adverse economic events, given that its value has remained stable for many years.

Perhaps the strongest example of gold as a safe-haven was following the 2008 global financial crisis. The influx of investment caused the price of gold to rise by nearly 24% during 2009 alone, for example, and it continued this upward trajectory into 2011.

Government bonds

Government bonds are essentially a fixed term ‘I owe you’ from a government, which have periodic interest payments – treasury bills and notes are a type of bond. The only difference between them is the amount of time before you will be reimbursed in full. Treasury bills have maturities of a year or less, while treasury bonds can have maturities of ten years or more...

Investors tend to have more confidence in bonds issued by governments of developed economies – the most popular are US treasury bills. Their status as a safe-haven is based on the credit status of the US government, and the high quality of income in US dollars. With such a stable income behind the asset, investors consider government bonds to be a risk-free safe-haven.

Investors tend to have more confidence in bonds issued by governments of developed economies – the most popular are US treasury bills.

Currencies

Some currencies are also considered safe havens.

• US dollar

Given that the US is the world's most robust economy, it's no surprise that the US dollar (USD) is considered a safe-haven currency. It typically has a history of stable interest and exchange currency rates. Given that it’s the global reserve currency, it's used for many business deals globally and isn't normally negatively impacted by uncertainties.

• Swiss franc

Switzerland has a large, safe, and stable banking industry, a low-volatility capital market, tax-friendly policies, near-zero unemployment, a high standard of living, and positive trade balance figures. Switzerland's independence from the European Union also somewhat shields it from any adverse political and economic events in the region.

• Japanese yen

The Japanese yen often appreciates against the dollar when US stocks and government bonds experience volatility. Post-World War II, the Japanese economy was restructured, which enabled it to catch up with other global economies. Despite continued interventions from the government, the liquidity of the yen has continued to attract investors.

The yen earned its reputation as a safe-haven due to Japan’s high trade surplus versus its debt.

Defensive stocks

Although the stock market is mainly at the centre of crisis during a market downturn, some specific companies are noted to have outperformed during turmoil, referred to as 'defensive stocks'. 

Examples of defensive stocks are utility, healthcare, biotechnology, and consumer goods companies. Regardless of market conditions, consumers will still buy food, health products, and basic home supplies. As a result, defensive companies will generally retain their stock values in times of uncertainty.

Treasury bills

Debt securities issued by governments across the world are generally stable investments.

T-bills or T-notes in the US act as safe-haven investments, and are backed by the full faith and credit of the US government. Because they are considered to have low credit or default risk, they generally offer lower yields relative to other bonds.

However, these assets are still affected by inflation, interest rates, and currency changes. 

Investors often use instruments considered 'safe havens' in times of economic uncertainty or hardship to help offset risk on their existing portfolios. In any case, all investments carry a certain amount of risk and the safe-haven assets listed above may react differently in different times of market volatility.

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