Alex Chappell

2nd September, 2016

IC Insights

Where are the true safe havens?

If investment markets were a boat, they would currently be circling around the Mediterranean. Down the east coast of Spain, along past Valencia, Murcia, and down to Marbella, the sun shining and the winds calm. Temperatures have risen since storm Brexit on 23rd June, but there is remarkable stability and no sign of any significant change. The odd bad piece of news still reaches the box-like TV screen that’s below deck, but they don’t change the boats course, and the tranquillity remains. The plan is to head out through the tip of Gibraltar, as the US will hoard much of the focus for the rest of the year. Who knows what the shore will be like when we reach Washington in December and we have the vast Atlantic to navigate in the meantime. Whether hurricane Donald will fully take hold is yet to be decided, but as always, we should be prepared to batten down the hatches…

If the winds pick up or the seas change, as investors we would usually turn to the likes of gold, government bonds and even reserve currencies such as the Japanese Yen or the US dollar. These are traditional safe havens; a shelter against the oncoming storm. Their job is to protect capital in times of market turbulence, retaining or even increasing in value.

The systemic crisis that flooded 2008 was maybe the most shocking stress-test since 1929. Amidst the melee, Gold, UK Government bonds and the US dollar returned 3.41%*, 11.99%** and 8.1%*** respectively.  As equities and other “risk assets” fell around them, they behaved perfectly. Held for their defensive qualities, they were a just inclusion in any investors portfolio.

Determined to generate economic growth and stave off further crises, since then, Central Banks have flexed their muscles. By purchasing trillions of pounds of assets, they have pushed bond markets higher and higher. You don’t need to be a rocket scientist to work out the central bank playbook, so if you know they will be buying, you can gain a quick buck by getting involved before. Money has flowed into bonds quicker than a Groupon offer for Prosecco, but crucially, for the wrong reason. The investment rationale has moved from ‘safe foundation’, to ‘return generation’ and in 2016, government bonds have been more volatile than equities! The increase in risk isn’t limited to bond markets either, as currencies can now move 3%-4% per day without breaking a sweat.

Here is our safe haven definition; a low volatility asset that has the ability to perform strongly given the threats. Neither government bonds or currencies now meet this definition. Instead, we continue to search our investable universe for the best quality assets, but the risks are rife, so we’ve required a bigger telescope to find them. Gold remains one of the only assets to display true safe-haven characteristics, alongside selective corporate bonds that offer more reasonable yields, and some unique absolute return funds. Diversification across all asset classes has never been more important and we remain focussed on ensuring we have a lot of tools in the toolbox.


*Source Bullion Vault Period 1st January 2008 to 1st January 2009, spot gold

**Source Bullion Vault Period 1st January 2008 to 1st January 2009, 20-year UK Gilt, Yield + capital value

***Source FRED, St Louis Federal Reserve 1st January 2008 to 1st January 2009, Trade Weighted U.S Dollar Index: Major Currencies

Past performance is not a reliable indicator of future returns.  The value of any investment can go up and down and investors may get back less than they invested.