SLI’s Frances Hudson seeks to identify safe haven assets

As investors seek out safe haven assets, Standard Life Investments global thematic strategist Frances Hudson analyses just how well these may cope with various threats.

In an uncertain world characterised by ultra-low interest rates, sovereign and banking crises, geopolitical events and natural disasters, investor focus now vacillates between securing income and preserving capital. In the prevailing ‘risk-on/riskoff’ environment a major challenge is to determine which of a number of risks is paramount and how different combinations of risks will affect prospective portfolio performance. In this article we set out a framework for assessing types of risk and consider how well some of the supposed ‘safe havens’ may cope with the various threats.

The choice of haven depends on the magnitude, nature and incidence of the perceived threat. It is important to have an idea of how long it is expected to last and whether the impact is likely to be local or global, confined to specific asset classes or more general. ‘Systemic risk’ and ‘contagion’ have become watchwords for sharp market moves across a range of assets. Is complete protection possible in this environment or is the best alternative to put some insurance in place and avoid the assets most at risk?

A simple approach to identifying current safe havens would be to find assets that have risen in value in, say, the last decade, when other markets have been volatile. Assets such as farm land, gold and the Swiss franc have obviously served as panoply against recent perils. However, after performing so well, valuations may be off-putting and intervention has removed some currencies from the game. Unlike paper assets, gold and farm land have more finite supply and are less subject to tampering, which may add to their attractiveness.

Another consideration is that the perception of safety can change. Government bonds often served as a safe haven until sovereign indebtedness was flagged as a significant risk in some regions. Now investors have to discriminate between different sovereign bonds using credit ratings or credit default swaps (CDS) to assist their decisions. Until five years ago, housing would probably have made the list; the candidates today range from the traditional, which include certain currencies, US Treasury bills, real assets such as gold and real estate, to newcomers such as CDS and derivative
instruments that enable investors to express views on volatility and variance.

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