A safe-haven asset is a type of financial instrument likely to retain or increase value during market turbulence.
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.
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.
A safe-haven asset is a type of financial instrument likely (but not guaranteed) to retain or increase value during market turbulence.Investors seek out safe havens to help limit their exposure to losses if market downturns occur.
This article will explore 4types of assets that investors may turn to during bear markets.
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.
Some currencies are also considered safe havens.
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.
The USD is the global reserve currency. Therefore, it's used for many business deals globally and isn't normally negatively impacted by domestic or international uncertainties.
The Swiss franc is considered a safe-haven currency.
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.
Although the stock market is mainly at the center 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.
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.
However, all investments carry a certain amount of risk and the safe-haven assets listed above may react differently in different times of market volatility.