In today’s time where uncertainty has become a new normal, especially when it comes to navigating a seamless investment roadmap. With equity markets nearing all-time highs, bond yields reaching cyclical lows, and geopolitical risks rising, portfolio protection is a major issue for investors in today's late-cycle period. Looking at this market dynamics, investors are looking for ways to make their portfolios more resilient.
So, what is Safe Haven?
A safe haven is an intriguing word that refers to an investment that is believed to remain stable or grow in value during times of market instability. In today's market, safe havens might be a 'Heaven' for investors trying to limit their exposure to losses in the event of a market disintegration. However, investors should conduct extensive due diligence to identify the best safe haven for their purposes, as assets designated safe havens might differ depending on the specific nature of the down market.
Furthermore, a safe haven investment can help investors diversify their portfolio which can turn out beneficial in times of market downturn; often, when the market rises or falls, it is for a short period of time. However, one should know that there are instances of economic recession, wherein, the downturn of the market is prolonged. When such systemic crises occur, some investors seek out safe-haven assets that are uncorrelated or negatively correlated to the overall market. While most assets are losing value, safe havens are either maintaining or increasing in value. So to look at the characteristics of a Safe Haven Asset it includes high liquidity, limited supply, continuous demand, endured performance, and permanence.
Let’s Look At Some of the Best Safe Haven Assets One Can Invest In:
Gold
A store of value is what gold has been considered for ages. Gold cannot be printed like money, wherein, its value is not impacted by interest rate decisions made by a government. Gold serves as a form of insurance against deteriorating economic events as it has historically maintained its value over time. Investors may decide to pile their funds into gold, when an unfavorable event occurs, which causes the price to rise. Since gold is priced in U.S. dollars, the value increases when there is a threat of inflation. Furthermore, investors can also consider other commodities, such as silver, copper, corn, sugar, and livestock as safe havens.
Cash
Since time immemorial, cash has been the sole true safe haven amid market downturns. However, cash provides no actual return or income and is badly influenced by inflation.
Defensive Stocks
Consumers will continue to buy food, health items, and essential household supplies regardless of the situation of the market. As a result, companies in the defensive sector often maintain their values during times of uncertainty, as investors raise their demand for these shares. Utility, healthcare, biotechnology, and consumer goods industries are examples of defensive stocks.
Currencies
Some currencies are considered safe havens. For safety in volatile markets, investors and currency traders may choose to convert their holdings into these currencies. Given the stability of the Swiss government and financial system, the Swiss franc generally faces significant upward pressure from rising outside demand. Switzerland has a large, secure, and stable financial industry, a capital market with minimal volatility, nearly no unemployment, a high standard of living, and a positive trade balance. Switzerland's independence from the European Union also protects it from any negative political and economic occurrences in the region. In addition, Switzerland is a tax haven for the wealthy, who use the country's high-security and anonymous banking features to evade taxes and conceal possibly illicit funds.
In addition to the Swiss franc, and depending on the nature of the market's challenge, the Japanese yen and the US dollar (USD) are regarded as safe-haven assets. Since it is the world's reserve currency and the denomination for many international commercial transactions, the US dollar is frequently used as a default safe haven for enterprises experiencing domestic currency volatility.
Not every safe haven will have all of these features, investors must make a decision regarding the best safe haven for the current economic climate. It is crucial to note that what constitutes a solid safe-haven in one market downturn may not produce the same outcomes in another, so investors must be clear about what they hope to achieve from safe-haven assets.
Know when to trade them?
To understand how the economy is performing, traders should monitor the price of assets such as growth stocks, the US Dollar Index, and industrial main commodities, as well as basic elements like employment data and GDP. This will give you a better understanding of when a downturn is likely to occur and when you should shift a portion of your portfolio into more defensive assets.
Three factors that may predict a downturn include:
The yield curve for US Treasury Bonds Becomes Inverted: While a recession is not certain when the yield curve inverts, this occurrence has a track record of triggering recessions.
Poor Business/Consumer Confidence Data: When consumers and businesses are unsure about the economy, they are less willing to spend or invest for the future, which can lead to contractions in growth and subsequent downturns.
Statistics on Unemployment: Employment statistics can reveal not only hiring intentions, but also the number of hours spent. Companies that reduce hours or hire temporary workers may be concerned about the status of the economy.
Let’s conclude by understanding that nothing pays off more in terms of investment than educating oneself. Before making any investing decisions, conduct the essential research and analysis.
