What Is a Safe Haven?
A safe haven is a type of investment that is expected to retain or increase in value during times of market turbulence. Investors seek out safe havens in order to limit their exposure to losses in the event of market downturns. However, what assets are actually deemed safe havens can vary depending on the specific nature of the down market. That means in order for an investment to act as a safe haven, investors must perform ample due diligence.
Understanding Safe Havens
A safe haven investment diversifies an investor’s portfolio and is beneficial in times of market volatility. Most times, when the market rises or falls, it is for a short period of time. However, there are times, such as during an economic recession, when the downturn of the market is prolonged. When the market is in turmoil, the market value of most investments falls steeply.
While such systemic events in the market are unavoidable, some investors look to buy safe haven assets that are uncorrelated or negatively correlated to the general market during times of distress. While most assets are falling in value, safe havens either retain or increase in value.
- Safe haven investments offer protection from market downswings.
- Precious metals, currencies, and stocks from particular sectors have been identified as safe havens in the past.
- Safe havens in one period of market volatility may react differently in another, so there is no consistent safe haven other than portfolio diversity.
Examples of Safe Havens
There are a number of investment securities that are considered to be safe havens. Some of them include:
For years, gold has been considered a store of value. As a physical commodity, it cannot be printed like money, and its value is not impacted by interest rate decisions made by a government. Because gold has historically maintained its value over time, it serves as a form of insurance against adverse economic events. When an adverse event occurs that lingers for a while, investors tend to pile their funds into gold, which drives up its price due to increased demand. Also, when there is a threat of inflation, the value of gold increases since it is priced in U.S. dollars. Other commodities, such as silver, copper, sugar, corn, and livestock, are negatively correlated with stocks and bonds and can also serve as safe havens for investors.
Treasury Bills (T-Bills)
These debt securities are backed by the full faith and credit of the U.S. government and, hence, are considered safe havens even in tumultuous economic climates. T-bills are considered to be risk-free, as any principal invested is repaid by the government when the bill matures. Investors, therefore, tend to run to these securities during times of perceived economic chaos.
Examples of defensive stocks include utility, healthcare, biotechnology, and consumer goods companies. Regardless of the state of the market, consumers are still going to purchase food, health products, and basic home supplies. Therefore, companies operating in the defensive sector will typically retain their values during times of uncertainty, as investors increase their demand for these shares.
Arguably, cash is considered the only true safe haven during periods of a market downturn. However, cash offers no real return or yield and is negatively impacted by inflation.
Some currencies are considered safe havens compared to others. In volatile markets, investors and currency traders may seek to convert holdings of cash into these currencies for protection. The Swiss franc is considered a safe haven currency. Given the stability of the Swiss government and its financial system, the Swiss franc usually faces a strong upward pressure stemming from increased foreign demand. Switzerland has a large, safe, and stable banking industry, a low-volatility capital market, virtually no unemployment, a high standard of living, and positive trade balance figures. The country’s independence from the European Union also makes it somewhat immune to any negative political and economic events that occur in the region. Incidentally, Switzerland is also a tax haven for the wealthy, who take advantage of the country’s high-security and anonymous banking features to evade taxes and hide ill-gotten funds.
In addition to the Swiss franc—and depending on the particular challenge the market is facing— the Japanese yen and the U.S. dollar are also considered safe haven assets. Often the U.S. dollar is a default safe haven for companies facing any domestic currency uncertainty due to the fact that it is the world's reserve currency and the denomination for many international business deals.
Every year, Morgan Stanley picks the year's best safe haven currencies. In 2020, the investment bank picked the U.S. dollar as the best safe-haven currency. It also named the Japanese yen and Swiss Franc as relatively safe bets. In a research note, Morgan Stanley analysts wrote, “We expect the U.S. dollar (USD) to be the best safe-haven currency, especially now that lower U.S. rates make it a more attractive funding currency for carry trades.”
The assets listed above are not guaranteed to maintain their values during periods of market volatility. Furthermore, what constitutes a safe haven changes over time. For example, if an entire economic sector is performing poorly, but one company within that sector is performing well, its stock could be considered a safe haven. Investors should carry out due diligence when looking to invest in safe havens, because an asset that is considered a safe haven in a downturn may not necessarily be a good investment when the stock markets are rising.