The ‘Safe Haven’ Illusion
- 30 September 2011
The credit crisis has rewritten the rules. ‘Safe havens' have seen too much cash and many now look very expensive. This Reuters piece outlines the dilemma.
The question on ‘safe havens' is most pertinent in the case of developed market government bonds. Another Reuters piece neatly outlines the problems in these markets. A combination of weak economic growth, market volatility and quantitative easing has pushed gilt yields down to record lows at the same time as borrowing levels have hit new highs. Investors are therefore getting a lower income, backed by weaker quality government finances. Equally, the debt debacle in the US raised the spectre of default. It remains possible that government bonds will start to price in some credit risk in the US and UK as they have done in parts of the Eurozone.
Cash should be the ultimate safe haven asset. It may not be possible to make much money in a bank account and it won't protect your purchasing power, but surely capital will be preserved? As this article from the Mail in May demonstrates, the rating agencies do not agree that UK banks are safe. There is certainly enough controversy to make people think twice before depositing any cash over and above the compensation scheme limits.
The outlook for gold has been hotly debated. But, at the time of writing, it has sold off over 10% in a week. This is hardly most people's idea of a ‘safe haven'. Equally, the Swiss franc – the other great alternative to the US Dollar and gold – proved vulnerable to the machinations of politicians as the Swiss Government lowered rates to weaken the currency.
The blogosphere is alive with theories as to the true ‘safe haven assets'. Many have focused on physical assets. As one commentator writes on the Mindful Money blog: "When it comes to safe haven investing, people immediately think about physical assets such as gold, silver, oil, land, real estate. There is a reason for this: Physical things have intrinsic value. The value of a paper fiat currency, or a stock, can fall to zero. But the value of any physical asset can never fall to zero. The intrinsic values of physical assets are the reasons why they preserve wealth during times of financial and economic crises."
Property certainly has some claims to be a ‘safe haven'. Yields and capital values have proved stable in the recent market rout. This Savills survey suggests foreign buyers are still drawn by the transparency of the UK property market and the UK's strong rule of law.
However, investors need to be careful how they access it. Many REITs and other property equities have proved as volatile as the rest of the equity markets.
Emerging market bonds have been presented as another alternative: Emerging market government finances look safer, their debt burdens considerably lower – this article in the Financial Post makes the case and again in the Independent. However, local currency bond funds have seen huge inflows, usually a warning sign, and have suffered as emerging market currencies have sold off. Cris Sholto Heaton makes the case for the other side in Money Week.
But is the solution really a specific asset class? Mark Dampier, head of research at Hargreaves Lansdown, suggests that investors need to set aside the concept of ‘safe havens' and instead focus on taking advantage of valuation opportunities as they arise: "So called ‘risk free' government bonds are not a risk free asset anymore with a yield of under 2%. They have asymmetric risk unless you believe in a Japan style deflationary decade. Low risk investors really need to ask whether they want to get involved at all. If they hold a lot of cash in all areas it gives a lot of optionality." Equally, diversification is a means to achieve greater safety within a portfolio.
Mindful Money's economist blogger Shaun Richards thinks that "In these times the concept of a "safe haven" is an illusion just like risk-free interest rates have turned out to be as a concept.
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