Safe-haven assets are some of the most sought after in times of uncertainty in the global scene. Simply put, they are assets or securities that tend to increase in value when the overall capital markets is in a downturn. By investing in such asset classes, investors limit their losses by avoiding or reducing exposure to assets under pressure.
Similarly, investors turn to safe-haven assets to diversify their investment portfolios. Acting as a hedge against excessive market volatility, such asset classes allow investors to generate significant value when the market is in turmoil. Such assets elicit strong demand in times of economic recession as well as when geopolitical tensions spiral at of hand.
Safe Haven Assets
Gold is one of the biggest safe-havens and one of the most sought after. Gold stands out as one of the best safe-havens on the fact that it is not affected by interest rate decisions carried out by policymakers around the world.
Considered as a store of value, the commodity serves as a form of insurance in times of adverse geopolitical and economic events. In times of these adverse events, investors turn to Gold to shield themselves from losses emanating from other asset classes.
Treasury bills also fit the bill as safe havens as governments back them. These asset classes are risk-free, given that they always repay the principal in full upon maturity, in addition to interest payments, regardless of adverse events in the market.
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Defensive stocks also act as safe havens as they always tend to outperform the overall market even in times of turmoil. These stocks are mostly made up of utility, biotechnology as well as consumer good companies stocks.
The fact that consumers will always spend money to purchase goods that these companies offer ensures they always generate revenues, consequently generating shareholders’ value.
The Swiss franc and the Japanese Yen are some of the currencies considered safe havens given the stability of the two countries’ governments as well as financial systems. The two currencies often face strong upward pressure when other currencies are under pressure because of adverse economic or political tensions.
How To Trade Safe Havens
There is no clear-cut formula as to how people should trade safe havens. The fact that market downturns will always be there means investors should always pay attention to these asset classes as a way of diversifying investment portfolios.
Safe havens are some of the best to trade in times of financial crisis, as they always tend to elicit strong demand and generate significant value. It is also important to identify a safe haven that is likely to outperform and anticipate price movements.