A safe haven investment is one whose value is stable, or increases, during major political, systemic or financial crises such as the sub-primes crisis of 2008, or the health situation that the world is currently experiencing. Investors ‘seek shelter’ in this type of financial instrument so as to protect their assets as much as possible when the climate does not lend itself to more risky investments.
The most famous: gold
When you hear people talk about safe haven investments, and even if you are not part of the financial sector, the one that comes up the most often is gold. Gold is a much sought-after commodity in times of instability anywhere in the world, because it represents a secure investment, as opposed to a financial investment such as shares. It is not subject to fluctuating interest rates. It is also very easy to sell, either in the industrial or jewellery sectors, and there is a limited supply. The precious yellow metal hit a historic high in 2020 with a rate of more than $2,000 per ounce.
The robustness of the Swiss franc
The Swissfranc has always been considered a safe haven currency, especially when we look at market uncertainties. The major assets of this currency are the robustness of the country’s banking sector and its flourishing economy. In addition it benefits from a low debt-to-GDP ratio compared to members of the OECD and very low unemployment. Also, its independence with respect to the European Union that surrounds it, affords it an extra level of capital security, especially in times of economic, political or health difficulties in the EU.
A government bond is simply a debt issued by the government, that pays interest returns. Government bonds in the developed countries (especially members of the G10) are very sought after in times of instability, because the risk of a government defaulting is slim.
Is the Yen a better ‘bet’ than the US dollar?
The Japanese currency has long been considered an even safer investment than the greenback, as the yen tends to increase more in value than its US counterpart in times of uncertainty. This reputation comes from Japan’s large trade surplus compared to its debt throughout the 20th century. However, Japan’s public debt is the highest in the world, representing more than 200% of its GDP. Despite this, the Yen remains a safe investment, because Japan still has a powerful economy and more than 90% of the public debt is owned by companies and Japanese households, guaranteeing a certain amount of stability.
The greenback, that most liquid of assets
Confidence in the US currency soared after the Bretton Woods agreement, which created a fixed exchange rate and immediately turned the dollar into the biggest currency reserve in the world. The crisis in the emerging markets in the 2000s led to further appreciation of the dollar. In addition, the dollar is the most liquid of all currencies and is the symbol of the biggest economy in the world at present. However, the greenback seems to no longer be considered a safe investment, as proved in 2020. During the year, the DXY index, which is the reference index of the dollar against six major currencies including the euro, with a total weight of 57%, was somewhat shaken. After a rise to 103 in March 2020, the US currency kept falling throughout the pandemic, dropping to 89.20 in early January 2021.
DXY index chart as of 22.01.2021
Let’s take a look at cryptocurrencies and more specifically the Bitcoin, which has been mentioned during the current crises as a type of safe investment. Like gold, Bitcoin is completely independent of politics and the stock markets. However its extreme volatility (up to +40% in one day) invalidates its status as a potentially secure investment. As you can see below, the Bitcoin has appreciated continuously since the beginning of the year, especially after the second COVID wave arrived. Let’s not forget that the dollar has depreciated, which makes financial instruments that are priced in dollars more accessible, i.e. cheaper.
Bitcoin on 22.01.2021
Another interesting aspect during the health crisis is that technology stocks (GAFAM, Netflix and Tesla) have experienced a significant boom and were considered safe investments during the first wave of the coronavirus. Their market capitalisation grew exponentially to the point that in April 2020 they represented 50% of the total worth of the NASDAQ index.
In summary, 2020 was a particularly surprising year and probably saw the end of the dollar’s attraction when the market turned in ‘risk-off’ mode. Conversely, newcomers such as tech stocks and Bitcoin have fared well. The unanswered question is if these financial instruments might become the new safe heaven investments, or whether 2020 was just a one-off event.