What are safe haven assets?

What are safe haven assets?

Safe haven assets are those securities or financial instruments that investors turn to during periods of economic slowdown or risk aversion

What are safe haven assets?

Haven assets, also known as defensive assets, are certain financial assets that, in times of increased risk such as times of crisis, uncertainty, or economic weakness, can maintain their stability and even increase their price or value.

This situation occurs because these securities are less exposed to market volatility. They are assets that are not very sensitive to economic cycles, both expansive and recessive.

When an economy suffers episodes of high inflation, high unemployment, or volatility scenarios in the financial markets, the value of safe-haven assets remains stable, giving confidence. In turn, these assets must have a high degree of liquidity, which guarantees a wide margin of maneuver for their purchase and sale.

Characteristics

Safe haven assets or defensive assets have three characteristics that make them relevant in times of crisis, in addition to minimizing risk:

  • Liquidity:

A good safe-haven asset should be able to be easily converted into liquid money and, therefore, you can have the belief that, when you need it, it will be available. To guarantee this characteristic the value must be highly demanded.

  • Low volatility:

Safe haven assets also require defensive behavior in the face of financial and market situations, as a result of low volatility in their value. A safe haven asset must remain solid in value and stable as an investment.

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These securities are guarantors in their payment through the support of institutions with high credit quality that can serve as a safeguard for the investment.

Main haven assets

Depending on the moment, the evolution of the market, or the economic cycle, safe haven values ​​can change but there are some more recurring defensive assets:

Gold

This metal is a safe haven asset during times of market stress and when there is high inflation. Unlike other values, it has a physical and tangible character. On the other hand, it does not pay interest or dividends, so its benefits are generated by the revaluation of its price.

Historically, gold has always been a safe haven asset in the markets. Let’s remember that before money was fiduciary, the value of countries’ currencies was based on the gold standard. Thanks to its decorrelation with the equity market, investing in gold is presented as a good way to allocate your wealth to a refuge value. The only problem that this asset has compared to others is its high price for small investors.

US public debt

US public debt bonds are classified as safe-haven assets of high credit quality, according to the rating risk rating agencies. The public associates them with a safe investment, but it must be remembered that the level of risk increases if the period of the investment is extended.

Foreign exchange

The currencies considered defensive are those of countries with stronger and more stable economies, such as the dollar, the yen, the Swiss franc, or the euro. In periods of uncertainty or economic weakness, the countries with these currencies are the ones that provide the greatest security and confidence to their investors.

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Currencies are highly liquid assets that can be easily converted into cash in the local currency.

The dollar, for example, has always been a refuge asset because it is the world reference currency in financial markets. In the case of the Swiss franc, its strength became more evident during the eurozone crisis, while the stability of the Japanese economy makes the yen a strong currency.

Actions

Certain stock values are traditionally defensive, such as those related to food or the pharmaceutical industry since, even if there is a recession, the demand is maintained.

 

It is true that the selection of assets that we can consider as a refuge is not closed since it evolves with the new assets and the various circumstances. The clearest example in recent years has been that of the ten-year German bond. This fixed-income asset had always been listed and was a classic haven asset; however, with negative interest rates, it has given negative returns in recent years.

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