INSIGHTS

SAFE HAVEN ASSETS IN TIMES OF UNCERTAINTY

Mark Lister, 11 April 2017

There was an immediate move to safe haven assets when news of the US missile strikes broke last week. Share prices were down, but government bonds and fixed interest rose, while gold and the Japanese yen also rallied. Safe haven assets are all these things that go up in value during times of uncertainty.

It’s normal to see shares fall when you get news like that. Company profits are linked to economic growth, so during the good times profits are going up and prices reflect that. When investors start to question the economic outlook, prices do the opposite.

If houses traded on a market that with instant price reactions, they’d have fallen in value too. House prices are driven by similar things as shares – economic activity, population growth, and consumer confidence, among others.

For the same reasons shares were down, interest rates fell too. Rising conflict would dent growth and spending, which means the path for interest rates is a lower one.

When investors sell growth-sensitive assets like shares the money goes into more secure ones like fixed interest and government bonds, putting upward pressure on prices and downward pressure on interest rates.

That’s why most investors need a healthy weighting to fixed interest, as well as shares and property. It’s a bit of a drag when the going is good, but an essential shock absorber if things go pear-shaped.

Gold is another traditional safe haven, although the reasons are based on sentiment more than fundamentals. For many people gold makes no sense. It pays you nothing to own it, and it has little industrial use compared to other commodities.

I’ve got a bit of sympathy for a small exposure to gold, but I would think of it as an insurance policy, rather than an investment. You buy it, and you hope it never goes up.

As the dominant currency of the world, it’s understandable why people flock to the US dollar in times of stress, but the Japanese yen is a bit of a strange one. Someone asked me the day of the strikes why it’s considered a safe haven anyway. I had to think for 30 thirty seconds before answering, because it’s a fair question.

Japan has the highest government debt levels in the world, even higher than Greece, so it doesn’t exactly seem like a safe place to park your cash.

The thing is, that massive debt is held almost entirely by the Japanese public. While the government is hugely indebted everyone else in Japan has healthy finances, and there aren’t any nasty offshore creditors to worry about. Japan has been a net exporter for decades, as well as being a net owner of foreign assets by a wide margin, so that also helps.

Nobody knows where last week’s events go from here. Maybe they fade away quickly like the last several almost-crises, or maybe they escalate into something scarier. Predicting how such a volatile situation transpires is nothing more than guesswork, which makes it even harder to navigate.