Safe haven investments are a lot harder to find amid the fog of war, sanctions and uncertainty


Russia’s Invasion of Ukraine sparked a political and humanitarian crisis, a tragedy that we never want to see again.

In the face of rapidly evolving developments, the EU, US and UK have begun to steadily escalate economic sanctions against Russia and Belarus.

The situation sent shock waves through the financial markets.

It is an environment where investors often turn to what are called “safe haven assets,” but the performance of these products is not guaranteed.

For many investors, gold is seen as the epitome of a safe-haven asset. Advocates support its long-term performance as a store of value, inflation-proof credentials, and its limited supply. A historical analysis of gold during periods of high volatility and strong equity reversals shows that its performance is solid and consistent, but it is not erroneous.

During the 2018 equity crisis, it lost 2 percent of its value, and after the bankruptcy of Lehman Brothers, it fell 3.2 percent.

With gold there are always additional considerations.

Since a large portion of the precious metal is owned by central banks, there is a risk if the crisis investors are trying to navigate gets so bad that central banks will liquidate. some of their gold. This can cause the price to spiral downward.

Another option for risk-averse investors is short-term government debt that appreciates, such as US Treasuries.

But if the economy drops back to high inflation and the US Federal Reserve needs to raise interest rates, these bonds could fall dramatically and damage the value of an investor’s portfolio.

Indeed, in recent years the threat of monetary tightening alone has been enough to trigger panic attacks in the stock markets, and short-term government bonds offer little protection in the future. those cases.

Cash reserves are less risky and protect investors against sharp corrections in the bond and stock markets, but are not without risk. In a high inflation environment, the return on cash deposits adjusted for inflation can be negative. And for multi-currency investors, there’s the added headache of forex risk.

The market has at times seen the euro as a safe-haven currency, but since the beginning of the current crisis it has fallen in value by more than 3 percent. Over the past 20 years, the most reliable safe-haven currency has been the Japanese yen, followed by the US dollar and the Swiss franc. Cryptocurrencies don’t have a long enough history to fully appreciate their safe-haven credentials, but the early signs aren’t good. For example, Bitcoin has too many trademarks for its name.

Not only has it struggled to gain acceptance as a medium of exchange, its store of value has also been destroyed by sheer volatility and its correlation with tech stocks too high to be worth it. comfortable.

Moreover, in recent months, as inflation has increased, bitcoin has become floundering, so its anti-inflation claims have proven to be highly controversial.

In the coming years, we are likely to see the emergence of central bank digital currencies, but do they have any safe-haven properties other than cash deposit properties? no is still unclear at this stage.

Some equity sectors, such as retail, aerospace or pharmaceuticals are considered defensive and cyclical. Portfolio managers typically allocate a portion of their healthy capital to these defensive assets to protect them during strong equity price adjustments, but these areas are not spared. from shocks or recession fears.

During the first month of the Covid lockdown, the large-cap defense index in the US fell 27 points. The high tide can lift all boats, but if the tide goes down fast enough, most boats will sink.

The best-performing safe-haven assets during recent volatility have been inflation-related products.

These bonds and derivatives, which pay dividends linked to common inflation, have delivered double-digit returns since the start of the year. They are ideally suited to market conditions beset by both geopolitical risks and inflation fears.

The macroeconomic landscape is currently changing. Covid may have waned as a growth risk, but other risks are still huge. Inflation is too high to be comfortable and central banks have either raised interest rates, or are preparing to do so.

The situation in Ukraine is very unpredictable and threatens to stifle growth and cause inflation.

Choosing an appropriate hedging strategy in this environment is easier said than done.

Past experience tells us that it is important to treat all risk environments on their merits.

When it comes to targeting safe haven assets, there is no magic solution.

Investors need to peel back the layers of the onion, looking at what is causing the volatility spike and what are the key features of the economic landscape. This will give them more confidence in their decision making and help them protect their portfolio in times of volatility and uncertainty.

Ronan Costello is the Director of FX Strategy & Systems Trading at the Bank of Ireland Safe haven investments are a lot harder to find amid the fog of war, sanctions and uncertainty

Fry Electronics Team

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