What is a safe haven asset?

Core points

• Risk aversion assets refer to a kind of relatively stable assets whose prices will not fluctuate sharply and have the function of preserving value when the market risk assets are adjusted sharply.

• Common safe-haven assets include gold and other precious metals, safe-haven currencies represented by the dollar, defensive stocks and treasury bonds.

• In reality, investors may need to analyze the nature and causes of each economic crisis to determine which assets are more risk-averse in the current market turmoil.

Detailed explanation of concept

Risk aversion assets refer to a kind of relatively stable assets whose prices will not fluctuate sharply and have the function of preserving value when the market risk assets are adjusted sharply.

If the market is in the doldrums, investors will tend to invest in safe-haven assets to reduce investment risk. This article will list the four most common safe-haven assets, including gold and other precious metals, safe-haven currencies represented by the US dollar, defensive stocks and treasury bonds.

• Gold and other precious metals

Precious metals, mainly gold, are the most common safe-haven assets, and their risk-aversion properties mainly rely on their recognized stability and scarcity as well as the monetary attributes of circulation. As physical goods, they cannot be printed like money, and their value is usually not seriously affected by the macroeconomic environment.

• The risk aversion currency represented by the US dollar

The risk aversion currency mainly depends on the comprehensive strength endorsement of the issuer. The hedging attribute of the dollar comes from its strong economic strength and global influence, the hedging attribute of the Japanese yen comes from the role of the carry trade under the low interest rate policy in Japan, and the hedging attribute of the Swiss franc comes from the independence of Switzerland.

• Defensive stock

Although the stock market was mainly at the center of the crisis during the market downturn, the stocks of certain companies performed well during the turmoil and were called "defensive stocks". Defensive stocks are mainly concentrated in public utilities, health care, biotechnology and consumer goods companies. Regardless of market conditions, consumers will still buy food, health products and basic household items. As a result, defensive stocks usually maintain a stable value during periods of market volatility.

• National debt

Bonds issued by governments around the world are usually stable safe havens. The risk aversion attribute of treasury bonds mainly depends on the credit endorsement of the issuer, which is often negatively related to the economic situation so that it has a strong hedging effect. If the issuer is stable, the credit is stronger and the probability of default is lower, the risk aversion of its treasury bonds, such as US bonds and German bonds, will be stronger.

The appropriate hedge asset allocation can effectively reduce the risk in the portfolio, improve the stability of the return of the whole portfolio and reduce the volatility. However, it should be noted that the above-mentioned safe-haven assets cannot guarantee a stable value in every economic crisis. In reality, investors may need to analyze the nature and causes of each economic crisis in order to determine which assets are more risk-averse in the current market turmoil.