What are safe haven assets?
Key Points
Safe-haven assets refer to a class of relatively stable assets that do not fluctuate sharply in price during market risk asset severe adjustments, and have a value-preserving function.
Common safe-haven assets include gold and other precious metals, safe-haven currencies represented by the US dollar, defensive stocks, and government bonds.
In reality, investors may need to analyze the nature and causes of each economic crisis to determine which assets have more safe-haven properties in the current market turmoil.
Concept Explanation
Safe-haven assets refer to a class of relatively stable assets that do not fluctuate sharply in price during market risk asset severe adjustments, and have a value-preserving function.
If the market is sluggish, investors will tend to invest in safe-haven assets to reduce investment risks. This article will list the 4 most common safe-haven assets, including gold and other precious metals, safe-haven currencies represented by the US dollar, defensive stocks, and government bonds.
Gold and other precious metals
Precious metals, mainly gold, are the most common safe-haven assets, with their safe-haven properties mainly relying on their recognized stability, scarcity, and the currency attributes of circulation. As physical commodities, they cannot be printed like currency, and their value usually will not be severely affected by the macroeconomic environment.
Safe-haven currencies represented by the US dollar
Safe-haven currencies mainly rely on the comprehensive strength of the issuing entity's endorsement. For example, the safe-haven attribute of the US dollar comes from its strong economic power and global influence, and the safe-haven attribute of the Swiss franc comes from Switzerland's independence.
Defensive stocks
Although the stock market is mainly at the center of crisis during market downturns, the stocks of specific companies perform well during turbulent times, known as 'defensive stocks.' Defensive stocks are mainly concentrated in utilities, healthcare, biotechnology, and consumer goods companies. Regardless of market conditions, consumers will continue to purchase food, health products, and essential housewares. Therefore, defensive stocks may exhibit relatively smaller volatility during market fluctuations.
Government bonds
The safe-haven attribute of government bonds mainly relies on the credit endorsement of the issuing entity. The more stable the issuing entity of government bonds and the stronger the credit endorsement, the lower the default probability and the stronger the safe-haven nature. For example, US Treasury bonds are recognized as one of the government bonds with strong safe-haven attributes in the global market.
A suitable allocation of safe-haven assets can effectively reduce risk in an asset portfolio, enhance the stability of the overall asset portfolio returns, and reduce volatility. However, it is important to note that the safe-haven assets mentioned above cannot guarantee stable value during every economic crisis. In reality, investors may need to specifically analyze the nature and causes of each economic crisis to determine which assets have stronger safe-haven attributes during current market turmoil.
