What is Safe-Haven flow?
Safe-haven flow is an investment that is expected to maintain or increase value in the event of turmoil or uncertainty in the market. Safe-haven flow gets the attention of investors to limit their exposure to losses in the event of market collapse.
Investment in safe-haven flow has diversified investors’ portfolios and benefited in times of volatility market. Often, when the market goes up or down, it is only for a short period of time. However, there are times when it lasts for a long period of time such as during an economic recession that results in a prolonged market collapse. While the market is in turmoil, most of the market value in investment also falls significantly.
While events in the market are unavoidable, a number of investors want to buy safe-haven assets that are not correlated or negatively correlated with the general market in times of stress. Although most asset values fall, safe-haven assets either maintain or add to their value.
Examples of Safe-Haven Flow Assets
There are a few number of investment securities that are considered safe-haven assets. Some of them include:
For many years, gold was considered a treasure trove. As a physical commodity, it cannot be printed like money and its value is not affected by the interest rate decisions made by the Government. This is because gold can maintain its value over time, it serves as a form of insurance against declining economic events. In the event of a temporary catastrophe that persists for a while, more and more investors tend to accumulate their funds into gold which raises its price as demand increases. Also, when there is a threat of inflation, the value of gold increases because of its price in the U.S. Dollar or other commodities such as silver, copper, sugar, corn and livestock, are in direct correlation with stocks and bonds and serve as a safe haven for investors.
Treasury Bill (T-bill)
These debt securities are backed by the full trust and credit of the US government. Therefore, it is considered a safe place even in chaotic economic conditions. T-bills are considered risk-free because every investment invested is paid by the government when the bill is in maturity. Therefore, investors tend to use these securities during turbulent economic conditions.
Examples of defensive stocks include utility companies, healthcare, biotechnology and consumer goods. Regardless of good or bad market conditions, consumers will still buy food, health products and household items. Therefore, companies operating in the defensive sector will usually maintain their current value as investors increase their demand for such shares.
Arguably cash is considered the only safe place to be during a declining period in the market. However, cash does not provide real returns and is influenced by inflation.
Types Of Currency For Safe-Haven Flow
Some currencies are considered as safe-haven assets compared to others. In volatile markets, investors and currency traders can convert cash to currencies that are safe flows for protection.
The Swiss Franc is considered as safe haven currency. Given the stability of the Swiss government and its financial system. The Swiss Franc is usually facing strong uptrend pressures due to rising of foreign demand. Switzerland has a large, secure and stable banking industry and volatile capital markets.
Therefore, there is almost no unemployment rate, high standard of living and a positive trade balance figure. The independence of the country from the European Union also made it immune to any negative political and economic events that took place in the region. Coincidentally, Switzerland is also a tax haven for the rich who take advantage of the high security and anonymous banking features of the country to avoid taxes as well as hide improper or illegal funds.
In addition, the Japanese Yen and the U.S. Dollar also considered a safe flow asset. U.S. Dollar is a haven for companies facing any uncertainty for domestic currency due to the fact that it is a world reserve currency and is a widely used value for international business transactions.
The assets listed above are not guarantee to maintain their value during periods of market volatility. Furthermore, what happens to a safe-haven asset changes over time. For example, if the entire economic sector performs poorly but one company in that sector performs well, its shares can be considered as safe haven.
Investors should make wise choices when it comes to investing in a safe place because assets that are considered a safe place in a downturn may not necessarily be a good investment as the stock market rises.