Abu Dhabi, UAEMonday 1 June 2020

Are there any safe havens in this global market crash?

Bonds, gold and cash are the traditional stores of value, but even their performance has been erratic amid Covid-19

During periods of market volatility, traditional stores of value are meant to shield investors from the worst of the meltdown. Getty Images
During periods of market volatility, traditional stores of value are meant to shield investors from the worst of the meltdown. Getty Images

As stock market volatility looks set to continue for some time, investors can be forgiven for wanting to flee the carnage and hide their money in the safest possible haven.

In chaotic times like these, traditional stores of value such as bonds, gold and cash often come into their own, by shielding investors from the worst of the meltdown.

However, both gold and bonds have performed erratically in recent weeks, while returns on cash are plunging even lower, amid a flurry of global interest rate cuts.

Before the coronavirus crisis struck, some cryptocurrency fans argued that Bitcoin also offers protection, but it has subsequently fallen even faster than shares.

So which of these safe havens, if any, should you be racing to right now?

Government bonds

US government bonds, or Treasuries, are one of the lowest-risk investments in the world.

They are issued by the US Department of the Treasury to finance government spending, and it pledges to raise money by any means legally available to repay them. No wonder investors rush to buy them in a crisis.

After wild swings in March, US Treasuries have now justified their safe haven status again.

Michael Bolliger, UBS Global Wealth Management

Michael Bolliger, analyst at UBS Global Wealth Management, says US Treasuries also benefit from being issued in the world's reserve currency.

Despite these advantages, bonds were incredibly volatile in March. While prices initially went up as stock markets fell, they then fell as panicky traders dumped long-term bonds because they anticipated a surge in the supply of newly issued debt, which would drive down prices.

Bond traders later calmed down after the Senate approved a massive $2 trillion (Dh7.34tn) economic relief package. “After wild swings in March, US Treasuries have now justified their safe haven status again,” Mr Bolliger says.

When bonds are in demand, prices rise, but yields fall. On Friday, the yield on a 10-year US Treasury fell to just 0.59 per cent. If you invest in a 30-year Treasury, you get only slightly more at 1.23 per cent.

US Treasuries are safe, but you pay a high price for that kind of security these days.

To get exposure, USD Treasury Bond UCITS ETF (VDTY), which invests 100 per cent in US Treasuries, currently yields 2.06 per cent. It boasts an impressive year-to-date return of 8.91 per cent, or 14.69 per cent over 12 months, according to Bloomberg.

Gold

Gold is the oldest store of value but its price also fell in March, as fund managers took profits and used the money to cover losses elsewhere, meet customer redemptions or buy shares at reduced prices.

The gold price is nonetheless up a punchy 26.74 per cent over the last year, according to Goldprice.org. Carsten Menke, head of next generation research at Julius Baer, says its safe haven status holds good. “As the global recession unfolds, we still see more upside for gold,” he adds.

Gold is still some way off its all-time high price of $1,895 per ounce, which it hit during the eurozone crisis in September 2011.

At the time of writing, it trades at $1,618, and Mr Menke says it will only top its previous record if the crisis “moves out of hand and the expected short and sharp recession turns into a longer-lasting depression”.

Professor Stephen Thomas, associate dean, MBA Programmes at Cass Business School in Dubai and London, says gold has enjoyed a fantastic 12 months, along with US bonds, proving the importance of having a diversified portfolio. “The gold price certainly isn't going to collapse in the current environment, when shares are impossible to value.”

The danger comes when markets recover, as the gold price could slip back, but there seems little danger of that right now.

Perhaps the easiest way to invest in gold is through an exchange traded fund. WisdomTree Physical Gold (PHAU) is up 6.07 per cent so far in 2020 and 24.74 per cent over 12 months, according to Bloomberg, while iShares Physical Gold (SGLN) is up 14.35 per cent and 34.20 per cent over the same period.

Cash

Cash has been out of favour since interest rates were slashed to near zero during the global financial crisis of 2008.

Last month, the US Federal Reserve cut its already-low benchmark interest rate to zero in repsonse to the current crisis, but Mr Thomas says that is the least of people's worries right now. “Cash has been underappreciated for too long. In today's low inflation world, it might be a hidden gem in your portfolio,” he adds.

Cash is safe but just remember that it will not completely protect your capital, as inflation may erode its value in real terms.

Mr Bolliger at UBS says in the longer run, you need your money to work harder than it will sitting in cash. “Money markets yield little to nothing, and even with inflation rates rather low, cash holdings offer negative real expected returns.”

However, amid today’s extreme volatility, many investors will still appreciate the comfort that cash offers.

To get exposure, a search on comparison site Souqalmal.com shows HSBC eSaver pays up to 1.5 per cent in interest, Emirates Smart Saver Account pays 1.5 per cent, RAKBank Fast Saver pays 1.75 per cent and ADCB Active Saver Account up to 2 per cent. The interest rate you receive depends on factors such as how much you save and in which currency.

Bitcoin

Before Covid-19, fans of cryptocurrencies started to circulate the theory that Bitcoin was now a safe bolthole in a crisis. The last month has proved them wrong.

On February 12, Bitcoin traded at $10,350. Exactly one month later, as coronavirus swept the West, its price had slumped to $4,857 as panicky investors fled risky assets in a rush to raise cash ahead of an expected liquidity crunch. It has recovered slightly to $6,720, but as Vijay Valecha, chief investment officer at Century Financial, notes: “Bitcoin has actually been the biggest loser in this crash, falling 70 per cent as traders and investors shifted into cash.”

The cryptocurrency is a speculative and highly volatile investment, making it a poor safe haven, Mr Valecha says. “Bitcoin may be more erratic than ever amid the current volatility.”

Mr Bolliger says: “We do not consider Bitcoin as an investment vehicle, and would recommend investors not to see cryptocurrencies as a safe haven asset.”

Stay diversified

As bonds and gold have both demonstrated, even safer asset classes can fall, but Mr Valecha says their recent minor correction may be healthy because both were in danger of becoming too expensive. They now look more attractive at today's slightly lower price.

Maurice Gravier, chief investment officer at Emirates NBD, says whatever happens in the stock market, one thing never changes: “The absolute golden rule in investment is diversification.”

Every investor should build a balanced portfolio that includes shares, bonds, gold, property and cash. So if one asset plunges, the others may compensate by holding firm or rising.

The balance you hold will reflect personal factors such as your age, and attitude to risk.

Mr Gravier says even safe havens can crumble if investors rush into cash to reduce or cover their losses. “This extreme correlation is generally temporary, so if anything it can be an opportunity,” he says.

Along with diversification, time is your best defence. Whether buying risky assets like shares, or safer options such as bonds and gold, you should aim to hold for the long term. "Avoid being a forced seller at the worst possible time, and having to take your losses," says Mr Gravier.

Panic episodes like this one are a good opportunity to buy assets you are underexposed to, he says.

Currently, he is neutral on gold, relatively overweight in cash and underweight in bonds. “We are always ready to adjust,” Mr Gravier adds.

Updated: April 5, 2020 02:16 PM

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