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Abu Dhabi, UAETuesday 11 December 2018

Five safe havens amid the global stock market storms

With most markets now suffering, here are some more secure options to find shelter

Illustration by Mathew Kurian 
Illustration by Mathew Kurian 

October once again lived up to its reputation for being one of the stormiest months for investors as global stock markets came crashing down.

In the US, the S&P 500 index fell a whopping 6.9 per cent, its worst month since September 2011, while the MSCI emerging markets index fell 7.8 per cent, the worst showing since October 2008.

Most markets ended the month lower than they were at the start of the year, with a drop of 7.5 per cent on the UK's FTSE All Share, 7.1 per cent in Europe, 9.4 per cent on the Japanese Topix index and 12.3 per cent across emerging markets. Only the US is in positive territory, up 1.4 per cent.

The latest sell-off was fuelled by rising US interest rates, US-China trade war fears and disappointing results from a few top US companies including Amazon.com. Its stock fell 20 per cent in October, although it is still up 37 per cent this year.

Today's storms are making you feel uneasy, then you may be tempted by the following safe ports. Just remember that nowhere is completely without risk.

Gold

Gold is the ultimate safe haven. It has been used as a store of value for thousands of years, and is the go-to asset in times of crisis.

The price slumped as low as $1,160 an ounce in August but after jumping 3 per cent in the past 30 days it trades at $1,209 at the time of writing, according to Goldprice.org.

However, it is still down 6.72 per cent over six months and 4.73 per cent over five years. Gold does not always shine.

Adrian Ash, director of research at BullionVault, says the plunge in global stock markets is driving current demand for gold. "November's rally has capped the price rise but private investor demand remains strong. As we saw in the financial crisis, gold does well when other assets do badly.”

Fawad Razaqzada, technical analyst at currency specialists Forex.com, says rising US interest rates and bond yields could hit the gold price. “Gold doesn’t pay any interest and therefore looks less attractive when you can get higher income from cash and bonds.”

Gold does not look compelling right now, he adds: “However, it would quickly find support in another stock market sell-off.”

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Japanese yen

The Japanese yen is a popular bolt hole in times of trouble but Mr Razaqzada says it has one disadvantage: “Japanese assets yield very little interest.”

Currently, 10-year Japanese government bonds yield just 1.12 per cent and that is unlikely to rise much as monetary policy is likely to remain lax and interest rates low, he adds.

“The Japanese yen should remain under pressure for the foreseeable future, especially against the US dollar, where the Federal Reserve is turning hawkish and raising rates.”

Mr Razaqzada says the yen did strengthen when markets sold off this October. “Ultimately, the growing monetary disparity between Japan and faster-growing economies like the US will limit its upside potential," he adds.

US Treasuries

Governments issue bonds to raise money for their spending, paying investors a fixed rate of interest with a guarantee to return their capital at a set date. The US government proudly boasts that it has never defaulted on its debt obligations and although money geeks will tell you this is not strictly true, their bonds are secure because the country can always print money to cover its obligations.

US government bonds are a popular destination in a "flight to quality” and yields are rising with 10-year US Treasuries now paying around 3.2 per cent but, again, they are not wholly without risk.

Russ Mould, investment director at AJ Bell, says the yield on 10-year Treasuries currently beats the US inflation rate of 2.3 per cent, but that could change. "If inflation continues to rise and overtakes the Treasury yield this will erode the real-terms value of the income.”

When bond yields rise, bond prices fall. This means today’s investors could suffer a capital loss, Mr Mould adds. “The price of 10-year Treasuries has fallen 16 per cent since yields bottomed out two-and-half years ago, inflicting nasty capital losses on anyone who bought then.”

US Treasuries may be one of the safest homes for your money, but no asset class is entirely risk free.

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Defensive stocks

When stock markets are booming and confidence is high, investors are happy to take a punt on riskier but potentially more rewarding sectors such as smaller companies or emerging markets. However, when markets are falling blue-chip companies in developed markets such as the US, UK and Europe start to look more attractive.

Many rush into classic defensive sectors include pharmaceuticals, utility companies, telecoms, tobacco and food producers. In practice, this might mean household names such as Walt Disney, Amazon, Microsoft, Visa, Nike, Netflix, Johnson & Johnson, Union Pacific, Exxon, Royal Dutch Shell, Volkswagen, Daimler, Nestlé and Unilever.

Mr Mould says defensives have been gaining in popularity during recent volatility. He tips three funds investing in this sector with a global spread: Troy Trojan Income, Newton Global Income and Stewart Investors Asia Pacific Leaders.

Cash

For years, cash was king. Interest rates hovered around 5 or 6 per cent, protecting the real value of your money against inflation.

That changed after the financial crisis, when central bankers slashed interest rates to near zero. Even today, savers in the UAE struggle to get more than 1 or 2 per cent, unless they lock away their money for several years.

As stock markets grow more volatile many fund managers are leaving large sums in cash right now, including investment legend Warren Buffett. His Berkshire Hathaway investment vehicle is now 14.1 per cent in cash, as he does not consider that there are enough attractive stock buying opportunities at the moment.

Steven Downey, chartered financial analyst candidate at Holborn Assets in Dubai, says: "Cash is a good place to park your money in the short-term because your capital is safe but in the longer run its real value is likely to be eroded by inflation.”

Mr Downey says no safe haven favoured is without its downside. “The safest way to protect yourself is to build a balanced portfolio covering all the major asset classes such as shares, bonds, cash and property. That way when one underperforms, another might compensate by doing better.”