T. ROWE PRICE

Yoram Lustig is the head of Multi-Asset Solutions, EMEA

As government bond yields

have fallen over the last decade, investors increasingly questioned how to effectively diversify equity risk. Only to be reemphasised by the experience of the 2020 corona crisis, three groups of safe havens have not disappointed. 1. Government bonds

The traditional diversifier of equity risk is duration risk. Bonds issued by trusted governments – the US, Germany, the UK – with long duration offering enough

RISK – WHERE ARE TODAY’S 'SAFE HAVENS'?

fire power to offset part of stock markets’ drawdowns, have been and are still a haven. During flights-to-quality, investors dump risk assets, rushing to the safety of high-quality government bonds. Low yields mean safety has become much more expensive than it used to be – instead of earning 4% on bonds, investors earn less than 1% or, indeed, pay when yields are negative. However, yields could go lower or turn negative, sending bond prices higher.

2. Currencies

Currencies have a pecking order, from safer to riskier. The US dollar, Japanese yen and

Swiss franc are often perceived to be safe and tend to appreciate when risk assets depreciate. The British pound – in the past a haven – has become a risky currency, partially due to Brexit uncertainty and partially due to the UK’s diminished economic prowess on the global stage. However, with quantitative easing of central banks, especially of the US Federal Reserve, on the course of printing unprecedented amounts of money, the relative future value of currencies might change.

3. Defensive strategies

If there is one constant in our world, it is change. Financial markets are ever evolving, and investors must use creativity to adapt. One dilemma facing investors seeking safety is costs. The trick is identifying havens that are not only not an expense but also a source of modest returns in good times and strong returns in bad times, when risk assets fall. One solution is systematic or active strategies, aiming to do just that. For example, buying low-volatility stocks and removing market exposure, buying defensive options at reasonable costs or using algorithm that sells stocks when their volatility jumps and buys them when it falls.

The future has departed from its trajectory in 2020. Investors need to recalculate their course. Splitting portfolios into growth and defensive assets and using a diversified blend of traditional and non-traditional safe havens in the defensive part is our preferred approach to face the new future. n

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