facebookAre Safe Haven Investments Still 'Safe' in Today's Volatile Market?



Are Safe Haven Investments Still 'Safe' in Today's Volatile Market?

profileJoel Koh

All around the world, governments have been implementing lockdowns in an effort to contain the COVID-19 pandemic.

This has brought global business to a virtual halt.

Many stock investors are still worried about the COVID-19 pandemic that has driven markets lower at record rates.

However, over the past month, we have seen something of a partial recovery with the MSCI All Countries World Index, a global equity index that tracks stocks from 23 developed and 26 emerging markets countries.

The index went up about 16% since 23 March.
Source: CNBC Markets

However, the index is still about 14% lower than the record high set on 15 Feb this year.

Several economists are predicting a recession far worse than the one experienced in 2008-09.

This suggests that markets are likely to remain volatile for the rest of 2020.

During these volatile times, investors may turn towards safe-haven investments like gold, US Treasury Bonds and lately, technology stocks.

These investments are thought to either retain or increase in value during times of market volatility.

But how are they doing during the current market condition? Are they as safe as they are touted to be? Let’s find out.

What Are Safe Haven Investments?

Safe haven investments, like the name suggests, protects your capital as it diversifies your investment portfolio during times of market volatility.

Source: Spongebob Squarepants | Giphy

It is natural that the market will go up and down in the short-term.

But, there are times, like during an economic recession, when the stock market descends for a longer period of time.

When this happens, the value of the majority of investments usually crash.

As such, there will be some investors who will invest in safe-haven assets that either have no correlation or are negatively correlated to the stock market during times of turmoil.

We will be putting this claim to the test.

We will be using data from the various safe-haven assetsĀ from 3Ā Feb 2020 to 23 Mar 2020 and compare it to the MSCI World Index over the same period. The MSCI will be used to represent the stock market as a whole.

We have chosen this timeframe as the first date provides an idea of what the stock was like pre-COVID-19 while the second date was the MSCI’s lowest point.

We will be looking at the value of gold, US treasury bonds and technology stocksĀ to see what the correlation to the MSCI was.

Granted this a short timeframe and a rather special one as the crash was brought about by COVID-19, which makes this an event-driven recession.

However, the comparison should still provide good insights into how safe those instruments have been.

What is Correlation?

Correlation is a statistic that measures the relationship within variables.

Source: Giphy

It is measured from a scale -1 to +1.

A -1 correlation means that when one variable’s value goes up,Ā the other goes down.

Whereas a +1 correlation means that the variables go up and down together.

The +1 and 0 values mean that the variables are closely related.

If the value is close to 0 or a bit negative that means there is little to no correlation or a negative correlation between these variables.

1) Gold as a Safe Haven Investment

First up we will be looking at gold, the most recognisable of safe-haven investments.

Most people invest in gold for two main reasons.

Firstly, they believe that it will isolate them from the falling stock market.

Secondly, they believe that it will protect them from the deteriorating value of currencies.

This is because when we experience a recession, banks will carry out expansionary monetary policies that might cause runaway inflation, if not used carefully.

An example will be how the US is printing money to fund its stimulus packages now.

We will use the SPDR Gold SharesĀ (ticker: GLD) as it is one of the largest gold ETFs in the world.

From 3 February to 23 March, the gold ETF went down by 7.48%.Ā 

During the same time period, the MSCI went down by 32%.

There shows a fairly positive correlation between the two.

Source: Bloomberg

In 2008, the price of gold did actually go up by 24.5% when the stock market fell.

But during the recent market crash, gold fell with stocks.

In addition, as you can see from the graph, gold did bounce back together with the MSCI’s partial recovery we are seeing now.

Perhaps in this type of market downturn, gold is less effective as a safe haven investment.

2) US Treasury Bonds as a Safe Haven Investment

Last I checked, the US is still the strongest economy in the world.

Thus, lending money to the US government is viewed as a safe-haven investment as it is highly likely that you will get your money back.

In financial theory, US treasury bonds are considered risk-free as theoretically, if the US government does not have enough money to pay you back; they could print more money or tax their people more to pay you back.

We will be looking at the Vanguard USD Treasury Bond UCITS ETF (ticker: VDTY) as a representation of US Treasury Bonds.

Source: Bloomberg

From 3 February to 23 March, the Vanguard USD Treasury Bond UCITS ETF went up by 4.46%.Ā 

During the same time period, the MSCI fell by 32%.

This shows a strong negative correlation between the two.

US treasury bonds seem to be a pretty good safe-haven investment. Because so many people bought them, treasury bonds earned a decent price return.

However, there are some important things to consider. Treasury bonds see their prices rise when interest rates fall. During this time, the U.S. Federal Reserve cut interest rates to near zero.

It is unclear how much this increase in the US treasury bonds can be attributed to market uncertainty or this rate cut.

Unless you have a plan to trade these securities actively, their long-term returns are not too good as their yields are low.

But this might change in the future depending on how interest rates go.

3) Technology Stocks as a Safe Haven Investment

It is a strange world we are living in where technology stocks are considered safe-haven investments.

Investors are drawn to the FAANG companies: Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), Alphabet (GOOG).

This is due largely to their rich balance sheets and deep liquidity in the market.

FAANG stocks have grown exponentially recently.

During the past five years, Facebook and Amazon have seen stock price increases of 185% and 500%, respectively.

Meanwhile, Apple and Alphabet saw price increases of about 175% over that same timeframe, whereas Netflix saw its value rise by nearly 450%.

To evaluate how the stocks are performing, we will look at the Invesco QQQ Trust (ticker: QQQ).

This ETF tracks the top 100 non-financial companies listed on the Nasdaq, comprising of the above-mentioned technology companies that are in the top 10

From 3 February to 23 March, the Invesco QQQ Trust went down by 23.35%.

Source: Bloomberg

During the same time period, the MSCI fell by 32%.

This shows a strong positiveĀ correlation between the two.

With technology stocks, it is clear to see that even though they have grown greatly in the past, they are still subject to a lot of volatility like the general stock market.

Perhaps in this type of market downturn, technology stocks are less effective as a safe haven investment.

In the end, market crashes are what we signed up for when we invest. After all, there is no return without risk.

Safe havens in one period of market volatility may react differently in another. Rather than try to control the uncontrollable, we should control what we can.

Take on the risk that is suited to your risk appetite and remember,Ā there is no consistent safe haven other than portfolio diversification.

Plus, uf you would like to learn more about investments and diversification of your portfolio, you can always ask our friendly Seedly Community!

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ā€‹Readers should always do their own due diligence and consider their financial goals before investing in any stock.Ā 


About Joel Koh
History student turned writer at Seedly. Before you ask, not a teacher. I hope to help people make better financial decisions and not let money control them.
You can contribute your thoughts like Joel Koh here.

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