Which FX and CFD markets are safe-haven assets?

What are safe-haven assets and what are they used for?

Safe-haven assets are those securities that, in times of market turbulence, maintain their value or even increase it.

For this reason, in times of crisis, they are highly sought after by investors and traders to reduce their losing positions.

Furthermore, in order for these assets to be considered as an effective refuge, they must be securities with high liquidity, so as to allow them to easily take positions if the market situation requires it.

Safe-haven assets can change over time, so it is very important to keep in mind that those securities that have been an excellent investment in a past crisis may not be in a similar situation.

The market in distress or not, all the elements must be studied before making the same decisions as in the past.

By definition, safe-haven assets are sometimes confused with hedging a particular portfolio.

There is actually a fundamental difference.

A hedge is a security whose valuation, on a regular basis, is unrelated to the portfolio itself that needs to be protected.

A safe haven asset, on the other hand, is a security whose valuation is not correlated to that portfolio in a given market crisis situation.

It is important to understand this difference since safe-haven assets are usually attractive to the investor only when the market is in a time of crisis.

As a result, they are not particularly profitable during normal market activity.

For this reason, traders only resort to these assets if the situation requires (dictates) them.

Why trading safe-haven assets in times of crisis is therefore very clear.

Here because:

• They protect invested resources;
• Diversify your investment portfolio;
• They increase in value when the rest of the securities are quoted lower;
• They allow obtaining a positive return in situations of economic crisis.

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How do safe-haven assets work?

Volatility is an integral part of trading itself.

Just as breathing is a natural process for the human being, so in the markets there are periods in which the prices of securities rise and others in which they fall.

These situations are generally temporary and define the bullish or bearish trend, then exploited properly by the most experienced traders who know how to identify them and therefore get the most out of their trading operations.

However, in situations of prolonged crisis, as can occur during an economic crisis, the market is characterized by the persistence of a collapse in the value of listed securities and a constant downward trend in prices.

An example of market behavior in a situation of economic crisis can be seen in the following graph which reflects the evolution of the IBEX-35 index, made up of the largest capitalization stocks of the Madrid Stock Exchange, during the last global recession that has started in 2008.

During the period indicated, the primary trend of all the values ​​that make up the IBEX was bearish.

As can be seen, in a situation of economic recession, the price of most of the values ​​falls sharply, prolonging the fall for the duration of the crisis.

Faced with such a situation, the only possibility that traders had to recover was to look for assets that were correlated or had a negative correlation with the general market.

These resources are called “safe havens”.

For example, in the global recession that began in 2008, the Swiss franc served as a refuge in the eurozone.

The demand for this currency meant that the Swiss currency was (over) valued during the crisis, allowing not only to minimize losses but also to obtain a positive return in a situation of global economic crisis.

The following chart shows the evolution of the CHF / EUR pair (Swiss franc/euro exchange) during the aforementioned recession.

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Examples of safe-haven assets

These assets have historically played the role of refuge in times of turbulence in the financial markets:

• Gold
• Forex trading
• Treasury bills
• Shares of safe-haven assets

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1. Gold

Gold is the ultimate safe-haven asset.

When the financial markets go into crisis, the solidity of gold as a safe haven of value pushes investors to shift their “attention” from risky securities to this commodity.

Have you ever noticed how many “Buy gold” shops have sprung up (fatality) in recent years all over the European continent, including Italy? It is certainly not a coincidence.

The advantages of operating with gold in a crisis situation are:

1. Protection of assets: being a physical and limited resource, gold has always been considered a precious safe-haven asset. Being a physical and tangible resource, unlike FIAT money which can increase its amount with monetary policy decisions, the quantity of gold always remains practically stable, varying only on the basis of mineral production.
2. Profitability: when a crisis situation continues over time, investors tend to accumulate their funds in gold, which (obviously) drives up their price thanks to the increasing demand.

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2. Forex Currency market

As can be seen in the previous charts, the Swiss franc is considered a safe-haven currency in fx trading.

Switzerland has a secure and stable financial sector.

It has a low volatility capital market.

Unemployment practically reduced to a minimum and certainly not less important, a high standard of living and a positive economic balance.

The advantages of operating in favor of the Swiss franc in a crisis situation are therefore manifold:

1. Stability: the country’s economic stability is “transferred” into its currency, so it is perceived as safe. The independence of Switzerland from the European Union also helps to protect the currency from any political and economic crisis that may affect the eurozone (such as the recent Brexit).
2. Profitability: given the stability of the Swiss government and its financial system, the Swiss franc, in a situation of economic crisis or recession, generally faces a strong upward trend resulting from the increase in foreign demand which produces a further appreciation of the currency.

Another currency that has traditionally been considered a safe haven is the US dollar.

The explanation is soon said. Historically in times of crisis, its value has always remained fairly stable when other currencies have depreciated.

It is no coincidence that the foreign exchange reserves of many countries are precisely in sounding stars and stripes dollars.

In addition, the dollar is used as a reference currency in foreign trade.

Both factors have helped maintain the dollar’s value and its reputation as a safe-haven asset.

However, since the last global financial crisis, the dollar’s reputation as a safe haven currency has been slightly skewed in favor of US treasury bonds.

Despite this, the American currency continues to have some of the main characteristics of classic safe-haven assets, above all liquidity.

The dollar remains, by far, the most widely used currency in the world.

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3. Shares – safe-haven assets

In equity markets, there are listed stocks that are less prone to the downside in times of global crisis or economic recession.
These assets usually correspond to shares of companies in the following sectors:

• Public services: supply of water, electricity, or gas
• Basic consumer goods: food
• Health

Even if a crisis situation occurs, consumers cannot stop demanding services and use some products sold by certain companies, which is why they are considered countercyclical values.

Regardless of the market situation, consumers will continue to buy food, take health products, consume energy and water for their homes.

Therefore, the shares of listed companies in these sectors tend to act as safe-haven assets in times of crisis, highly appreciated in their value for the interest they arouse in these situations.

In times of crisis, the investor transfers his capital to these realities at the expense of other cyclical sectors and therefore more exposed to a decrease in economic activity such as the financial sector, construction, or new technologies.

All areas usually with good returns, but certainly not fundamental when the dish cries and the economy flounders.

Safe-haven assets are divided into:

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4. Treasury bills

Safe-haven assets are not only found in stocks and commodity trading.

In fixed income markets, it is also possible to find examples of issuing debt securities that meet the necessary characteristics to act as a safe haven.

The issuance of safe-haven debt securities corresponds to the debt of the countries with the highest rating.

Based on this premise, the debt certificates traditionally regarded as risk-free assets are the German and US Treasury Bills.

This is for a very specific reason.

In the event of the maturity of these bonds, the governments themselves are the ones who will have to repay the capital invested.

The investor knows this well and is equally aware that the United States and Germany will always be able to pay their debts, regardless of what happens in the markets.

Within the issuance of debt securities of these two countries, the securities considered to be the highest safe-haven assets are 10-year bonds.

For this reason, German and US bonds are widely in demand in times of market instability.

This request leads to an estimate of these issues, lowering their interest rate in proportion to their increase in value.

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When does an asset stop being a safe haven asset?

It cannot be guaranteed that assets that have already acted as a refuge in a crisis will repeat the same path in a similar period of instability.

Online trading with safe-haven assets has great advantages in situations of economic or political crisis, but when the turbulence in the market disappears, so does the interest (and ardor) for the aforementioned.

It should also be remembered that safe-haven assets are not permanent.

The interest in their value in times of crisis is due to the incessant demand.
In the case of currencies then, even with the complicity of economic policies.

Unlike the case of safe-haven stocks where the post-crisis loss of attractiveness is not so significant.

If these companies in fact obtain benefits in times of crisis, once the economic landscape has improved overall, they will continue to reap good performances without affecting their value.

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How can safe-haven assets be used in trading?

CFDs are the smartest choice to make when it comes to trading safe-haven assets.

The variety of stocks that can be traded with CFDs is very wide: stocks, commodities, bonds, and/or currency pairs.

From the platforms offered by Exness it is possible to operate on CFDs in all safe-haven assets that have been indicated:

• CFDs with gold
• CFDs with currencies
• CFDs with shares
• CFDs with German and US Treasury Bills

When trading CFDs it is not necessary to purchase the actual asset.

What the CFD allows is to obtain a profit depending on the direction (bullish or bearish trend) on which it is established.

Due to the nature of its special features, CFDs are presented as the best option for trading with safe-haven assets compared to other derivative products such as futures.

This is due not only to the lower rates but also to their greater flexibility as they do not have an expiration date.

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