After a strong start to the year, recent volatility in markets fuelled by concerns over US growth and trade war between the US and China has made some investors become more cautious. 
While markets rallied after a poor 2018 amid expectations of a Federal Reserve rate cut that finally took place at the end of July, the inversion of the two-year, 10-year US Treasury yield curve – a closely watch recession indicator – has stoked growth concerns once again.
As such, Tom Stevenson (pictured), investment director at Fidelity Personal Investing, said that ‘safe havens’ are now ‘back on the radar’.
“So where should investors look for a port in the storm?” asked Stevenson. “And, just as important, how can they be sure that the haven they choose really is as safe as it looks?”
Below, the Fidelity investment director examines seven potential ‘safe havens’ and what investors need to consider when investing in them.
Bonds
First on the list is bonds, which Stevenson said are generally considered as safer than riskier equities because the returns on offer are more predictable.
“As long as the issuer does not default, you know what the income will be and how much and when you will get your money back,” he explained.
“Because of this certainty, however, the returns on bonds have historically been lower than from shares.”
Whilst the security of a return – as long as there’s no default – is a positive in times of market volatility they are lower levels of returns than shares.
Performance of indices in US dollars over 10yrs
Source: FE Analytics
And today, said Stevenson, prospective returns are lower than they have ever been because demand in the post-financial crisis environment has risen while yields on offer have fallen.
“In some cases – bonds with a value of $15trn around the world – the yield is actually negative – investors are paying for the certainty of a return of nearly all their money back in due course,” he added.
Gold
Long considered a classic ‘safe haven’ asset, as a physical commodity gold is noted as a store of value. Its scarcity means that – unlike a paper currency – it is able to hold its value over time, making it an ideal inflation-protected asset.
More recently, the yellow metal has soared in value as investors have sought out safety from more volatile markets.
Performance of gold vs MSCI AC World over 1yr
Source: FE Analytics
As the chart above shows the Bloomberg Gold Sub index made 34.44 per cent total return over the past 12 months, in sterling terms, while the MSCI AC World index made just 4.57 per cent.
However, the yellow metal isn’t for everybody.
“The downside of holding gold is that it pays no income,” said Stevenson “Which means it becomes less attractive as interest rates rise. That, however, looks like a distant prospect at the moment, so in the short-term gold could go further.”
Currencies
Another “port in the storm” are a small handful of currencies that Fidelity’s Stevenson said “investors tend to buy when things look shaky”, such as the Japanese yen and Swiss franc.
Yet, there are some issues with relying on currencies as a ‘safe haven’.
“As with bonds, ‘port in a storm’ currencies already look expensive, something you realise as soon as you try to buy literally anything in Switzerland,” he said
“Dealing in currencies is a specialism that most personal investors would be wise to avoid. And if you try to play currencies by buying other assets like funds or shares then the movement of the underlying asset can easily offset any currency gain.”
Cash
Cash is the “ultimate safe haven”, according to Stevenson, and has one main advantage over all the others.
“You know exactly how much it is worth and what it will buy you,” he explained.
Nevertheless, it has “one major disadvantage, at the moment”, the investment director said.
“Thanks to falling interest rates, it pays almost as little income as gold,” he said. “This means that, in inflation-adjusted terms. a cash investment is constantly going backwards.”
Defensive stocks
For investors wishing to stay invested in equity markets, an obvious option when looking to protect against volatility could be defensive stocks.
These companies are located in sectors of the market that are less vulnerable to the economic cycle, said Fidelity’s Stevenson.
“Even in a recession, people tend to continue eating and heating their homes,” he explained. “The companies that serve these basic human needs can be expected to deliver profits and dividends whatever happens in the outside world.”
But these, too, are expensive, with the market having already priced in such advantages.
This means that investors will pay a higher price for their “perceived security,” said Stevenson.
“No-one should think that defensive shares are immune to market downturns,” he added. “They will also fall, especially if they start out overpriced.”
Developed markets
While investors tend to think of emerging markets as riskier than developed markets, Stevenson said it is probably more accurate to say that they are more volatile.
“The difference is important. Volatility measures how much an investment moves up and down over time. Risk indicates the chance that you will lose your money permanently,” he explained.
Monthly rolling 10yr volatility of indices in US dollars since 2011
Source: FE Analytics
Stevenson added: “Depending on the time horizon of your investments you may not worry about short-term volatility. If emerging markets are cheaper than their developed counterparts, they may actually represent a lower risk.”
Multi-asset funds
Finally, Stevenson suggested multi-asset funds as a potential defence against market volatility, given the range of assets that they can invest in.
“These invest in a mixture of different asset classes, sometimes just shares and bonds, sometimes a more diverse mix that includes commodities, property and other alternative investments,” he concluded.
“With investors flitting between different types of investment on the basis of their perceived risk, holding a mixture of assets can be a good way to get a good night’s sleep.”