How to trade on safe haven assets

A safe haven typically refers to something that provides security or an escape from things that a person may find worrying or dangerous. This can come in the form of a place, situation or object, but in trading, it comes in the form of an investment. Certain asset classes may provide a feeling of safety.

A safe haven investment is an asset that can be used to offset the risk of an investor’s portfolio and limit their exposure​ to negative shocks. In a market downturn, safe haven investments will often outperform the majority of financial markets.

Safe haven investments often share similar characteristics, such as the following:

The commodity markets offer a number of potential safe haven assets, usually involving precious metals such as gold, but also silver and palladium.

Here is a list of safe haven currencies that investors generally consider to be the strongest, and most resilient and reliable in a financial crisis.

Although the stock market is mainly at the centre of crisis during a market downturn, some specific companies are noted to have outperformed during turmoil, which are referred to as ‘defensive stocks​’. This covers major stock market sectors such as utilities, consumer staples and healthcare. Defensive stocks typically have a continual demand for their products or services, even in a period of economic decline or a recession.

For example, companies that provide water, gas, electric or broadband services will always see demand as these are basic necessities for living, along with supermarkets, and general food, beverage and household suppliers. Healthcare providers and pharmaceutical companies have historically performed well during these times, an example being the Covid-19 pandemic and subsequent global recession.

Defensive stocks are the opposite of cyclical stocks​, which tend to thrive during economic growth and inflation but fall during periods of hardship.

Debt securities are issued by governments across the world and are generally seen to be a stable investment. Gilts in the UK and T-bills or T-notes in the US act as safe haven investments, and this may be based on the credit status of the government and high quality of income for each country.

Given that government bonds provide a fixed rate of return until maturity, after which any principal is then repaid to the investor, this may be a more attractive investment than other safe havens as you’re not losing any of your initial capital. Some even refer to gilts and T-bills or T-notes as “risk-free”. However, these assets are still affected by inflation, interest rates and currency changes. When trading derivative products on any financial market, there is still risk of volatility, combined with the use of leverage, which can lead to large losses if your positions are not protected by adequate risk-management controls.