Have you got safeguard measures in place?
After nearly a decade of low interest rates and central banks pumping money into financial markets, traditional safe haven investments have become expensive, so where could investors look to keep their investments safe?
Gold, the US dollar, ‘defensive’ stocks such as utilities and pharmaceuticals, government bonds, cash – what do they have in common? In times of economic stress and market volatility, they are seen as safe havens for investors.
Price for protection
Investors post-Brexit may have increased concerns around a recession in the UK, slowdown in the European and the global economy, a break-up of the EU, and increased global political risk. There is no doubt that these scenarios are all possible, but by seeking traditional safe havens investors are likely to pay a high price for protection.
In the UK, if you want to put your money into a government bond for ten years, the Government will pay you just 79 pence a year for every £100 you lend it, and in Germany investors have to pay the German Government to own its bonds. A German ten-year bond yields -0.2%.
Defensive stocks drivers
We are currently in the second longest stock market bull run in history, and gains have been driven primarily by defensive stocks, which has arguably made them expensive. It is a high price to pay for the feeling of security. It has happened because in a world of economic uncertainty, the money pumped into financial markets by central banks via quantitative easing (QE) has been invested in the highest-quality assets first.
But paying such a high price for protection in traditional safe havens is a risk in itself. Like buying a house at the top of the market, there is the risk that the price can’t go much higher. While traditional safe haven assets may provide some protection for investments in times of economic and financial strife, they all currently carry risk because of their high prices.
From there, the slew of central bank money has trickled down the investment pyramid into lower quality assets as investors have gone in search of higher returns.
Safe haven seekers
Options for safe haven seekers are very limited. Gold remains the ultimate safe haven as it is seen as a store of value. The price tends to rise at times of uncertainty and when there is a threat of inflation. The search for safe havens may have created other opportunities in an area previously considered risky: cyclical shares (shares where the prices are particularly affected by ups and downs in the overall economy).
If the economy recovers or the fears of investors don’t materialise, there is a strong argument that cyclical share prices will rise sharply, and if investors’ fears do come true then those cyclical shares don’t have too far to fall. They also pay healthy dividends, so they could provide an income greater than is available in more traditional safe havens.
How to safeguard your investments
Following June’s EU referendum and Britain’s decision to leave Europe, you may be thinking more about the impact on your personal finances and how to safeguard your investments. Everyone has their own attitude to risk, and it’s important to understand yours before making any investments – to discuss how we can help you make the right choices, please contact Admiral Wealth Management today on 01472 357035 or email firstname.lastname@example.org.
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