January 25, 2013 5:03 pm

Not-so-safe havens show uglier side

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Ah, this is obviously some strange usage of the word ‘safe’ that I wasn’t previously aware of.”

Arthur Dent, reluctant hero of Douglas Adams’ surreal comic novel The Hitchhiker’s Guide to the Galaxy, was not convinced of the merits of landing on a hostile Vogon spaceship. Investors in traditional financial havens such as the Swiss franc or Japanese yen – or in refuges from the eurozone’s woes, such as the UK pound – may feel he had a point.

As optimism about the global economy has brightened, haven assets have begun to take on Vogon-like ugliness. The Swiss franc has fallen more than 3 per cent against the euro so far this year. The yen has fallen almost 5 per cent against the dollar and 7 per cent against the euro.

Other havens have wobbled. US Treasury and German bond yields spiked this month, triggering fears that a broader sell-off may be looming. Gold prices have fallen 8 per cent since October.

Sterling, meanwhile, has fallen 5 per cent against the euro this year, and on Friday reached a 10-month low on a trade-weighted basis after weaker than expected growth figures.

The shifts are the flipside of receding concerns about a eurozone break-up or a US fiscal crisis. Investors’ risk appetites have increased in a hunt for yield that has seen, for instance, a surge in foreign demand for Spanish and Italian government debt and tentative signs of a global rotation out of recession-proof bonds and into equities.

“Late last year investors saw political risks subside and the global economy improving. Now people are putting their money where their mouths are – and they are starting to exit safe havens,” says Stephane Deo, global head of asset allocation at UBS.

UBS analysts reckon a “substantial part” of the SFr350bn the Swiss central bank sold in the market last year to fend off its currency’s appreciation was bought by haven investors. They believe the unwinding of those flows could send the euro as high as SFr1.30 against the franc.

But as well as a search for better yields and rising risk appetites, questions are also being asked about what is safe in the post-crisis world.

Sterling has long looked an unlikely haven. When crisis fears were high, investors bought gilts in spite of a poorly performing UK economy and budget deficit. Now they warn that, without haven inflows, Britain’s economic fundamentals have been exposed. “As the distraction of the eurozone fades, markets will only increase their focus on the reality of the weak UK domestic economy,” says Stewart Cowley, head of fixed income at Old Mutual Global Investors.

Jitters have intensified on fears the UK could lose its triple-A rated status this year. The unexpectedly sharp 0.3 per cent contraction in gross domestic product in the fourth quarter of last year revealed on Friday has raised fears of a triple-dip recession.

Other spots in the haven universe never seemed entirely suited to the job: the Australian dollar and Swedish krona were classically correlated with global equities but became unusually popular during times of stress because of their countries’ highly rated government debt and relatively high interest rates. Their allure could wane even as equity markets rally, analysts warn.

Meanwhile, fiscal constraints and the pressures on the world’s main central banks to inflate economies have also changed investors’ perceptions about Japanese and US assets. Some classic havens “are exposed to a possible shift in inflation targeting, particularly in Japan”, says Fredrik Nerbrand, global head of asset allocation at HSBC.

“Traditionally, at risky times you wanted to be in dollars but we’re not sure that is the right place to be. You might want to be in local currency emerging markets or the eurozone. The traditional thinking [about safe assets] still dominates in markets, but at some point that is going to change.”

In Tokyo, officials have talked the yen down, saying this week that a weaker yen at Y100 against the dollar would not pose a threat to Japan’s economy. Japan also revealed a record trade deficit this week, highlighting the complex challenges facing the new government as it tackles two decades of economic malaise.

But the yen showed unexpected resilience this week: along with the Swiss franc, it jumped higher amid disappointment over the Bank of Japan’s plans to combat deflation and a pullback in global risk appetites. And few would argue that havens have had their day.

“When everyone stops worrying about safety and goes for yield, that’s when you should worry,” says Matt King, credit strategist at Citigroup. “The fact that everyone is busy buying [the rally] but nobody really believes in it, tells you there is something wrong. We think it is a temporary phase.”

Still, that does not rule out a shift in what is considered a haven. “Safety is whatever investors consider to be safe,” says Mr King. “It is in the eye of the beholder but, in the end, the money has to go somewhere – so you only have to be the least ugly place.”

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