Six-month review: Where have the safe havens gone?


Midway through 2013, strategists, economists and analysts have taken pause to weigh up the events that have dominated investor sentiment over the first six months of the year and predict what will cast shadows over the second half.

With markets still reliant on central bank liquidity and the erosion of safe havens in recent months, conditions are expected to remain challenging – although some commentators see opportunities emerging.

Charles Stanley investment analyst Rob Morgan says the stand-out trend of 2013 so far has been a high correlation between asset classes. While it could be argued this undermines diversification within portfolios, Standard Life global thematic strategist Francis Hudson sees it as a positive development.

“It signifies a healthier market and provides scope to do fundamental bottom-up analysis. It also shows a move away from risk-on, risk-off trading, due to liquidity flooding in from central banks,” she says.

So-called safe assets have also been affected. Gold and cash have seen a turnaround, with the former experiencing poor fortunes in the market – signified by the worst drop in value in 34 months – and cash being seen as the only safe asset left.

Hudson says: “It is interesting that cash is seen as a safe asset because it used to be quite risky. That is a change that tells us about the outlook for inflation.”

Morgan adds: “Apart from cash we have not got a safe asset class anymore. That is a problem for investors because the benefits of diversification worked well in the past.”

However, Legal & General global equities strategist Lars Kreckel sees gold’s fall from favour as a positive sign.

He says: “It is one of the most promising signs that we are not looking at the start of a bear market. If people have been worried about inflation getting out of control, we would not have expected the gold price to fall so much.”

The main event so far is arguably Federal Reserve chairman Ben Bernanke’s suggestion that the pace of quantitative easing in the US could slow later this year, which brought the stockmarket rally to a halt and ushered in a global sell-off.

F&C director of global strategy Ted Scott says: “There was a big rise in bond yields everywhere, especially emerging markets. We also saw an enormous withdrawal of capital from riskier products and a move into safe havens.”

This showed just how vulnerable markets still are to sentiment. Newton global strategist Peter Hensman says: “We are expecting markets to remain skittish. There was confidence at the beginning of the year around central banks and this has diminished as we have gone on.

“As some of the certainty starts to reduce then we will continue to have a more difficult period. The excessive optimism starts to reverse a bit.”

Investors also continued to be driven by a hunger for yield. With QE impacting yields and the outlook improving, many expected a great rotation out of bonds and into equities. However, now the end of QE may be on the cards, there is the possibility there will be another mass movement of money.

Morgan says: “That fear manifested itself with Bernanke’s comments and there was a potential policy change all of a sudden. All that risk got taken off the table again.

“We are back to November and December levels in a way. I think people will still look to add risk because there is an underlying demand for it. Potentially, we will have a more stable period. It will it be a stockpicking environment going forward.”

Kreckel believes that if markets become more confident and signs of global economic expansion return, asset classes will see a shift in favour as investors move from more defensive, income-focused parts of the market towards growth.

“The acceleration in global growth will begin in the second half. If this picks up it will be more about growth than the dividend,” he says.

“With bonds yields rising, such income characteristics are not as attractive and investors will want economic beta and exposure to economic cyclicals.”

Scott is more sceptical of equities being given a boost in the second half of the year and believes bonds may start to receive more attention, especially if the demand for yield still dominates investors’ vision.

“A lot of high-income assets were changed up to find yields. There was actually the reverse this time. As bond yields went up, the worst performers in equity markets were high-yielders,” he says.

“There was also a bubble in dividend-paying stocks. Looking ahead, the question is the strength of company earnings and the strength of the market.”

If nothing else, so far this year has reiterated how big a part sentiment plays in global markets. With asset classes behaving in a highly correlated way, and investors prioritising yield yearnings, the biggest stand-out theme that has a lot of people on their guard is what the Fed will do next.

Hensman says: “We are expecting some of the more challenging conditions that recently appeared to continue through the second half of the year.”