Understanding Safe Haven Assets: What & Why?

In September 2021, a CNBC Delivering Alpha investor survey found that three out of every four investors believed it was time to be conservative in the stock market. Since then, market sentiment has only continued to slide. The number of investors describing their outlook as “bearish” continues to increase, and many don’t expect strong stock prices this year.

During times like this, many investors looking to shed risk and preserve capital are turning to safe haven assets.

Defining Safe Haven Assets

Safe haven assets can reduce your portfolio’s risk and limit your exposure in economic downturns. These safer investments generally outperform riskier investments during stock market crashes or financial contractions, as their goal is not to make money but to preserve it.

There are several specific characteristics shared by most safe haven assets:

• Low Volatility: Investments with lower volatility are more likely to protect capital, minimize losses, and demand less of future returns to compensate for losses.
  
• Resilient Performance: Safe haven assets have a proven record of positive investment performance across multiple economic cycles.
  
• Low Correlation: Investments acting independently of general market conditions can hedge against losses and minimize total portfolio risk.
  
• Utility Value/Demand: Investments with real-world purpose are not at risk of becoming worthless due to the inherent, underlying value of the asset.

Current Demand for Safe Havens

There are a few reasons investors have been flocking to safe haven assets more recently.

The stock market ended the year volatile. The CBOE Volatility Index (VIX) rose 35% in December and topped 31.0, ending the year with some of the most volatile conditions seen all year. Other indices like the Nasdaq 100 and Russell 2000 also experienced the most turbulent month seen in over a year. Market swings of this magnitude may not be a thing of the past given that the stock market is expected to produce another year of above-average volatility in 2022.

Many investors are also still grappling with uncertainty as they try to figure out the Fed’s future monetary policy plans. Financial markets aren’t sure how Omicron or potential future COVID-19 strands will impact business closures and economic stimuli. Political uncertainty leading up to the 2022 midterm election might lead to increased uncertainty and market turbulence, as it did leading up to the 2020 Primary Election.

Further, many investors appear to be shying away from the stock market as they feel equity prices do not justify future potential earnings. Multiple metrics and indicators signal that the stock market is more overvalued than it has been in over 100 years. The S&P 500’s current earnings yield is 3% less than the CPI’s 12-month rate of change, indicating real corporate earnings today are lower than the rate of inflation. The Buffet Indicator - a metric that compares equity market capitalization and compares it to the GDP - hit 211% last month. Warren Buffet has previously referenced this level of stock prices as “playing with fire”.

All of this is happening on the heels of monetary contraction. Signs point to multiple interest rate increases by the Fed this year, and many market analysts believe there’s a 76% chance the first-rate increase occurs in March. Meanwhile, a majority of Fed members believe 3 rate hikes will occur this year. Historically, when the Fed begins raising rates, the cost of doing business increases, company profitability is negatively impacted, and company growth has been stunted. As the cost of borrowing increases, credit card interest rates and adjustable-rate mortgage rates both historically increase. Asset valuations also tend to decrease. Although contracting monetary policy is an essential part of combating inflation, there are serious implications for broader financial markets - understandingly causing investors to seek investment alternatives.

Popular Safe Haven Investments

Based on prior economic downturns, investors have commonly turned to the following safe haven investments.

Insured/Backed Assets

High-yield savings accounts, checking accounts, money market deposit accounts, and certificates of deposits are backed by the Federal Deposit Insurance Corporation. Though savings rates on these instruments have never been lower, a certain amount of capital is insured by the government. U.S. Treasuries are also popular for the same reason. However, the United States has defaulted on its debt four times in history, making these deposits not entirely risk-free.

Precious Metals

Precious metals, such as gold, have many popular safe haven asset characteristics. It’s usually easy to sell digital ownership of gold held within an ETF or mutual fund, while gold bars, coins, or bullion have many active physical markets. There’s also a wide range of real-world uses for gold including jewelry, dentistry, aerospace, and electronics. Gold is also a scarce asset;  the amount mined each year has not been enough to match global demand. However, gold has experienced losses as high as 32% in a single year., making a few investors wary.

Defensive Equities

Some investors protect against the stock market by changing where they invest within their equity holdings. Shares of preferred stock get preferential treatment over common stocks including the first claim to dividends and the first right to claim assets in the event the company liquidates. Sectors such as consumer staples experience steady demand for their products independent of broader market cycles and thrived during the 2008 recession.

Farmland: The New Go-To Safe Haven

Farmland has also emerged as a top-tier safe haven asset option. Farmland’s long-term historical standard deviation of 6.9% is comparable to other low-risk assets like bonds. During the 2008 Global Financial Crisis, the S&P 500 declined 46%; during the same time period, the NCREIF Farmland Index increased 17%. While the stock market most recently crashed in 2020, farmland’s Q1 2020 total return was a loss of only 0.1% - only its second negative quarter in 30 years.

Farmland also has proven itself a successful long-term investment based on historical returns. Over the past 30 years, farmland has generated an average return of 11%, and the NCREIF Farmland Total Return Index has increased more than fivefold over the 15 years. Last year, farmland valuations increased 7.8% from 2020 while total crop receipts collected in 2021 were approximately 18% higher than what was earned from the year before. While gold has periods of stagnated returns and the average savings account rate is only 0.06%, farmland provides investors a unique opportunity to generate wealth while simultaneously protecting it. Another reason farmland has performed exceptionally well as a safe haven asset is its low correlation to other investments; although gold has had an inconsistent correlation to stocks, farmland has a low correlation to stocks, bonds, and real estate.

Farmland has also outperformed gold when combating inflation; since 1980, farmland and commodity values have risen greater than prevailing inflation rates. Gold can’t make the same claim. Farmland’s demand is driven by trends independent of economic cycles, shielding it from financial market performance and actually increasing due to increased consumption or population growth. The real-world practicality and scarcity of land are difficult to find in other assets, making it a prime safe haven option.

Protecting Your Wealth Through Farmland

There are enough reasons to be uneasy about today’s financial markets: stock prices are volatile, the future of the pandemic is uncertain, and Fed rates are likely on the rise. Investors have already begun to turn to farmland to mitigate risks surrounding rising prices as well as seek an economically resilient investment.

Through its proven record of historically low volatility, high returns, and minimal correlation to other asset classes, farmland is worth consideration as the safe haven asset providing protection to your portfolio.