Dangers lurk for investors in the old safe havens
Cash savings, government debt and gold used to be reliable bets in turbulent times. But even these carry risks amid the eurozone crisis
Sunday 27 May 2012
The financial world used to be a more straightforward place. With a little research investors and savers could sift out which products were safe. Money placed in a government bond for instance was a surefire way of protecting your capital while slowly accruing returns, while money in an emerging market fund was a seat-of-the-pants investment play: high risks but potentially high returns. But then came the financial crash in the West along with the developing euro crisis and the lines of what is safe and not so safe have become blurred at best, if not torn asunder.
"The traditional safe havens are generally cash savings, government debt and gold," says Adrian Lowcock, a director at Bestinvest. "however, safe havens are not always what they seem and you should be aware of the new risks these carry. Investing in them can also result in a loss."
Cash is king, the saying goes, but, if it is, its crown has become more than a little tarnished of late. With Bank of England interest rates stuck at 0.5 per cent and UK savers subsidising borrowers to the tune of an estimated £100bn even the most active of consumers, those willing to become a "rate tart" and switch between the highest-paying providers, are barely keeping up with inflation.
"Putting your money in cash will protect it from the effects of falling markets, but in the current climate this should only be considered a short-term solution." says Mr Lowcock. "Cash cannot ever grow. There is no capital appreciation and therefore it is entirely dependent on the income it generates."
But at least cash qualifies as a safe haven. Or does it? Recent reports of savings being withdrawn from Greek, Spanish and Italian banks brings back still-sharp memories of the run on Northern Rock in 2007. There is protection in place. The first £85,000 in an account with a UK bank or building society is protected under the financial services compensation scheme.
As for gold, investors who bought before the onset of the financial crisis and for a few years afterwards have done very well as the price has moved substantially higher. Gold enjoys the status of the traditional hedge investment; bad times on the markets mean good times for gold.
But this is the wrong way to look at gold, according to Adrian Ash, the head of research at gold investment firm BullionVault: "Investment wise, the biggest pitfall is expecting gold to act as a magic safe haven when everything else falls. It's subject to just the same selling pressure as equities and commodities when investment funds need to cover client redemptions. Gold fell when Lehman Brothers collapsed, and it's fallen again during this latest round of euro panic."
What's more, while the euro crisis has got worse the price of gold has taken a step back, falling by $130 an ounce, or 8 per cent, in the past six months. Mr Ash adds investors also fall into the trap of buying expensive gold, that is gold that has been manufactured into a "collectable" or buying into funds which trade complex financial instruments such as futures in the gold market. These are not for "normal everyday investors as there are quite substantial risks with them," according to Danny Cox from IFA Hargreaves Lansdown.
The explosion of government-issued debt in the West is making some observers nervous for the prospects for this once very safe asset. "Government bonds are an income asset. The price is driven by the income yield on the asset," says Mr Lowcock. "As the bank of England base rate fell, the price of gilts has risen, driving down the yield, which is currently around 2 per cent. As with cash, inflation is an important factor when considering income assets."
"Some 'safe' investments such as government bonds actually fluctuate in value, often more than the average investor might think," Philip Bray from Investment sense warns. What's more, Greece has already undergone a partial default and who is to say, as the euro crisis unfolds, that other members won't follow suit.
Phil Milburn, the strategic bond manager at Kames Capital, believes this will happen: "I can see numerous other nations defaulting on their government debt over the next few years," he says. And the contagion isn't just euro-based. Last week Fitch surprisingly cut the credit rating on Japan government bonds to A+.
So with once-safe investments not seeming so quite so safe any more, what should people looking for a port in a storm with at least inflation growth do? Philippa Gee, the managing director of Philippa Gee Wealth Management, says: "Diversifying your investments is absolutely key. Now it is time to create as much spread across cash, bonds and funds as possible.
"However, once the market hits a significant low and euro matters become more certain, then there could be a bounce back, so you have to be careful to have a plan for the now and then a plan for the future, ready to execute when appropriate."
Mr Lowcock says shares in big global companies offer the right mix of safety and inflation-beating growth potential. "Investors should continue to look at equities as a sound way of achieving long-term inflation protection. Recent equity falls have left many well-funded, profitable global companies trading on low valuations and high (dividend) yield."
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