When Safe Havens Become Bubbles
CNBC EMEA Head of News
Safe haven is a lovely term indicating that an asset class, bank or company is rock solid, reliable and dependable. After years of financial crisis a safe haven asset feels like a port in a storm and investors have flocked into so-called safe haven assets like U.S., German and UK government debt.
The problem with this trend is that returns are low, with many investors now willing to pay for the privilege of lending money to governments who enjoy safe haven status. Preserving capitalin volatile times is an art in itself, but one analyst says the safe haven play is now creating bubbles in safe haven assets, indicating losses could be just around the corner.
“No one wants to be a safe havenanymore,” said Matthew Lynn, the founder of Strategy Economics on Wednesday.
This creates an acute problem for investors, according to Lynn.
“As soon as they flee to a ‘safe haven’, the authorities slam the door in their face—or else it turns into a crazy bubble," he said.
The key therefore is to pick the next safe haven before it becomes one and doing so requires getting as far away from the euro zone debt crisis as quickly as possible.
"After all, you don’t want to leave much cash at the mercy of a group of politicians who understand about as much about the markets as most of us do about the Higgs-boson particle,” said Lynn.
This trend has seen money pour into Switzerland, for centuries the ultimate safe haven for investors, pushing up the Swiss franc and hurting the Swiss economy.
“Zurich and Geneva were never cheap cities, but you need a mortgage to buy a cup of coffee these days," Lynn said.
The rise of the franc has seen the Swiss National Bankintervene in the foreign exchange marketto little effect. The central bank's intention is to drive the franc lower, sooner rather than later.
“It is clear that Switzerland does not want to be a safe haven anymore. And anyone who parks their money there has to accept the central bankwill be fighting them all the way."
Hot money has also been pouring into Denmark as the Danish krona offers investors the chance to park assets in a European country without the risk of Denmark having to bailout the likes of Spain or Greece .
“Denmark is a small place—its population is a mere 5.5 million, less than London. It can’t absorb a few hundred billion euros without blowing up. To try and stop the flood of hot money, the
Danish authorities last week cut a key interest ratebelow zero to deter investors. They don’t want to be a safe haven any more than the Swiss do,” said Lynn.
Lynn says other safe havens which are showing signs of overheating include the London property market, up 35 percent over 3 years, and German bunds, which investors are currently willing to pay for the privilege of holding.
“Any safe haven you pick on, you are either fighting the central bank or else paying crazy prices," he said.
“One is to pick on ‘safe havens’ before they become popular—and watch them soar in value.”
So what should you buy? Lynn likes the Icelandic krona . “It is close to the euro zone but safely outside it. The economy is recovering fast from the financial crisis. And its banks have probably learnt their lesson about taking crazy risks."
Polish equities also look like a potential winner according to Lynn due to the countries fast growth rate(relative to euro zone), its low government debt and the country's location (next door to Germany).
The Icelandic Krona and Polish equities might not be safe enough for all investors so if you really want a safe haven in a storm, Lynn advises you play it dull and head to the biggest safe haven market on the planet.
“The U.S. economymay have plenty of problems of its own. It has big debts and growth that is nothing like as fast as it used to be. But compared with the rest of the world it’s a genuine safe haven—and it is big enough not to be completely overwhelmed by hot money”