In the current low or even zero interest rate environment, the stabilising factor of government bonds for a portfolio does not apply anymore. Are there any alternatives to replace the former ‘safe haven’ function of traditional government bonds and cash? Find out what our specialists say below.
For a few weeks in March when the Covid-19 virus started to spread all over the world, it seemed as if markets were on a wild ride. Stocks around the globe fell massively and market volatility spiked. The move downwards was shortly followed by an unbelievably fast recovery, which is still ongoing. Now, equity markets have again reached or are currently climbing towards all-time highs – even though we are still in the midst of a pandemic.
At the same time, government bond yields are at lows never seen before, while geopolitical risks persist. Major central banks have lowered interest rates and a large proportion of developed market sovereign bonds now yield zero or less. As a result, holding such bonds in a portfolio even costs performance, due to the so-called opportunity costs.
Government bond returns
Although this trend has been reinforced during the current crisis, it has been underway for some time. We all need to be aware that ‘risk-free returns’ do not exist anymore and that investors are now even required to ‘pay’ for the portfolio protection that government bonds provide. Investors should ask themselves how their portfolio will fare in the next downturn and how they can build resilient portfolios in the current low-yield environment. When seeking ‘stores of value’, investors are advised to look beyond traditional safe-haven investments.
Where can investors find return and some level of stability as government bonds in developed markets offer little in yield and much in terms of risk?
Our specialists introduce alternative investment solutions which could come close to replacing the old safe havens:
- Chinese government bonds
Magdalene Teo, Head of Fixed Income Research Singapore: “Asia is coming of age and so is its bond market. Government bond yields in China are attractive compared with their European and US counterparts.”
Government bond yield curve
- Assets in Swiss francs
Andreas Feller, Head of German-speaking Switzerland: “In a time when a tweet can destabilise the market, it’s crucial to have some buffers in the portfolio. The rock-solid Swiss franc and a market-friendly and highly competitive environment enable Swiss companies to operate from a stable home base. Investors who are looking for a safe haven are in good hands with Swiss assets due to the quality of the companies and the strength of the currency.”
- Non-directional strategies
Albulen Kastrati, Head of Fund Specialists: “Often, investors manage the risk of their portfolio by selling shares during turbulent times and re-entering the market once the worst seems to be over. This may work, but it is risky and jeopardises the stability of the portfolio. Highly disciplined so-called ‘non-directional strategies’ can avoid this dilemma by generating returns with a limited downside risk and low correlation to traditional markets. The right equity long-short strategy offers investors a flexible approach to equity investing while at the same time providing stability when markets are shaky.”
- Capital protected solutions
Marco Murgida, Head of Markets Private Banking Solutions & Sales: “Products with capital protection can be a good way to reduce the risk of a portfolio while still generating positive returns. The upside potential of capital-protected products may be limited, but they are very attractive compared to other safe-haven solutions which yield almost zero now.”
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