Financial crisis carries potential of contagion which often results in the spreading of crisis to an international levels regardless of macroeconomic fundamentals of countries involved. Such development is often referred to as panic which affects even assets of higher rating and thus limits the benefits of international diversification of portfolios. This is often followed by flight to safe haven assets – a type of assets believed to perform relatively well during a crisis.
The designation “safe haven asset” has been ascribed to a multitude of diverse assets including sovereign bonds, major global currencies, gold and other commodities. But how have these assets performed during severe financial turmoil?
Kopyl and Lee asked themselves this question in their 2016 paper How safe are the safe haven assets? The research focused on US equity markets and 32 different safe haven assets over the period of 1964 to 2014. The asset pool included government bonds, currencies, commodities such as gold, silver, copper, platinum, palladium, crude oil, natural gas and diamonds. Real estate and wine were included as an alternative asset, while US equity market returns and VIX index were used as proxies for identifying periods of crisis. The candidates for safe haven assets had their returns compared to those on the equity markets during the periods of financial stress.
PERIODS OF FINANCIAL DISTRESS AND INVESTOR UNCERTAINTY
Not unexpectedly, the authors found that US Treasury bonds exhibited significant safe haven properties during market downturns, while during calmer periods they are positively correlated to S&P 500. Other sovereign bonds were insignificantly correlated to US equity market in times of distress, but displayed a positive correlation in other market conditions.
Interestingly, gold, considered a prime safe haven by many, showed statistically insignificant correlation, while silver and platinum showed tendencies to move with the US equity markets under all conditions.
Among the currencies, Japanese yen displayed the strongest safe haven properties and was found to be historically used as shelter for capital fleeing US equity markets. Japanese government bonds also show significant hedge properties as they co-moved with VIX unconditionally.
In times of enhanced volatility, only US Treasury bonds, Japanese bonds and yen displayed positive correlation with the monthly VIX changes. All other assets showed either negative or statistically insignificant correlation to VIX.
THE GLOBAL FINANCIAL CRISIS OF 2008
The research indicates that the financial crisis of 2008 should be treated separately due to its severity. The question is whether safe haven properties of the assets remained stable throughout this period. Defining the pivotal date of the crisis as 7th September 2008, the authors found that after that date most government bonds are significantly positively correlated with market movements in all conditions, with exceptions of US and Japanese bonds where correlation is statistically insignificant. This led the authors to the conclusion that after the crisis of 2008 only few government bonds were still considered a safe haven by US investors.
When examining the behaviour of currencies one cannot overlook the unexpected appreciation of USD during this major crisis. This sudden appreciation of USD against the currencies of the countries less affected by the crisis may be one of the factors behind the decline of safe haven properties of other asset classes. Again, Japanese yen was an exception as it did not co-move with the markets.
Commodities and real estate seemed also to lose some appeal as safe haven assets in the immediate aftermath of the crisis. Diamonds were the only commodity whose safe haven properties grew stronger.
X8 AG’S CONTRIBUTION TO THE SAFE HAVEN ISSUE
X8 AG is a Swiss-based fintech company releasing a line of products based on proprietary AI actively managing funds. The company’s solution to the safe haven problem are two stable digital currencies: X8currency and X8dollar.
A new type of blockchain-based asset has been vying for inclusion in the safe haven asset group – stable token. The majority of stable tokens endeavour to maintain a 1:1 peg to one of the major global currencies. A small number of them is based on a different concept of tokenization of diversified assets. X8 takes a step forward by applying a unique solution of an active basket that can outperform a single currency in terms of stability.
This active-basket approach does not only significantly reduce the domino effect of an international crises for an investor’s portfolio, but uses the temporal difference even in co-moving currency markets to enhance its value preservation function. In other words, it is unlikely that all currencies in the basket will plunge together at exactly the same rate.
X8 AG’s oncoming stable digital currency X8dollar will offer the opportunity to benefit from the above mentioned property of USD to appreciate during a financial crisis, while at the same time actively fighting inflation. Its diversified broker architecture will allow investors to avail themselves of the US dollar enhanced in terms of safety and stability.
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