Established in 1974
185,800 clients worldwide
Over 15,000 markets

Where are the safe havens following Brexit?

Financial markets have been volatile since the UK voted to leave the European Union, and that volatility is set to continue for some time, as investors come to terms with the new reality. Here’s a look at the potential safe havens during this turbulent time.

Swiss coins
Source: Bloomberg

The result of the referendum on the UK’s continued membership within the European Union has had major consequences. The British voted to leave, resulting in the so-called ‘Brexit’, a result the market hadn’t expected.

The far-reaching consequences have had little time to be felt. The euro and the pound respectively lost 4.5% and 11.9% against the US dollar on the Friday the referendum results came in, the biggest daily drop in the history of these currencies. Equity markets were not left out: the SMI conceded 3.44%, the FTSE 100 3.15% (after plunging more than 8% in the day), the DAX 6.82% and the CAC 40 8.04%. Even crude oil lost more than 5% that day.

There has been a rebound in stocks since, although some markets have fared better than others.  The pound remains under pressure. Markets are set for more volatility and steep price movements.

The prudent investor will be looking for ‘refuges’ – assets which remain stable or even appreciate when there’s a lot of market turbulence. There are plenty of market risks ahead, including political impasse, financial contagion and the macroeconomic impact. So where are the havens that can preserve portfolios and guard against the risks?

Gold

This is the most obvious instrument in times of high volatility. Gold is the ultimate safe haven. Following the Brexit vote, the yellow metal has stabilised at around $1320 an ounce, compared with $1260 previously, an increase of 4.5%.

Its range after the initial post-Brexit surge has been tight, between $1312 and $1330, a difference of just 1.3%. Gold remains, above all, extremely stable. Historical volatility over the past 100 days is around 18%, a low level, and this should be noted by the prudent investor.

Gold price chart

EUR/CHF

This may seem surprising, but EUR/CHF falls into the category of safe havens. Even during the UK referendum results, the pair largely fluctuated between CHF1.0733 and CHF1.086, a range of just 1.2%. Note also that historical volatility over the last 100 days is very low at 5.052%, including the Brexit moves. Excluding the Brexit, we get a historical volatility of around 4.2%.

The range is less than gold and this is explained by a very simple reason: the Swiss National Bank (SNB) will at all costs prevent its currency from appreciating against the euro. To this end, the central bank operates very regularly and heavily in the foreign exchange market to stabilise the price of the pair. With the problems facing Europe following the Brexit, the SNB is not likely to stop. EUR/CHF should still remain stable for a while.

EUR/CHF chart

The Bund

The German sovereign bond, known as the Bund, is also a traditional safe haven. When the markets hit troubled times, investors tend to rush for interest rate products they consider ‘safe’, and even if they report a low yield they provide a steady source of income.

The German Bund is a safe haven because the German state is considered to be one of the most able to repay its debts. It is one of ten countries rated AAA by all three major ratings agencies. Although the whole economy of the euro area has been affected by Brexit, investors retain a strong bond allocation in their portfolio and prefer Germany. Since mid-June, the yield, the inverse of the price, has fluctuated between positive and negative and stabilised recently at -0114%. The negative yield is not ideal, but bunds are still a strong lure for a conservative investor. Since the announcement of the referendum result, the future is moving between 166 and 167, an extremely low amplitude of 0.6%.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.