Safe havens in short supply, and only China can help

Assets that provide investors with a true ‘safe haven’ have been vanishing as long-held sanctuaries are written off as indebted targets for short-selling vigilantes.

But, according to a major study from Barclays Capital, this ‘safe asset shortage’ predates the 2008 crisis and subsequent rush for cover. In fact, increasing scarcity of safe havens is one of maybe two very long term – or ‘tectonic’ – drivers that are changing markets.

And, the annual Equity Gilt Study appears to conclude, only China can restore the safe haven status quo.

Forget old people

Of two ‘tectonic’ drivers the authors consider, they effectively write off the first: demographics. 

The decline in the working-age population in the developed world – with China to follow in four to five years – ‘looks set to be the least of the world’s problems in the decade or so to come'. The same can be said for ageing populations, which they say may or may not lead to less demand for equities. So in conclusion ‘the impact of demographics is subtle enough to leave plenty of scope for other drivers of asset prices to dominate it’.

‘Striking collapse’

This takes us back to the ‘safe asset shortage’.

In the wake of the financial crisis, yields on US, UK and German government bonds have hit the decks. Investors have been willing to pay the price for refuge from the eurozone crisis. 

But the Barclays authors spot a deeper trend, one that has seen a ‘striking collapse’ in government bond yields over the past decade, which they say ‘marks a rupture with post-war financial history’.

It is ‘difficult to rationalize this as a classic, anxiety-driven ‘flight to quality’; the fear that would in the past have been required to push yields so low is just not evident in current markets,’ they say.

In fact, it stems from a growing scarcity of government bonds that predated 2008, which started in part because advanced economies were seen as fiscally sound. This scarcity relative to demand has been compounded by fear since then.

‘Even before 2008, a safe-asset squeeze driven at least as much by developments in demand as in supply was affecting global asset markets,’ they add.

And as ‘safe haven’ assets have become scarcer, those remaining have become intensely negatively correlated with risky assets, such as equities, making them even more important as safe havens – especially in the fearful markets since 2008.