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Shifting Safe Havens

Dylan Grice of Societe Generale wrote a piece recently making the case for there always being a safe haven somewhere, though, sometimes the source of safe havens change. The article boiled down to an observation that the source of safe havens may be in the process of shifting once again as sovereign credit weakens. Thus, Treasury bonds and other recently well-regarded bonds (such as Yen (Japan) and Bunds (Germany)) may no longer be the benefactors of the flight to safety that they once were. Alternatively, investors may begin to make the switch to the stock of major blue chip companies. He expects 6-7% annualized returns from this type of safe haven, which would certainly beat the current sovereign yields and provides a greater hedge against inflation.

I agree that blue chip companies will be the increasing benefactor of sovereign credit risk (they already are if you consider the incredibly low rates at which major blue chips can borrow!). I also agree that Treasuries may one day lose their safe haven status. However, I believe now would not be the best time to take on general stock market risk based on relative comparisons. In other words, there is no reason to accept a false bifurcation and head into a "less bad" investment of only two options provided (Sovereign bonds and blue chip stock). (Grice was not making the false bifurcation--I am just warning against doing so ourselves!)

Now, Grice may end up correct regarding his belief that the blue chips may provide total returns of 6-7% over the very long-term, but this does not make this direction a safe haven! Especially given the potential volatility one could experience with the overall stock market and even more especially as the economy teeters in and out of recession. Grice's article addressed Spanish, French, Italian, and Greek blue chip corporations, which certainly provide greater stability than their sovereign counterparts. Nevertheless, investors in those countries may be better suited to avoid the risks of sovereign credit, corporate profits, economic weakness, and stock market volatility by investing in relatively stronger currencies to maintain purchasing power and await better valuations before placing their capital.

On our side of the pond, we have it a little better, but a "cash is king" approach intermixed with selective value investing model remains the approach we recommend.

Written By: Joshua Ungerecht
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blue chips, Bunds, Dylan Grice, France, Greece, Inflation, Italy, Societe Generale, sovereign credit risk, Spain, Treasuries, Yen