The new face of safe havens
Posted on 01. juil, 2010 by Jean Jacques Ohana in Weekly Focus | Commentaires fermés
We have predicted market vulnerabilities since the end of April. And as market dislocations materialize, let us tackle the issue of hedging the risk of future rounds of defiance towards risky asset classes.
The answer can be inferred from a proprietary indicator called the “crash risk beta”. The latter expresses the sensitivity of an asset class to a major downward shock in worldwide equities. It is computed as the average return of each market conditional on equities returns being below their 10% quantile over a window of 100 days., This average “crash day” return is the expressed in numbers of standard deviations.
The present dashboard leads to somewhat surprising results:
Actually, the most crash sensitive assets appear to be liquidity plays: hedge funds, European stocks indices, emerging bonds, PGM and … Greek Bonds. A special award for the “diversification benefits” of hedge funds!
Meanwhile, at the other side of the spectrum, stand the “crash-friendly” or “safe haven” assets, rising during stock market crashes, hence providing portfolio protection. These are the “safest” sovereign bonds and the yen effective exchange rate against a basket of currencies.
Looking at Riskelia’s trend and global indicator, we can see that safe havens share a common positive trend whereas ”crash sensitive” assets have contrasted long-term price behavior. For instance, Emerging Markets bonds still pursue a rising trend while being strongly related to downward drifting European Equities during crash periods.
The positive trend among “safe havens” is a reward for the political risk involved in the financing the guarantors of the financial system, as the latter strive to find their way in dangerous cliffs, swinging between two opposite types of dangers: be trapped into the deflationary spiral that has already set off in the most insolvent countries –which would probably lead to political and social outbursts and eventually a partial default on their debt- or resort to money creation as a last recourse to pay their liabilities –another type of default through currency devaluation.
Providing an efficient hedge against liquidity risk but carrying instead long-term political risk, the face of “safe havens” have considerably changed since the good old times when sovereign solvency risk was confined to Argentina, Mexico, and other ‘remote’ places of the emerging world…
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