Safe-haven investments are expected to retain their value during market downturns.
When the market is looking shaky, investors flock to such investments to preserve capital. With an especially volatile start to 2025, investors may find themselves considering whether to shift some of their investments to safe havens.
Traditional safe-haven investments include gold and bonds. For centuries, gold has been considered a safe-haven investment due to its limited supply, high liquidity, and status. Bonds are also viewed as traditional safe havens. Government bonds provide a fixed return while preserving capital, which is attractive during volatile times.
More recently, some investors have viewed cryptocurrency as a hedge against inflation and, therefore, a form of safe haven.
On the other hand, equities have traditionally been considered a riskier asset class.
During uncertain times, investors often reduce their exposure to equities. However, there are some great opportunities within equities that offer many similar qualities to those of gold or bonds. Here are a few things to look out for when selecting a safe-haven equities investment.
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Established industries
To preserve capital, it is advantageous to invest in industries and companies that are unlikely to become obsolete. In the era of artificial intelligence, this has taken on a whole new meaning. AI impacts almost every industry, including technology, healthcare, and more.
Part of the appeal of gold is that it has been around for centuries and is unlikely to be replaced. Similarly, the banking industry is unlikely to become obsolete or replaced by AI. This may boost the appeal of the big four banks as safe havens. In particular, Australia's oldest bank, Westpac Banking Corporation (ASX: WBC), has been around since 1817.
Companies with high switching costs are also likely to appeal. For example, TechnologyOne (ASX: TNE) offers mission-critical software, making it costly for customers to switch. As a result, it boasts a 99% customer retention rate. It may therefore be considered a safe-haven investment during a market downturn.
Inflation protection
Inflation protection is another reason investors consider gold a safe-haven investment. For investors, inflation is a significant concern as it can erode the value of their returns in real terms.
Inflation protection has become especially important in today's environment. In 2022, Australia's inflation, as measured by the Consumer Price Index (CPI), peaked at 7.8%. While it has since moderated, the trimmed mean (which excludes the more volatile food and energy components) sits at 3.2%. This is above the RBA's 2-3% target range.
In a scenario where inflationary pressure remains elevated, real estate investment trusts (REITs) provide a natural hedge against inflation. This includes companies such as Scentre Group (ASX: SCG) and the Charter Hall Long WALE REIT (ASX: CLW).
Health insurance companies such as Medibank Private Ltd (ASX: MPL) also have pricing power. This allows them to raise prices in an inflationary environment without demand falling. On 1 April, Medibank Private, which covered more than 4.2 million customers in 2024, increased its premium by 3.99%.
Dividend history
The fixed stream of cash payments paid to bondholders is often cited to justify bonds' safe-haven status.
Unlike bonds, there is no contractual obligation for companies to pay a dividend to shareholders. However, some ASX companies have very strong track records of paying reliable and consistent dividends. One standout example is Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), which has paid a dividend every year in its existence (for more than 120 years). It has also grown its annual ordinary dividend every year since 2000. This is likely to appeal to investors after a stable income stream through the cycle.
Foolish Takeaway
Asset classes such as gold and bonds are often cited as safe-haven investments. However, certain equity investments also exhibit safe-haven qualities. In 2025, those in established industries, with inflation protection and a reliable dividend history, are likely to be most appealing.
