Safe havens are performing like ‘insurance that covers just one bedroom in the house,’ says JP Morgan



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Should investors fear no assets can protect them from increased turbulence in global markets amid November’s looming U.S. election and persistent worries around the COVID-19 pandemic?

That’s the concern addressed by JP Morgan strategists who warned that many traditional haven investments in September have not performed as advertised, providing scant shelter as global equities came under steady, but incessant pressure over the past few weeks.

“For those looking for hedge protection, this typical basket of defensives is functioning about as well as fire insurance that covers just one bedroom in the house,” said a JPMorgan team of analysts led by John Normand, in a note Friday.

By their estimation, the performance of haven assets this month has been the worst in more than 10 years, when looking at periods with more than a 5% decline of the MSCI All Country World Index
ACWI,
+1.57%
,
a widely used composite benchmark that tracks returns of a mix of equities from emerging market and developed markets.

The bank’s analysts said nearly all of the world’s typical safe havens, including U.S. government bonds, gold
GOLD,
+0.46%
,
Japanese yen
USDJPY,
-0.06%

and the Swiss franc
CHFUSD,
+0.46%

did not move much in September.

The analysts, however, did point out how a short position against emerging market currencies would have delivered positive gains during the turbulent period.

See: Investors debate whether currencies can replace role of bonds in a zero interest-rate world

While the Nasdaq Composite
COMP,
+1.81%

saw a correction, commonly defined as a 10% drop from a recent peak, earlier this month, the 10-year Treasury yield BX:TMUBMUSD10Y largely stayed within a narrow trading band between 0.70% and 0.60%. Bond prices move in the opposite direction of yields.

Typically, haven sectors rally when a selloff has been sparked in stocks or other riskier asset classes.

Some investor pessimism, however, appeared to wane at the end of last week. The S&P 500
SPX,
+1.75%

rose 1.7% Monday, trimming the decline of the broad-market benchmark this month to 4.2%.

That doesn’t mean investors should ditch traditional havens altogether, but rather use all of them to avoid being entirely exposed to the pitfalls of a single market, said JP Morgan’s team.

Although, given the dismal performance of many traditional bulletproof assets in September, the team sees why some investors moved to keep more cash on the sidelines, even at the risk of missing out on any potential gains earned from holding bonds, precious metals and currencies.

See: You can ‘turn cash into anything,’ says big investor on why he’s putting more of it on the sidelines

Like other Wall Street banks, JP Morgan has warned against the diminishing diversification offered by U.S. Treasurys after the Federal Reserve lowered rates to near-zero earlier this year.

To that end, analysts at the bank have called for the rejigging of the traditional 60/40 mix of stocks and government bonds, advising investors to shift their funds from the latter to higher yielding fixed-income assets, such as highly rated collateralized loan obligations.

Read: JP Morgan joins the list of Wall Street banks calling for the demise of 60/40 portfolio, despite its success this year

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