During times of market turmoil, stock traders seek safe haven actions to withstand the storm. Safe Haven shares also allow traders to diversify their portfolio and reduce risk.
This article will explain the following key concepts to help traders take advantage of safe haven actions:
Definition of safe haven stocks
Cyclic vs. non-cyclical actions
The best safe haven stocks to trade when markets are volatile
Key things to consider when negotiating safe haven actions
Other safe shelters to guard
What are safe haven actions?
Safe haven stocks – also called defensive/non-cyclical securities – are securities that are expected to retain or increase in value during periods of market turbulence. This means that they provide a low level of risk in times of economic uncertainty.
Safe haven stocks are sought out by investors and traders to limit their exposure to losses in the event of a market crisis. However, stocks considered “safe havens” will change over time as market conditions evolve.
It is important to note that the role of safe haven stocks is to diversify a portfolio or simply beat declining market conditions.
Cyclic vs. non-cyclical actions
Cyclical stocks are stocks highly correlated to the current economic climate. When the market is in crisis/recession, cyclical stock prices tend to fall. Similarly, when the economy is thriving these companies tend to increase revenue along with an increase in the price of shares. E.g. Automotive and airline companies such as Bayerische Motoren Werke AG (BMW) or Boeing Co.
Non-cyclical stocks (safe haven) refer to stocks that provide investors with consistent returns regardless of stock market conditions. Safe Haven stocks usually outperform the market in times of recession, but are poorly performing during the expansive phases. These safe haven stocks can fall under three main headings:
Utilities
Basic products for consumers
Health
Utilities such as water, oil and electricity are requirements for consumers that make these businesses preferred in a slow economic environment. Regular consumer products are also preferred as people tend to reliably buy these items in all circumstances (hygiene, food and drink). Finally, health care is perpetual in all financial, economic or social circumstances. For example Southern Company, PepsiCo Inc and Pfizer Inc.
Popular safe haven stocks to trade when markets are volatile
The best safe stocks to trade through volatile markets will fall under the above defensive stock subcategories. The following is a bulleted list of common safe haven stocks in each category.
Utility stock:
NextEra Energy Inc.
Southern Company
York Water Company
New Jersey Resources Corporation
Cabot Oil & Gas Corporation
Consumer base stocks:
Procter & Gamble Company
Colgate-Palmolive
Coca-Cola Company
Walmart Inc.
Philip Morris International Inc.
Costco Wholesale Corporation
Health stocks:
Johnson & Johnson
Pfizer Inc.
Merck & Co Inc.
United Health Group Inc.
Key things to consider when negotiating safe haven actions
Very often, safe haven stock trading is used as a defensive tool to resist a declining economy, as defensive stocks may not produce a positive return, too.
Slow economic conditions allow safe haven stocks to outperform the rest of the stock market, however, this does not translate into profits. There are several factors to consider when identifying and trading safe haven securities:
1) Beta
Traders should consider the beta of a security before investing. Beta refers to the correlation between the stock and the market. A beta value of one indicates that the price is strongly correlated with the market. A beta value greater than one indicates that a security is more volatile than the market, while a low beta value (closer to zero) has less association with market conditions. This will allow traders to protect themselves from increased volatility.
2) Dividends
As a general rule, stocks with high dividend yields (above 6%) are considered to be excellent cases for safe haven stocks. Dividends also provide a fixed source of income that is often reinvested in society through dividend reinvestment plans.
3) P/E ratio:
Safe haven stocks are known to be underestimated in terms of the P/E ratio. The P/E ratio is the ratio between a company’s share price and the company’s earnings per share. The report is used to evaluate companies and to find out if they are overvalued or undervalued. Stocks with lower P/E ratios are seen as undervalued or over-performing compared to past movements, making these candidate actions ideal as safe haven actions.
4) Large consolidated enterprises:
Even the reputable companies that have been cemented in the stock market are outstanding candidates for a safe haven product. This is because people tend to stick to these established brands and trust the company even during a period of falling prices. These types of shares generally lose less value than mid- or small-cap stocks in recession.
No factor is dominant over another. Traders must do in-depth research and analysis before selecting safe haven actions. All of the above factors should be examined to determine the stocks most suited to the portfolio’s risk appetite.
Basic trading knowledge
Macro fundamentals
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FAQ section “Safe haven”
What are the differences between safe haven supplies and defensive ones?
Safe haven stocks and defensive stocks are interchangeable terms referring to the same non-cyclical activity as stocks. Beginner stock analysts and traders should not be perplexed by different stock languages, which extends to many other areas of financial markets that may seem daunting. Extracting complex terms from the equation will help novice traders analyze the essential aspects of the stock market.
Other safe shelters to guard
Safe haven activities are not only isolated from the stock market. Traders can turn to other financial markets for security against falls, such as forex and gold . Read our guide to safe haven currencies or follow the links to other safe haven assets below:
Japanese yen
Swiss franc
US Dollar
Cash
Treasury securities (T)
