Han Dieperink: Safe havens
This column was originally written in Dutch. This is an English translation.
By Han Dieperink, written in a personal capacity
When uncertainty strikes the financial markets, investors seek refuge in gold, government bonds, the dollar, defensive sectors, low-volatility shares, quality shares, energy and defence. Time and again, these are touted as a shield against the storm. The reflex is understandable: who wouldn’t want a safe haven in their portfolio when the world is in turmoil? But each of these safe havens has its own Achilles heel. The safest haven is rarely as safe as it seems.
Let’s start with the classics. For centuries, gold has been regarded as the ultimate safe haven in times of crisis. But even gold is not immune to the vagaries of geopolitics. During the current conflict in the Middle East, the price of gold is under pressure as countries sell off part of their gold reserves to finance the war effort. The precious metal that is supposed to offer protection against chaos is being sacrificed to that very chaos.
Government bonds face a similar credibility problem. Due to the prolonged period of low interest rates, they have largely lost their traditional buffer function. Moreover, the question arises as to how high government debt can rise before a government bond is no longer considered a safe haven. The so-called convenience yield on US government bonds has been eroding for years, in parallel with the steady increase in government debt. Switzerland appears to be the big winner, but the size of that market is too small to absorb global demand for safety.
Then there is the dollar, which traditionally benefits from global turmoil. But the concerns are mounting: the budget deficit, political pressure on the Federal Reserve, the erosion of the petrodollar system, and the growing willingness of trading partners to settle in other currencies. The dollar is currently benefiting from the turmoil, but the question is whether that benefit is structural or merely the last vestige of habitual behaviour in a market that has not yet found a fully-fledged alternative.
Within the stock market, the picture is no rosier. Defensive sectors (utilities, consumer staples, healthcare) offer predictability, but as soon as economic growth accelerates, they become the source of funds for more adventurous investments. Low-volatility strategies typically underperform in strong bull markets, precisely the moment when investors lose patience. And the quality factor, on paper the most compelling story, was mercilessly punished last year when loss-making shares outperformed their high-quality sector peers by 10%. The quality premium has fallen to historically low levels.
However, what is currently unfolding in the markets goes beyond a classic sector rotation. We are witnessing one of the biggest structural shifts in a generation: the transition from long-duration shares to short-duration shares. Growth shares whose cash flows lie far in the future behave like long-term bonds, sensitive to interest rates, inflation and, increasingly, to disruption risks. Artificial intelligence has rapidly eroded the competitive position of software companies. Even giants such as Microsoft, Adobe and ServiceNow are being affected. Microsoft is now trading at less than twenty times earnings, lower than the valuation of the S&P 500.
In contrast to these long-duration shares are companies with immediate, tangible cash flows, such as commodities firms, industrial conglomerates, infrastructure, transport and utility companies. They are leading the S&P 500 this year. The fundamental driver is the realisation that economic growth is broadening, moving away from the narrow technology base that dominated the market for years. These companies not only offer resilience against AI disruption, they also support the AI revolution. They provide the energy, infrastructure and raw materials needed to fulfil the promise of artificial intelligence.
The conclusion is not that safe havens are worthless. They serve a purpose, but every alternative has its own vulnerabilities. Gold is sold to pay for wars. Bonds lose their cushion when government debt is high. The dollar survives on borrowed credibility. Defensive sectors are the piggy bank that gets tapped as soon as there is something more appealing to buy. What the current market teaches us is that something fundamental has shifted. The structural rotation from long to short duration is more than a tactical move; it is a reassessment of what safety means in a world where AI is rewriting the rules of the game. The truly resilient portfolio combines quality with near-term cash flows, tangible assets and companies that form the physical backbone of the economy. And with a quality premium at historically low levels, the timing for that shift has rarely been more favourable.