It has been a rocky start to 2016 for stock markets. So rocky that banking giant RBS recently sent a letter to its clients telling them to ‘sell everything’ except high quality bonds after an economist predicted a ‘cataclysmic year’.

The RBS comments divided opinion, with some including TD Direct Investing branding it the ‘worst advice‘.

However the warning, in which analysts said “this all looks similar to 2008”,  unsurprisingly left investors nervous.

“It is about return of capital, not return on capital,” it said.

If now is the time to protect what you already have rather than prioritising a lucrative return, where should you put your money?

So-called safe haven asset classes often sound appealing during bouts of market turbulence. The problem, however, is that these safe havens are not always as ‘safe’ as they seem.

What are safe haven assets?  

Safe haven asset classes either rise in value or retain their value when investors get nervous or lose confidence, usually when stock markets fall. However, the list of asset classes considered ‘safe’ is not set in stone and definitions can change depending on market conditions. Three commonly cited safe havens are: cash, gold and inflation-linked bonds.

Cash

With stubbornly low interest rates on both sides of the Atlantic, cash has been a disappointing investment because investors have often got back less than inflation.

Despite further US rate rises expected this year and the possibility of the UK following the Federal Reserve’s lead, it is unlikely UK rates will rise by a large amount and so cash is not predicted to do well.

“Investors should consider other income-producing assets to deliver an income as cash is certainly not king,” says Adrian Lowcock, head of investing at Axa Wealth.

“Cash is likely to only lose you money after inflation at worst, so it is a defensive asset but it does not rise in value as other assets fall, it just stays the same.”

Ryan Hughes, fund manager at Apollo Multi Asset Management, takes an opposing view and says cash is the only asset that gives certainty at the moment. In fact he has held 10% cash in his portfolio for the last two to three months and during that time, the value of his cash holding has increased by around 4%.

“Even when cash is low value, there are ways to extract an extra return”, he says. He holds cash in different currencies including the US dollar.

He adds that “no-one holds cash for a return but to protect the value of assets” when there is volatility in the market. Then, he says, investors can “re-deploy their cash when there are better returns.”

Gold

Gold is considered a safe haven as it has a low correlation to other asset classes and as a physical asset, its value isn’t affected by interest rate policy.

The price of gold fell to a six-year low of $1,068 in December 2015 and private investors used this opportunity to grow their personal holdings, according to BullionVault, a gold-and-silver-bullion exchange.

While turbulence in global markets benefited gold, a strong US dollar has put pressure on the metal and kept the price down.

For Lowcock, the big question is whether the gold price will fall below $1,000.

“If concerns over China continue to weigh on markets and the economic outlook doesn’t improve, then gold will most likely become popular again,” he says.

As for whether gold should be classed a safe haven asset, Lowcock says the asset class is impossible to value so it is difficult to determine its longer term standing, but it has been a defensive asset class which “provides some genuine diversification”.

For Aneeka Gupta, associate commodity and equity strategist at ETF Securities, the recent stock market rout, exacerbated by oil price declines, has renewed gold’s appeal as a safe haven asset.

Gupta says: “Persistently low oil prices could lower the future rate, encouraging a weaker dollar and thereby making gold priced in dollars cheaper to buy. In the current environment, gold’s defensive properties are driving price performance. Gold has posted gains of 1.43% last week highlighting its resilience at a time when market uncertainty is at the highest levels since the global equity correction in September 2015.”

For Hughes, however, the way gold has been behaving over the past 18 months calls its status as a safe haven into question.

He says while gold has “held up ok” in value in the short-term, it has been in serious decline over the past few years. This is much to do with the value of the dollar and with this headwind, and the chance US interest rates (the dollar strengthens as US interest rates rise) could move three or four times this year, it is likely to put further pressure on the gold price.

Inflation-linked bonds

Traditionally in times of stock market volatility, government bonds have been considered a safer way of preserving capital as the chances of a government not paying money back is low.

Index-linked bonds take this a level further by also preserving the purchasing power of your capital by increasing with inflation and it is this inflation-protecting element that is seen as valuable, says Hughes.

But as inflation was almost non-existent in 2015, Hughes says investors need to be “wary” of inflation-linked bonds. He says with very low inflation across the world due to the significant fall in oil and food prices, the performance of inflation-linked bonds remains “quite volatile”.

Lowcock is slightly more optimistic, saying inflation should return this year as the dramatic fall in the oil price works its way out of the system.

But he cautions that while index linked gilts are a safe haven as they are backed by government, because they are so sensitive to inflation, they will rise and fall due to expectation as well as economic outlook.

Other safe havens to consider

For alternative safe havens, Lowcock suggests funds that are defensive in nature, either targeted absolute return funds or funds managed with a capital preservation perspective.

For Hughes, other assets that are not traditionally classed as safe haven assets can offer a very high quality return. These include long/short equity and market neutral strategies, which aren’t correlated to the stock market. This means investors can make money in both rising and falling markets.

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