Business Personal Finance

Friday 23 March 2018

Inside track - Safe havens for cash as Greek crisis rages


Michael Bradley

Following the Greek default of more than €1.6bn to the IMF, where should Irish investors look to now for a safe haven? No major western economy has defaulted in the last seven decades, so this is definitely unchartered waters.

With the ongoing pressure on the euro that has persisted since the start financial crisis in 2008, the question remains as to whether this is just the latest chapter in the saga or if it spells the end of the euro project.

Greece, like Ireland, has definitely shouldered its own share of austerity, but will Ireland follow suit and default on its creditors?

It is very unlikely that the euro will collapse as a currency if the Greeks choose to exit - especially compared with 2010, the last time the country teetered on the brink of default. The eurozone is better able now to withstand the possible withdrawal of a member state.

Nevertheless, the continuing saga brings much uncertainty for everyday investors worried about their pensions and savings.

So, in an era of low interest rates and economic turmoil, where can safe havens be found?

For those worried about the potential collapse of the euro and a return to the punt, what are the consequences and what alternatives are available for investors?

A flight to a strong government bond in the eurozone, such as Germany, could be a good move in this event.

Investing in German government bonds, however, will mean that you are lending your money at very low interest rates. So whilst perhaps adding security, it will not do much for savers or pension funds in terms of returns.

What about a move to a strong foreign currency such as sterling, or Sweden's corona, or the Swiss franc? This also could be a good move in the event of the break-up of the euro.

In this scenario, the punt would most definitely be devalued against its stronger peers. Those who switch back following this devaluation could earn themselves a healthy gain once the currencies settle down in relation to each other. But does the ordinary investor want to become a currency speculator? Unlikely!

What are the other alternatives? Our old friend - gold - is popular in times of uncertainty and has seen a rise in value over the last week. As the uncertainty continues, gold is very likely to climb higher.

Last month, we commissioned iReach to conduct a survey of 1,000 people throughout the country. What we found is that the Irish population has become very adverse to risk, with 80pc of those people surveyed insisting on "security" or a "guaranteed return" as their main priority when investing.

To that end, many of the investment products brought to the market in recent years are manufactured in such a way that they are selling into people's fear. Of all of these 'capital guaranteed' products sold, 70pc of them have not achieved any return but have just returned the original capital over five years.

Of course, getting your own money back is better than losing it but you have just defeated the point of investing and your money has been eaten away with inflation. The insurance companies and financial advisers have still got paid, but what about the client?

On the other hand, choosing asset-backed investments which are totally uncorrelated to the stock markets could be a smart move in today's environment, as returns are less likely to be unaffected by the continued uncertainty in the equity markets.

One example would be green investment funds that seek to build renewable energy plants that run on biomass in the UK or in solar parks across Europe.

These benefit from high returns generated by the sale of green electricity at fixed prices over long-term periods of up to 20 years.

Michael Bradley is managing director of Clear Financial

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