Geopolitics And Safe Havens

Any investor who has been in either gold, the Swiss franc, the yen or a multitude of other so-called “safe haven” assets has experienced extremely poor returns of late. Moreover, this has been taking place behind a backdrop of falling global equities and rising credit spreads, symptomatic of deteriorating economic momentum. Geopolitical risks have been on the rise too, with the recent Paris terrorist attacks highlighting the volatile playing field that a multipolar distribution of power has created. Multiple global powers are able to pursue their foreign policy independent of one another, creating ripe conditions for conflicts.

Geopolitical, economic and financial risks are often linked to demand for safe haven assets. For example, the 1973 Yom Kippur War triggered a 16% correction in the S&P 500, the September 11th terrorist attacks triggered a 26% decline, and the Great Recession triggered a 58% peak-to-trough plunge. During all these episodes, there was a central theme that determined what asset played the role of a safe haven – the economic and geopolitical regime of the time.

The Geopolitical Strategy team recently published a Special Report entitled: “Geopolitics And Safe Havens”. In this Special Report, we delve into the drivers of safe haven flows and answer the most important question: How likely are these assets to outperform in the event of severe market turmoil?


To access the Special Report entitled “Geopolitics And Safe Havens”, please click here.

The Renminbi’s Path Of Least Resistance

As the Chinese economy is still struggling with weak growth and heightened deflationary pressures, a weaker currency is certainly desirable in terms of aiding the authorities’ monetary easing campaign. However, it is not clear that will occur.


Some have argued that a large one-off devaluation of the renminbi, say in the magnitude of 20%, is in the best interests of China. The 33% devaluation of the currency in 1994 has been cited as a precedent. Granted, a quick and meaningful devaluation would not only help Chinese exporters but also minimize capital flight and reset market expectations for the exchange rate. However, this option, even if economically sensible, is technically and politically not feasible in the current environment:

  • The 1994 devaluation was a fundamental reform of China’s then “dual exchange rate” system. Prior to the devaluation, the “official” exchange rate deviated massively from the prevailing market rate. In this sense, the 33% devaluation was merely a move to eliminate the discrepancy. Unlike in 1994, there is no “market-determined” level that the official fixing rate can fall to now.
  • China’s share of the world economy is currently 14%, compared with just 2% in 1994 and its contribution to global growth is even bigger. With such a hefty weight, it is a lot more difficult for China to implement a “beggar-thy-neighbor” devaluation, especially considering the weak growth profile of other major economies. Furthermore, the latest numbers show that China’s trade surplus continues to make new highs, in stark contrast to chronic trade deficits in the 1980s and early 1990s. A sharp devaluation amid a record trade surplus would inevitably invite blames of currency manipulation and bode poorly for the renminbi’s bid for the SDR.

The second option for a weaker renminbi is a series of small devaluations over an extended period of time. Please see the next Insight, (Part II) The Renminbi’s Path Of Least Resistance.