Are SaaS Stocks Investors' New Safe-Haven Assets?
By Lior Ronen (@Lior_Ronen) | Founder, Finro Financial Consulting
In the current state of the market, we witness a unique phenomenon.
Investors consider SaaS stocks as safe-haven assets to the COVID-19 turmoil.
Will this last if the crisis evolves into a deep global economic crisis?
Traditional investing theories define a few assets as safe havens that investors turn to during a market correction to protect their capital. In a research paper analyzing the concept of safe-havens, JP Morgan analysts define an asset safe if:" it serves as a store of value – i.e., generally maintains or even increases in value through market cycles; can be readily converted to cash without significant loss of value, and exhibits low volatility. Importantly, safe-haven assets have a low or negative correlation to the general market and can protect portfolios during times of stress."
Investment professionals typically apply the definition above when scouting for safe-haven assets and the direct outcome of the description is the top-5 safe-haven holdings across different asset classes:
Bonds: US treasuries.
Foreign Exchange / Cash: US Dollar, Japanese Yen, Swiss Franc.
Commodities: Gold and Silver.
Stocks: defensive industries like utilities, consumer staples, and healthcare.
Real estate: even though not liquid, it can serve as a store of value.
In many recent downturns in the market, we witnessed risk-off actions of investors rushing into safe-havens pushing their prices high only to liquidate these holdings when turmoil settles down. However, this year, with the COVID-19 roller coaster in financial markets, we witness investors using SaaS stocks as a safe-haven instead of traditional safe-haven assets.
The investment thesis of using SaaS stocks as a safe-haven applies to the short-term COVID-19 crisis specifically. Many businesses worldwide are affected by the current crisis, either because they cannot operate as usually due to the coronavirus restrictions or that their regular business routine was impacted and drove a decrease in sales volume. One of the niches that kept most of its business and even generated more business volume is online subscription-based services.
Since more people are working from home or staying home due to lockdowns around the world, they consume different services online. These services can include almost anything from fitness or clothing to food delivery and coding—almost everything is currently consumed online these days. Most online services are not used only one-time. Still, continuously, therefore, clients need to join a subscription plan, and subscription-based companies and businesses that deliver services online can maintain their business as usual and even expand it.
Venture fund Bessemer Venture Partners launched a few years ago the "BVP Nasdaq Emerging Cloud Index" that tracks the performance of emerging public companies primarily involved in providing cloud software to their customers. The index is referred to and cited as the indicator for SaaS stocks performance. Since the beginning of the COVID-19 turmoil in the markets the index
When comparing the index's performance in the last three, which capture the period when the stocks began to bounce back, the BVP Cloud Index yielded 4x the return of the Dow and S&P and 2.5x the performance of the Nasdaq. This significant outperformance of the SaaS index illustrates the rush of investors into SaaS stocks as safe-haven while the market direction is not clear.
However, this rise of the SaaS index is specifically related to the current COVID-19 turmoil. In a case that the COVID-19 crisis will evolve into a bigger and deeper economic crisis worldwide, investors will shift their capital allocation from COVID-19 specific safe-haven assets like the SaaS stock into traditional safe-haven assets.
The SaaS businesses substantially benefitted from a sharp increase in their value in recent months, as presented in the chart above, which might drive them into an overvaluation territory.
If such a potential scenario materializes, we believe investors will return to their basics and prefer to use traditional safe havens to derisk their portfolios. In times of economic turmoil, investors turn to the familiar and known that fits perfectly to their definition of safe-haven assets: act as a store of value, provide immediate liquidity, and have low or no correlation with the market.
When things get fundamentally shaky in a crisis that investors not sure how it will end, they tend to go back to basics and buy traditional safe-haven assets such as t-bills, USD / JPY / CHF, Gold & Silver, defensive stocks and even real estate in some cases.
