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Friday, August 28, 1998 Published at 17:01 GMT 18:01 UK

Business: The Economy

Flight to security

Where would you invest during stock market turbulence?

As stockmarkets plummet, many investors wonder whether they should stop buying shares. But where can they put their money instead?

The answer is simple: somewhere safe.

That means bonds and cash.

Bond revival

Before the Asian crisis started to bite, shares offered a hefty and relatively risk-free return for investors.

[ image: It's been a tough few months]
It's been a tough few months
Now many wonder what bonds can do for them.

The performance of bonds is affected by the level of interest rates. These have been low recently, and falling rates translate into rising bond prices, but lower yields.

Yields are the interest bonds pay when they mature, i.e. when they are cashed in.

Now that shares are not such a good investment anymore, a lot of money is flowing into the bond markets.

The safest, western government-backed treasury securities (called gilts in the UK) have seen the biggest gains.

US Treasuries and German Bunds have been the strongest gainers, with yields hitting new lows and futures contracts soaring regularly to new highs.

The 10-year US Treasury yield fell below 5% on Friday, its lowest level since 1967.

The keyword here is safety, not quick profit.

Nothing like cash

There is nothing like a stock market crash to make investors think of putting more of their savings into cash.

[ image: Dealers have tried to stay ahead of market movements]
Dealers have tried to stay ahead of market movements
For the small investor this could mean notes in a jar at home or money in a savings account.

But for major fund managers it means buying up international currencies on the foreign exchange markets.

At times of turmoil the US dollar is seen as a safe haven, as is the pound sterling. The current crisis is no exception.

Collateral damage

But this has a knock-on effect on other currencies.

During the current turmoil, countries facing economic problems have seen their currencies fall sharply.

Australia, which like Russia depends on exporting commodities, saw its currency, the Australian dollar, hit its lowest level yet against the US dollar.

The reason is that the price of commodities like oil and minerals has been going down for many years now. A slump in demand in Asia has made things worse.

As a result, commodity driven economies earn less than they used to.

The New Zealand dollar also hit a new low and the Canadian dollar has seen its weakest levels in more than a century.

Smaller European countries outside the eurozone, who will not join the single European currency, have been under pressure too, for example Norway and Sweden.

Large investors

But what happens to share prices when large investment funds begin to move their portfolios?

Small markets tremble.

Investment funds need to be "liquid", they need cash to cover their losses. In order to get cash, they will begin selling in regions not yet affected by the crisis.

Modern hedge funds, however, control $10bn and more. In a world of free capital flows, small markets can collapse once the big investors move out.

The epicentre of the crisis may be far away, but these days stockmarkets around the world will quickly feel the pain.

Small investors

For small investors, it will be tricky to do anything under such market conditions. Selling shares costs money, and putting all savings into bonds is financially not very attractive.

Broadening the portfolio to include both shares and bonds will be a good move, but 'stay put' could be the best advice for them.

Investing in stocks and shares can bring rewards, but there are risks too. It should only be considered if you are ready to lose the sum invested. The BBC cannot accept responsibility for any recommendations made. Investors are recommended always to seek professional advice.

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