Flight to quality describes the movement of capital from risky investments to assets that are considered less risky with safer yield.
It is sometimes also known as flight-to-safety.
This can occur when fund managers for example, find that the current volatility in the market is too unpredictable to invest with a comfortable level of certainty.
Thus, instead of risking losses from uncertainty, the logical decision is to liquidate holdings and move the funds to safe investment vehicles like treasury bonds.
Blue chip stocks that never fail to issue dividend payments can sometimes also be judged to be safe investments.
While the returns for low-risk investments can be low, guaranteed yields still present a great proposition in times of instability.
When the markets settle down and new opportunities present themselves, then the capital would be shifted back into equities with growth potential.
This is why these capital flight are moved to liquid assets and cash equivalents that can be converted to cash quickly.
So that the funds can be quickly moved to better yielding investments when the opportunities arise.
Flight-to-quality can often be a mass event when it becomes increasingly clear that the market would be experiencing an extended downturn period.
This can sometimes cause whole economies to collapse as shown in history.
While a flight to safety rush generally refers to economies as a whole, it can also be limited to specific markets.
For example, the uncertainty risks are associated with only a particular currency. Therefore, investors would sell all their holdings of that particular currency and move their capital to safer habour such as gold or the dollar.
When a market downturn is expected, investment gurus usually use a two-prong approach to hedge their risks and also to profit out of it.
This can be a combination of flight to safety, and a flurry of shorting positions.
