Gold fall: A boon or bane for equities?

Of late, Indian stock markets too have been witnessing steady gains, thanks to fresh money chasing them as gold loses its lustre.

The talk doing the rounds in market circles is “do we need to look for alternatives as long as stock markets are making new highs?”

Though some of the developed markets have reset their peaks this month, Indian bourses are yet to scale such high points. However, both the S&P BSE Sensex and the NSE Nifty are at a striking distance from the new peaks that they had registered in 2008 at 20,873.33 and 6,357.10 respectively.

Gold is fast losing its safe haven appeal, after a massive global sell-off in April. Fears that some of the debt-laden countries such as Cyprus and Italy may liquidate their gold holdings triggered panic selling that pushed the yellow metal to a low of $1,321.35 an ounce on April 16.

Besides, signs of recovery in the US economy and the Japan Government’s $1.4-trillion stimulus to pull the country out of deflation also aggravated the pain for gold, which is yet to see a major recovery from the shock.

Though the appetite for gold is very high among Indians, empirical studies proved that equities have done exceedingly well in the long run when compared with all the other asset classes, including the yellow metal.

As gold is weakening, overseas investors are willing to take more risk on emerging markets’ equities to get extra return. Most foreign institutional investors feel that Indian markets are attractively priced at the current level. Foreign investors have pumped in Rs 68,561 crore ($12.7 billion) since the beginning of 2013 into Indian equities.

So is it time to ignore gold and concentrate on equity markets in a big way?

Domestic institutional and individual investors have preferred to wait and watch when it comes to equity investments.

Analysts are divided. Most of them feel that though gold has lost its appeal now, it is still a preferred investment vehicle and are advising investors to buy through systematic investment plan. Some, however, feel it is better to concentrate on equities, given that a lot of mid- and small-cap stocks are available at ‘very cheap’ rate.

But there is also fear in the market circle as some view the gold crash as a precursor to economic recession. In 2008, when both crude and gold prices crashed, a recession followed. Most of the economies are yet to recover from that impact.

Another scepticism is that all asset classes behave in a similar pattern. "So if gold falls today, will it be equity tomorrow," ponder marketmen.

However, the sustenance of the bull rally in equities would depend upon the global economic environment, especially headwinds from the Euro Zone.

Another key risk for the domestic market is political development. With the Union Government dithering on each passing day with one scam or the other, stability as well as governance issues continuously remain in investors’ focus. Already there are apprehensions in the investing community about the reform process.

Domestic economic growth is another key area of concern. Though the National Council of Applied Economic Research projected that the Indian economy is likely to grow 6.2 per cent in the current fiscal, the RBI expects GDP to grow at 5.7 per cent.

For this week, investors can watch the following developments that could have some impact on the market:

Bank of Baroda declares is Q4 results on Monday; Dr Reddy's Laboratories and Reliance Infrastructure on Tuesday; Bajaj Auto on Thursday; and ITC, which is ruling at all-time high levels, announcing its financial numbers on Friday.

The Government will announce the consumer price index on Monday. This could give clear picture on the RBI’s future course of action on rates.

badrinarayanan.ks@thehindu.co.in

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