Should gold get primacy over equity in your portfolio now?


The tables have turned in your investing universe.

India has been witnessing a shift in investors’ savings from physical assets to financial assets for some time now, and Covid-19 disruption has only intensified that momentum. The recent surge in the number of new demat accounts and mutual fund folios validates this.

While market watchers say some of these new investors may be indulging in very risky speculative trade in pursuit of supernormal returns from equities, the fact is, those eye-popping returns are getting generated elsewhere.

The Covid-19 disruption caused BSE benchmark Sensex to crash about one third from its peak point of 42,320 to 25,981. It has since recovered much of the losses but is way off its previous high.

But yellow metal gold has outperformed all other asset classes, having risen almost 20 per cent from the March lows in the same period; and 50 per cent in last one year to hover around a historic high of Rs 49,000 level in domestic market

Even over a slightly longer term, gold has delivered 11.7 per cent annualised CAGR return over last 12 years, 9.8 per cent for last 10 years, 12.3 per cent for last 5 and 16.7 per cent for last 3. Annualised Sensex return over these timelines has been less than 5 per cent.

As inflation in India hovered around 6 per cent all through these durations, gold prices logged 11.5 per cent average annualised growth, the World Gold Council (WGC) said a report released in March.

This has helped gold investors reap better returns than equity investors over different time frames, prompting some analysts to give higher weightage to gold in a portfolio.

The latest dream run in gold prices has been attributed to falling interest rates, Covid-19 crisis, US-Sino trade tussle, recession forecasts for the global economy, a spike in inflation in some parts following generous stimulus, all of which helped boosted sentiment on the bullion counter.

The stance of the US Fed and other global central banks to keep interest rates low till 2022 and projections for contraction in the global economy endorse gold as a better investment, analysts say.

“The more the money put into the economies through stimulus, the more will be the increase in gold prices,” says Sunilkumar Katke, Head of Commodities and Currency at Axis Securities.

Back home, investing options are getting limited for investors. Bank deposits have become unattractive, debt funds have turned super risky and equity looks uncertain.

In the commodities basket, the slowdown in economies has kept base metals at bay. Thus, gold and other precious metals have become more viable options.

“As long as there is uncertainty and volatility, the share of gold in investors’ portfolios will stay high. Investors may also look at silver as an investment opportunity among precious metal for coming months,” Katke said.

Bullion watchers expect gold to continue to outperform equities for some time, in view of the break commentaries from the US Fed, other central banks and global financial institutions.

They say the recent gold rally has been powered mainly by investment demand rather than the consumption, as investors dumped other asset classes to take refuge in the safe haven. Despite India being the largest consumer of gold, imports have dropped to just about 25 per cent.

“There is scanty physical demand for gold. It is moving northwards based on buying by ETFs and gold bonds. This shows people are more interested in the yellow metal as in asset class,” said Anuj Gupta, DVP, Research- Commodities and Forex, Angel Broking.

He does not expect gold prices to correct in the near term. “If there is a correction, it will be an opportunity to buy. We expect domestic gold prices to reach Rs 50,000-52,000 in six months,” Gupta said.

Will gold then outperform other asset classes in the months and years ahead? Should the yellow metal get primacy in the overall portfolio?

G Chokkalingam, Founder and CEO, Equinomics Research and Advisor, says conservative investors can allocate about 15-20 per cent of their portfolio to gold.

“In the overall asset mix, equity allocation should be 30 per cent for the average investor and 50 per cent for the risk takers. The rest can be in fixed income,” he said.

Sunilkumar Katke of Axis Securities said one should not compare apples with oranges. “Gold will look like a massive outperformer when you compare gold with an equity index, which is linear in nature. The index is a balanced approach for equity investing, which brings in a mix of outperformers and underperformers. Gold as a commodity has been a decent performer, and others have not fared this well,” he said.

“Success stories of stocks like DMart or IndusInd Bank, which have created enormous wealth for investors don’t get captured by index. If we see the overall market-cap, the growth in domestic equities has been tremendous,” he said.

Katke said the basic reason why investors do not make enough money in equity is that unlike in the case of physical assets, they do not follow the investment basics for financial assets. “One should look for stock-specific investment opportunities in equities,” he said.

“In a stock-specific approach, many shares would have turned multibaggers over time. The indices do not necessarily reflect such upside,” he pointed out.





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