Gold on track to beat Sensex for the second year in a row

Gold investors are on a roll these days. For the second year in a row, gold is on track to beat the equity market in India. According to data from the World Gold Council (WGC), spot gold prices are up 10.7 percent in India from the start of 2023 till the end of October. 

In the same period, the benchmark equity index S&P BSE Sensex is up just 5 percent. Similarly, the spot gold prices in India were up 11.7 percent in the 2022 calendar year compared to just a 4.4 percent rise in the Sensex during the period. With this, the yellow metal has beaten the benchmark equity in four out of the last five calendar years, which will surprise many investors and savers in India.

The recent macroeconomic and financial developments in India and across the world hint at a further rally in gold prices in the Indian market while the stock prices may grind down or at best remain range-bound. 

There has been a sharp slowdown in corporate growth in India in the last two quarters and corporate revenues are now growing in low single digits and barely keeping pace with the underlying inflation in the economy. The corporate profits have grown in high double digits in the last two quarters. It largely came from banks, automobiles and the oil and gas sector.

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According to a recent report in Business Standard, the combined net profit of India’s top 30 companies that are part of BSE Sensex is up only 7.2 percent in the second quarter of FY24. The earnings trajectory in India looks challenging given a sharp slowdown in India’s nominal GDP growth in Q1FY24, a continued contraction in exports, higher interest rates, rising core inflation, geopolitical tensions and a slowdown in government spending.

All these factors are likely to translate into lower consumer and industrial demand and thus a slower growth in corporate revenues and profits. This is negative for equity markets in India.

Besides, equity valuations in India remain one of the highest globally. This has made the Indian market less attractive to foreign investors compared to markets in China, South Korea and Taiwan where valuations are 25-30 percent lower. The valuation gap suggests a long phase of correction or range-bound movement on Dalal Street. It will translate into negative returns for equity investors adjusted for underlying inflation.

Meanwhile, the Reserve Bank of India (RBI) governor recently hinted at the possibility of keeping interest rates in India higher for a longer period to fight inflation. Higher interest rates are likely to hurt public finances, corporate earnings and millions of Indian families that pay EMIs on their home loans. This is another headwind for equity markets.

In India, gold prices also get a boost from the deprecation in the value of rupee against the US Dollar. While the rupee exchange rate has stabilised at around Rs 83.3 to a US dollar, the consensus among analysts and economists on the rupee is that it’s a matter of time before the rupee starts to depreciate again. India continues to run a large and growing trade deficit and the country’s public debt-to-GDP ratio is expected to rise once again in FY24 reversing the trend of moderation seen in FY22 and FY23. 

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Besides, there has been a decline in foreign direct investment and foreign portfolio investment inflows in India in recent months. All these factors would keep the Indian rupee under pressure which is positive for the gold price in the domestic market.

Lastly, at the end of the day,  gold is like insurance and a near-perfect hedge against macroeconomic and financial instability in the domestic and global economy. 

To appreciate this, imagine the plight of savers and investors in countries such as Turkey, Sri Lanka, Pakistan and Egypt which have seen a plunge in their purchasing power due to a sharp depreciation in their currencies and a high double-digit inflation in their economy.

But gold prices are up sharply in these countries when bought and sold in their currencies, which is great for savers and investors in these countries who have the foresight to invest in the yellow metal at the right time.

This risk-mitigating strategy applies to Indian savers and investors as well. It is good to stay invested in gold and use the occasional dip in its price to make incremental investments in the yellow metal.

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist). 

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