Equity vs Gold: Which is a safer bet to invest in volatile markets?

As the physical asset accumulation of gold during the COVID times is increasingly tough, gold-backed options such as gold exchange-traded funds (ETFs) are a promising option.

As the Coronavirus pandemic displays no signs of slowing down, investors have begun to worry about shrinking investment options in such stark periods of market volatility. While possession of gold as an asset has retained a distinct aura in India, sophisticated modern-age market dynamics complicate the equation, especially as it involves several factors.

The perennial question about safer choices draws comparisons between equity markets and gold once again. Observing the trajectory of both markets over 10 years could provide us with insights vis-à-vis the better alternative in the current times of uncertainty.

Over the Decade: The Trends in Equity and Gold Markets

In the last 10 years, Indian indices such as the SENSEX (BSE 30) and the BSE 500 recorded a CAGR of approximately 9.05% and 8.5%, respectively. However, the period between 2010 and ’15 saw only a gradual increase amidst the economic slowdown of 2012 – with a subsequent rise from February’16 till January’20. The SENSEX’s growth from nearly 17,500 points to over 40,000 points by December’19 is indicative of wealth generated through equities across sectors, even though periodic interludes were owing to global trends.

The global markets crashed following the spread of COVID-19, as it effectively stalled all economic activity and shrunk wealth generation prospects. This resulted in the plummeting of Indian markets as well by more than 23% i.e. to 27,400 base points by the beginning of April’20. The maximum drawdown was around 40%. Although the recovery since April has been significant, the looming unpredictability of the markets is characterized by investors’ reservations over emerging trends.

On the other hand, the gold markets have witnessed a meteoric rise. People use gold to diversify their portfolios, especially when there were signs of an emerging crisis. In 2008, gold appreciated from Rs 8,000 to Rs 25,000, while 2016 onwards gold prices have gone way past the Rs 31,000-mark per 10 gms of gold. The slowing of economic growth in India resulted in further increase as, within the previous year alone, prices have appreciated from Rs 35,000 to Rs 50,900 as of today. Through April, investments in gold provided 11% returns, with returns expected to increase multifold in subsequent months. Gold and related asset classes have long been a safe option during times of turmoil and the current crisis is no different. The increasing COVID-19 cases have also impeded global growth, with several global financial institutions and consulting firms forecasting a downward trend for equity markets.

Influential factors and Investment options

After pushing major banks and the world’s markets to the brink of collapse in 2008, the recovery of the global financial system was observed by astronomical stimulus packages by the US Fed and other Central Banks. In the subsequent years, several markets continued to be impacted, drawing smaller European nations like Greece into debt and forcing a European Central Bank stimulus to reinvigorate the EU single market. With regards to post-pandemic measures, global banks and India’s Reserve Bank are showing keenness to decrease interest rates.

Since interest rates and gold prices have a negative correlation, an economic deceleration such as the one mentioned above is likely to impact the equity markets severely. The International Monetary Fund (IMF) June 2020 growth forecast puts global growth in the 4.9% range for 2020, 1.9% below the April forecast. Additionally, their April 2020 world economic outlook report had projected a 3% contraction, reportedly worse than the situation during the 2008 financial crisis. On similar lines, the consulting firm Deloitte’s outlook indicates major technological disruptions, changing the nature of work having serious consequences for markets and the banks. It also mentions falling bond yields, crude prices, and a possibility of further reduction in interest rates. These factors are on top of the infusion of liquidity which might harm the markets. Adding to this, it warns banking institutions and markets of short-term financial risks and regulatory compliance issues as a result of the COVID-19 pandemonium. The long-term risks of COVID-19, however, are unsurprisingly stated as unpredictable to assess. The crisis’s conclusion is still not in sight.

The Government of India has recently announced a Rs 20-lakh crore stimulus package to revive the economy. It will too most likely hurt the financial markets and bond asset classes. With greater levels of liquidity and limited activity, the trend for investments in gold is likely to remain positive for the unforeseen future. However, it is necessary to look into several gold investment possibilities, which could counteract inflationary trends.

As the physical asset accumulation of gold during the COVID times is increasingly tough, gold-backed options such as gold exchange-traded funds (ETFs) are a promising option. The positive flows of gold into India have beaten the previous average of 35 tonnes per month early this year, to the current 39.8 tonnes since March 2020. Globally, central banks have purchased record-levels of gold of late. It indicates that there might be more headwinds in the markets going forward. It, by default, will have an impact on the equities and contribute to market volatility. So, as of now, gold and gold-backed instruments seem to be a better alternative.

(By Anuj Gupta, DVP-Commodities and Currencies Research, Angel Broking Ltd)