Allocating money into different assets has been tricky business in the last five years due to a variety of issues. Those batting for equities have seen their faith being tested in this period, while money managers relying on gold, considered a safe haven, have done exceptionally well. Illustratively, if you had invested in gold in December 2007, your money would have gone up by a factor of three, but if you had bought equities, you would be pretty much where you started based on the performance of BSE Sensex.
Moreover, the returns for gold have been lot more steadier with double-digit returns in all the five years under consideration, while equities have been down 50% one year and up 80% the next year.
The last five years have been really difficult for equities the world over and Indian markets were no exception. However, the question is will this trend continue in 2013 as well, or will things begin to change in favour of equities.
The outlook for equity has definitely improved in the later part of 2012. As a result, the stock market in India is up about 25% in 2012 and has beaten gold, where money has grown by about 12%, by a wide margin. But it is also important to note that the stock market lost about 25% in 2011 even as gold went up 31% in the same year.
In this scenario, it would be interesting to see which asset class will outperform the other in 2013. The choice, however, will be as difficult as ever and there will be a number of factors, both national and international, that will play different roles at different points during the course of the year.
What will affect gold?
Gold is a dollar denominated commodity and India is a price taker, therefore, the factors affecting its prices are truly global in nature.
The immediate trigger could be the way the US lawmakers deal with the fiscal cliff—the forced reduction in the budget deficit that will kick in from the beginning of 2013. If the issue of fiscal cliff is resolved in a meaningful way, it will avert a lot of uncertainty and may lead to lower demand of dollar assets for safety reasons.
Fall in demand for dollar assets could lead to dollar deprecation, which normally results in higher price of gold. However, a non-satisfactory solution or continued flux could again result in higher demand for gold as a safe haven asset.
But fiscal cliff is only one aspect. The other important factor that could affect gold prices is ultra lose monetary policy. Large central banks are pumping huge quantity of cash into the system.
For example, the Federal Reserve alone will supply at least $1 trillion by the end of next year. Adding to the fire of the Federal Reserve, Bank of Japan and Bank of England are also expected to print money. Says Naveen Mathur, associate director (commodities and currencies), Angel Broking Ltd: “So much pumping of money by large central banks will lead to inflationary concerns and will be positive for gold.”
However, there are different views on the outlook for gold. Says Lakshmi Iyer, head (fixed income and products), Kotak Mahindra Asset Management Co. Ltd: “Gold may not give the kind of returns it has in the last few years.” Iyer bases her argument on the fact that uncertainty in the global financial market has receded significantly and that will affect gold demand as a safe haven asset.
Therefore, though gold may still give a positive return in 2013, it may not be able to match up its own performance in the last five years.
What will affect equity?
Even though growth in the global economy will remain subdued, the biggest advantage for equity will be the fact that the level of uncertainty has clearly receded.
The domestic market, apart from the positive vibes from the global development, has also gathered momentum because of some reforms measures by the government and expectations around cut in interest rates in 2013. It is also expected that one of the biggest driver of our market—foreign institutional investors—will keep pumping money into the market.
The search for yield in the global market will lead to flow of funds towards risky assets such as emerging market equities, including Indian equities. Says Sandip Sabharwal, chief executive officer (portfolio management services), Prabhudas Lilladher Pvt. Ltd: “The outlook for equities is positive, but we may not see 25% kind of return like (we saw) in 2012 and returns would be in the range of 12-15%.” Sabharwal argues that the activity will be higher in the broader market compared with the index movement.
What should you do?
Taking a call on which asset class will outperform in 2013 is a difficult one. It appears that gold has run up quite a bit in the last few years and it will be difficult for it to maintain the pace. “This year (2012) is possibly the last year of bull run for gold,” says Sabharwal. The reasoning behind the argument is that the demand for the safe haven will decline. Also, the threat of inflation, if any, in the global market is still some distance away and that makes a case for equities.
However, as an investor, in the effort of analyzing which asset class will outperform, you shouldn’t lose track of your long-term investing goal. Says Mathur, “Gold is not the primary asset and should only be used as a diversifier.” Differently put, you should follow your asset allocation and use gold to diversify your portfolio.
While it is difficult to answer the question, stick to your long-term goals and use gold only to diversify portfolio