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Business News/ Market / Stock-market-news/  Equities may see comeback as gold slumps

Equities may see comeback as gold slumps

Local investors sold stocks worth `1 trillion in the 15 months till the end of March, but the trend may now change

After dropping to 18,226.48 points on 9 April, the Sensex, the 30-share benchmark equity index of the BSE, has risen to 19,016.46 points. Photo: Mint (Mint)Premium
After dropping to 18,226.48 points on 9 April, the Sensex, the 30-share benchmark equity index of the BSE, has risen to 19,016.46 points. Photo: Mint

Mumbai: Massive redemptions in mutual funds and unit-linked insurance products (Ulips) have forced local institutional investors to dump shares worth about 1 trillion in the past 15 months till the end of March. About 70,000 crore of stocks were sold in fiscal year 2012-13 alone, the highest ever in any year. But with gold prices declining, equity may come back on the radar of local investors, brokerages say.

According to domestic institutional investors (DIIs), which include insurance firms and mutual funds (MFs), while investors in MFs have been seeking redemptions every time the equity markets move up, insurers have seen policyholders pulling out money in bulk from Ulips and those policies that were sold with false promises of high returns.

An internal research note by HDFC Standard Life Insurance Co. Ltd showed that mutual funds sold 21,960 crore of equity in fiscal year 2013. India’s largest insurer, Life Insurance Corporation of India (LIC) alone booked a profit worth around 25,000 crore in the year.

Even as foreign institutional investors continue to pump money into Indian stocks, insurers and fund managers do not see local money chasing stocks, unless the sentiment changes and new products in the insurance space come in to contribute to new sales.

After dropping to 18,226.48 points on 9 April, the Sensex, the 30-share benchmark equity index of the BSE, has risen to 19,016.46 points. The Sensex has shed 2.11% in 2013 after gaining 25.7% last year.

In the holiday-shortened week ended 18 April, the Sensex rose 4.2%—its best weekly gain since the one ended 30 November 2012—led by rate-sensitive stocks. With wholesale price inflation dropping to a 40-month low in March, accompanied by a sharp decline in gold and crude oil prices, the Reserve Bank of India (RBI) may give up its reluctance over monetary easing and cut the policy rate at its review on 3 May to prop up growth in Asia’s third largest economy.

Insurers contributed the most to the sell-offs on account of withdrawals from Ulips.

“We have realized profits from equity investments to distribute bonus among policyholders. Ulip-holders across the industry have been redeeming and no new products are being approved easily by the Insurance Regulatory and Development Authority. Where will the new sales come from?" asked Sushobhan Sarkar, managing director, LIC.

“With new norms in place, the existing traditional products also need to be withdrawn. Once new products are approved and sales strategies are drawn, the life insurance industry may start seeing things changing," Sarkar added.

Amitabh Chaudhry, managing director and chief executive officer (CEO), HDFC Standard Life, said, “On a net basis, no new money is coming in. Many policyholders in Ulips are withdrawing. Several large insurers sold their holdings in order to subscribe to the government’s divestment programme. The overall flow from insurers into the market is negative."

MFs, too, present a grim picture.

“There have been continuous redemptions as investors preferred other investment avenues," said Sandip Sabharwal, CEO of portfolio management services at Prabhudas Lilladher Pvt. Ltd.

DIIs are investing in real estate, gold, silver and fixed-income products.

Saurabh Mukherjea, head of research at Ambit Capital Pvt. Ltd, said, “Domestic investors want to take their money and run. They do not know what the future will hold. They are putting their money in real estate and fixed income because at least a couple of more rate cuts are coming up in the near term. In the last five years, bond funds gave 13-14% returns and it is a safer place to park your money."

Sabharwal of Prabhudas Lilladher also said the appreciation in precious metals gave attractive returns. Real estate and related products also absorbed a lot of flows, on the expectation of better returns, according to him.

On the Multi Commodity Exchange of India (MCX), silver surged more than 130% between December 2007 and December end 2012. Gold prices jumped 141% during the same period. However, both have taken a significant beating in the past few months, eroding the gains.

Gold prices have plunged at least $300 in the past eight weeks.

A recent Bank of America-Merrill Lynch (BofA-ML) report said the risk of gold prices may drop another $150 per ounce, and it has dropped the $2,000 per ounce price target for 2014.

“We reduce our core asset allocation toward precious metals from bullish to neutral... Gold is an idiosyncratic commodity," the BofA-ML report said. “After the plunge ends, equities tend to rally," the report added.

Real estate, as an asset class, is yet to see a fall. The National Housing Bank’s Residex index, which tracks prices of residential properties in 63 cities across India, has seen an average rise of 80% in seven major cities since 2007.

Mumbai has recorded a rise of 97%, Delhi 72%, Chennai 209%, Kolkata 96% and Pune 100%, while the index for Bangalore remained flat and Hyderabad saw a decline of 15%, according to a December 2012 research by Knight Frank.

With gold prices falling, some analysts see the investment trend reversing. “We need to see other asset classes such as gold, fixed income and real estate to structurally underperform (equity). We are already seeing a bit of a crack in gold, and once interest rates ease further, even fixed income may not do well. In real estate, the pricing-led growth may slow down," said Pankaj Pandey, head of retail equity research at ICICI Securities Ltd.

Gold may enter a multi-year bear market, said Vikram Dhawan, director, Equentis Capital Pvt. Ltd, a consulting group offering services in the equity, ventures and outsourcing sectors. “The current price action has severely damaged sentiment towards gold. Unless there is renewed central banks buying globally, the upside may be fairly limited from here onwards."

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Anirudh Laskar
Anirudh reports on significant corporate matters including large mergers and acquisitions, India's emerging e-commerce sector and regulatory issues in the corporate and financial services industry. Over the past 17 years, he has covered many beats including banking, NBFCs, aviation, automobile, insurance, markets, SEBI, IRDAI, mutual funds, investment banking, private equity, deals, and conglomerates.
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Published: 21 Apr 2013, 11:41 PM IST
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