Unstoppable Equity Gains, Gold On A Slide

The upward journey of Indian markets seems to be unstoppable. There are talks of rich valuations, markets in the overbought situation, rise in US bond yields and the dollar index, which are all negative factors for the emerging market like India but against all these, there is one strong factor that is providing strength to the Indian stock market and that is strong inflows by the Foreign Portfolio Investors (FPIs).

Generally, when yields on US bonds rise or when the US dollar index gains, it is taken as an indication that the time has ripe for the reversal of foreign funds flowing to the Emerging Markets (EMs). This time it is not happening particularly in case of India, as foreign fund managers feel, the possibility of India’s recovery is strongest among all the EMs peers and the corporate sector is expected to be on better footing, post the pandemic blues.

Frenzied FPIs buying is taking the markets to an unchartered territory. Last Friday, FPIs were net buyers to the tune of Rs 6,029 crore in the Indian equity. The Indian benchmark index Nifty ended in positive territory for the third day in a row on Tuesday. It closed with a gain of 79 points to close Tuesday trading at 14,564 and posted its highest trading volume since November 27, 2020.

V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services said, "Trend prediction has become extremely difficult. The market is in the overbought zone and there is no valuation comfort in the market. The market consensus that liquidity will remain abundant and interest rates low is driving the market. Risk is the consensus going wrong”.

The buying frenzy is so severe that the market participants are ignoring indirect hints given by the Reserve Bank of India (RBI) in its financial stability report released on Monday about the performance of the public sector banks (PSBs). The RBI in its report expressed concern about high potential Non-Performing Assets (NPAs) of the banking system which may rise above 14 per cent. The majority of the NPA brunt will be borne by PSU banks going ahead in 2021, the report warned. Despite this, PSU Banks index was one of the major gainers on Tuesday.

The market closed on Tuesday with a better market breadth and looking at the market data, it is clear that the action is now shifting once again to large caps and large mid-caps, while balance counters are witnessing profit booking. 

All these indications are of hectic buying by the FPIs. However, against this, the activities seen in the Asian and European market is diametrically opposite.

Deepak Jasani, Head of Retail Research, HDFC Securities, said, “Asian stock markets were mixed on Tuesday following the negative cues from Wall Street amid worries about the rising coronavirus cases across the world. European equities had a modest start on Tuesday after a suite of the US Federal Reserve officials hinted that it could start reducing its monetary stimulus later this year. Investors were also concerned about unsustainable valuations across asset classes”.

As more than 31 countries in the world began mass vaccination drives and India joining them in a couple of days from now, the factor of uncertainty driving certain asset classes like precious metals has come down. This has resulted in a steady fall in the prices of precious metals –Gold and Silver—in the international market. Besides the launch of vaccination drive, the other two factors mentioned earlier, the rise in the US 10-year bond yields and dollar index recovery have also impacted the prices of precious metals.  

However, experts feel the fall in prices of precious metals is a temporary phase and yellow metal may shine once again shortly.

Ravindra Rao, VP- Head Commodity Research, Kotak Securities, said, “Although the short-term moves remain choppy for Gold and Silver, due to rising bond yields in the US on back of a smooth transition of power, higher future inflationary concerns might trigger a re-emergence of buying in the precious metal at lower levels.”