The BSE-Sensex breached 20,000 yet again. In a month's time the Sensex has gone up by 5.95%. The most noticeable upward movement took place after, the new Reserve Bank of India Governor, Mr Raghuram Rajan announced a slew of measures. The rupee rose to a two-week high as expectations for a narrower trade deficit and receding concerns about Syria helped the Indian currency to recover. These events, coupled with lower oil prices, influenced the stock market rally.
While all attention was focused on the stock markets, another asset class that was in favour until recently, witnessed massive sell offs.
As per an article in Indian Express, during the month of August the gold ETFs (exchange traded funds) witnessed biggest outflow in last five years. This means that investors have booked profits as the yellow metal touched all time highs. On the other hand, various equity schemes witnessed inflow in the month of August versus outflow in the previous months. It therefore seems, that the investors are shifting their investments from gold to equities
So will stock markets continue this rally? Without even getting into short term predictions, we would recommend that investors keep risks and asset allocation in mind.
One should also keep in mind the challenges which are prevalent for Indian stock markets. India is still not done with the inflation or growth challenges. Besides growth, concerns related to fiscal deficit, current account deficit, lack of reforms etc are hardly addressed. Thus investors should not be carried away by the market rally, as this could be a temporary phenomenon.
In the backdrop of the above where economic uncertainty both in global as well as domestic markets, Indian equities could be vulnerable.Hence in our view, investors should not be carried away by the rise or decline in prices of any investments. Investors must diversify their portfolio to include some liquid assets. Among all the asset classes, gold acts as a reserve currency, hedge against economic pressures and a portfolio diversifier. Thus we believe, gold should always be integral part of investor's portfolio, while the debt and equity portion may change according to the risk profile.