Udayan Mukherjee, managing editor, CNBC-TV18, believes gold is an unproductive asset. In CNBC-TV18's special show, Investor Camp, he said there is no way to actually value gold other than to compare it with other asset classes.
The yellow metal has had a rough week. Its price fell for a seventh day in a row on Friday. Gold futures were trading at USD 1,362 per ounce, which is almost 28% down from its September 2011 high of USD 1920.
"People’s opinion on gold have formed or shaped by price action. When gold is at USD 1,800 per ounce then gold is the best thing to be in. when gold comes to USD 1,400 per ounce everybody says gold is finished and dead. However, gold may easily surprise. So, one does not want to get into that argument at all because it is a very difficult asset class to value,” he added.
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The Indian stock market showed a stellar performance in 2012. Despite 2013 not performing so well, Mukherjee believes investors should invest in equities. The BSE30 index gave 22% returns in dollar terms in 2012. According to media reports, Indian equities’ were the 23rd best performed equities of 94 global indices tracked by Bloomberg.
One may be satisfied with 16 percent returns from fixed income, considering it is enough to combat inflation, but one should look at equities too.
“Once growth picks up and people start feeling good about being in the equity universe once again, which may well happen next year. But if the Nifty goes back to 5,500-5,600, it may not be a bad idea to put some money to work there,” he elaborated.
He believes the US Federal’s policy towards the end of the calendar year 2013 and the results of Indian general elections, will help shape investors’ asset choices.
"It is possible that we get a bad election verdict and that worries a lot of people because when the first UPA government was formed, after that election day, the market fell 20 percent quickly,” he explained.
People are still left with last election’s memories and once that event gets out of the way, people will get excited and start parking their funds in equities, he added.
Below is the edited transcript of Mukherjee’s views.
On Nifty's rally
Mukherjee believes the Indian equity market has taken a lot of people by surprise. The market was at 5500 a few weeks back and no one thought it could see two years high so quickly says Mukherjee in his analysis of the market in Investor Camp.
However, the rally has not happened automatically. Some things have changed. Liquidity is spoken about everyday but liquidity is not an external factor to the market. It is very much a part of the core market. Now, whether this is a bull market or not, time will tell. However, liquidity is very much a core requisite for a bull market, so we should not talk about liquidity as something from another planet. It isn’t just something that came and triggered the rally off. It is very much within the realm of parameters that one should be discussing in a market outcome in any case.
The commodities, namely, gold and crude collapsed suddenly without notice and that is when people’s eyes lit up on India. That is when we started outperforming once again. We have seen these liquidity fueled rallies many times in the past over the last few years but more often what happens is that that rising tide lifts all boats. Hence, the stock market will go up but crude will go up as much and sometimes gold will go up too. So, commodities usually go up inline with equities in this kind of strong risk-on phases.
I do not remember in the last few global liquidity rallies when it happened. It hasn’t happened atleast in the last few years.
It hasn’t happened that equities have gone up but commodities have come down and that is a beautiful scenario for India. This is why we are outperforming right now. We are getting flows, but those flows are not lifting other things which hurt our macro- commodities. So, if it continues like this, like crude goes down to double digits and flows keeps sloshing all over the world, then I think it is a good scenario for India, which is why this rally has begun to take shift.
Fixed income vs equities
Not a lot of people have enjoyed this rally because their stocks have not moved. This rally has been so narrow and so focused on a few clusters which have done exceptionally well but for most of the people, their stocks are still down 40-50-60 percent from the peak, so they have not got back to 2008 level by a long short. That is why one does not see great enthusiasm when the stock market is going up, whereas usually one sees lot of exuberance.
This time there is no such exuberance because peoples’ stocks have not moved and their portfolios have not gone back to even five year earlier levels. They do not want to participate. The stock market has gone up a lot in the last three weeks but if one just maps it from the start of the year, from January 1, the market is up 4 percent. That is not a big deal. If one annualises fixed income returns and how well Gilts have done, fixed income has done much better than equities this year from the start of the year.
Though last year was good, this year has not been great. On keeps discussing when the crowd will get back into equities. People must be playing various kind of scenarios in their head , whether they should get in at a particular time. Things are going well but what happens if we get to the end of the calendar year?
There are two possibilities. Firstly, maybe the Fed starts tightening around that time, by which time more months would have passed. Another possibility is that we will be staring at a really bad fractured election verdict and that worries a lot of people because when the first UPA government was formed, after that election day, the market fell 20 percent quickly. People have memories of that. I think we need to get that event out of the way for the general public in India to start getting excited and to think about this as an asset class.
Brokers would love to think that because gold has fallen USD 300-400, people will come rushing into equities. It does not work like that. Five year memories are difficult to erase and people do come in late. So, this rally has to hold and the volatility has to subside a bit. All these other competing asset classes need to keep their head down and we need to get past elections before one sees people getting interested into equities.
Every time gold falls, I see relish on the faces of the analysts who come on television. Indian brokers, however, hate gold. They will not say it but they hate gold because they beg for money for equities and people keep buying gold. In India, if you are a broker you want to see the death and demise of gold. If gold goes to USD 500 per ounce there will be a big party on Dalal Street. People may sulk, but brokers will have a big party.
Nobody understands gold. It is an unproductive asset. How does one value it? You can only value it by reference to other asset classes. Nobody can, not even George Soros can tell you whether gold should be USD 1,300 per ounce and not USD 1,500 per ounce or USD 1,000 per ounce.
People’s opinion on gold have formed or shaped by price action. When gold is at USD 1,800 per ounce then gold is the best thing to be in. when gold comes to USD 1,400 per ounce everybody says gold is finished and dead. So, one does not know what gold will do going forward.
I do not have the foggiest notion of what gold will do. Surely a lot of people would love to see gold down, a lot of people may not want gold to fall but there is no way one can form a great opinion on gold saying I will base my asset allocation premised on a belief that gold will do this or that. Gold may easily surprise. So, one does not want to get into that argument at all because it is a very difficult asset class to value.
I know lot of people have already pronounced the death of gold. There maybe a few surprises here and there but competing asset classes are still doing quite well for people to start looking at equities in India. A lot of people do not buy fixed income as people would not own a lot of gilt funds of fixed income funds. However, one year returns are 16-18 percent after the recent fall in the yields and taxation is 10-11 percent on fixed income.
So, post tax, one is getting 15-16 percent returns without taking much of the volatility or the price risk. Equities might give 20 percent returns but the fixed income investor at this point maybe saying equity is 20 percent, fixed income 16 percent and I am happy with that.
I do not want the remaining four percent. I am beating inflation comfortably and I will be in the safety of fixed income. So, something has to change. Either growth picks up and people start feeling good about being in the equity universe once again and that may well happen next year. But if the Nifty goes back to 5,500-5,600, it may not be a bad idea to put some money to work there.