Daily Voice: Major price correction in gold unlikely amid current global economic environment, says Julius Baer’s Milind Muchhala

After a strong earnings growth of 20%+ CAGR between FY21-FY24, as anticipated, FY25 turned out to be a year of consolidation. The past few quarters have witnessed single digit earnings growth amid various factors including uncertainties related to US tariffs, global geopolitical headwinds, softening of urban demand, weakening of government capex, tightening by the RBI in CY24, etc. Q2FY26 too is likely to witness similar trends with a single digit growth in earnings.

However, there are reasons to believe that the growth trajectory is likely to pick-up in a quarter or two. Domestic consumption is expected to witness improving trends, aided by the twin drivers of fiscal and monetary stimulus in the form of income tax cuts in the Union Budget, GST 2.0, front-loading of rate cuts and liquidity infusion in the system.

While rural demand has been holding on well for the past few quarters, aided by better crop output, rising MSP, and increasing government spending on rural infra, the urban demand is also likely to see better trends, aided by the stimulus and some deleveraging at the household levels.

India recorded its best monsoon season in the past five years, which should boost the agricultural prospects while keeping food inflation under check.

Domestic manufacturing has also started to see improving prospects with government’s increasing thrust on domestic manufacturing, especially in sectors such as defence, railways, renewable energy, etc. while the various global developments are also resulting in some realignment of supply chains in favour of India.

While the recent sharp increase in tariffs for India has resulted as an Achilles' heel to tap the growing global opportunity, in case India is able to work out a more favourable trade deal hopefully in the next couple of months, it can be a big boost to revive the private sector capex cycle.

Improving domestic demand and capex cycle, coupled with improved liquidity in the system, should lead to steadily improving banking credit growth. The culmination of all these should lead to the corporate earnings getting back to the double-digit growth trajectory sooner than later.

Do you think the actual full-year GDP growth will surpass the projections made by the RBI and the World Bank?

Most of the institutions, including the RBI, World Bank and IMF, are projecting India’s GDP to grow by around 6.5-6.8% for FY26, after upward revisions of 20-30bps witnessed in the past couple of months. In all likelihood, the growth is likely to be around that zone, unless we see a big surprise emerging from some unexpected corner.

While there are several measures taken, we still need to see a more concrete and durable improvement in domestic demand to drive a higher growth number. However, going ahead, we could potentially see a slightly better number if we were to witness a distinct improvement in demand and a good revival in private sector capex/domestic manufacturing.

Given the current global economic environment, do you see little to no chance of a major correction in gold prices?

We have seen an unprecedented rise in gold and silver prices over the past 6 months, with the sharp increase attracting more participation into the precious metals. However, after the sharp rise in such a short period, there is always scope of some intermittent drawdowns, which can also see some overshooting of falls in case some speculative/leveraged positions get sold off.

A 10% correction in gold would take us to levels just two weeks back and a 20% correction to levels two months back. Hence, a normal intermittent correction of anything between 10 to 20% is always possible. But it will be extremely difficult to call out the intermittent top, as the momentum is still quite strong.

The longer-term outlook, however, still remains constructive in the scenario of depreciating USD, geopolitical uncertainties, dollar debasement and money getting withdrawn from US Treasuries by central banks. Hence, a major price correction seems a bit unlikely at the current juncture considering the global economic environment.

Do you expect financials and banks—which have reported weak earnings—to show improved performance in the coming quarters?

With the RBI cutting interest rates by 100 bps in CY25, the NIMs for most banks have contracted over the past couple of quarters on a sequential basis. We expect the bottoming out of the NIMs in a quarter or two as the full effect of the rate cuts get reflected in the banking system. However, the credit growth is expected to improve from H2FY26, with the RBI ensuring sufficient liquidity in the banking system and selectively lowering the risk-weightage requirements, besides frontloading the interest rate cuts for better and quicker transmission of lower rates into the economy.

Moreover, some of the pockets of asset quality stress such as MFI and SME are also likely to bottom out in a quarter’s time amid the various measures taken by the RBI and a steadily improving economic environment. A better credit growth, stable/slightly improving NIMs and steady asset quality is likely to result in steadily improving performance for the financials sector.

Is it currently more favourable to invest in auto ancillary companies rather than automobile manufacturers?

Generally, the fortunes of auto ancillary companies are linked to that of the Auto OEMs, unless these companies are able to expand their product offering or geographical/customer footprint. The auto companies have recently seen a healthy performance, with the sector being one of the bigger beneficiaries of the recent GST cut.

Albeit any intermittent bouts of profit booking, the outlook for the auto sector remains constructive. The investment call regarding the preference for an OEM vs an auto ancillary company should be driven by the growth dynamics/opportunity of the individual businesses, their positioning and their valuations.

Are you a buyer of new-age companies that have successfully built strong competitive moats?

Our stock selection has been driven by the attractiveness of the individual businesses, the growth opportunity/outlook and valuations. Some interesting businesses have got listed over the past few years in the areas of retailing, food delivery, fintech, leisure, marketplaces, platform businesses, etc., and there are many more in pipeline to be listed.

We have been open to ideas across businesses, provided they satisfy our criteria in terms of business moats, growth opportunities and management quality, and fit into our valuation matrix.

Do you believe the current market rally is being driven by strong earnings and economic growth expectations, despite the risk surrounding the India-US trade deal?

The Indian markets have been in a consolidation mode for the past 15 months due to softening of the earning growth momentum and some compression of the multiples, apart from other issues including the tariff related uncertainties and geopolitical developments. The unexpected sharp increase in US tariffs has further weighed on the markets, affecting the FPI flows.

However, the growth outlook remains constructive for both the economy and corporate earnings, on the back of the combination of the fiscal and monetary stimulus doled out by the Government and the RBI, apart from the expected revival in domestic manufacturing and capex.

Valuations have turned more supportive, with the markets now trading close to the historical averages. Any resolution on the trade deal front can remove one big overhang and result in improved sentiment for the markets.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.