Stock market slump, Indian investors turn to frantic buying of gold and silver ETFs

As the Indian stock market has recently faced a period of sluggish growth, investor sentiment is undergoing a significant shift. In the just-passed January, inflows into gold exchange-traded funds (ETFs) unexpectedly surpassed those into equity mutual funds, indicating a rapid change in market mood from seeking high-risk returns to seeking safe-haven assets.

The core driver of this trend is the recent underperformance of Indian equities. Despite the introduction of a growth-supportive budget and the signing of multiple trade agreements with the European Union and the United States, market enthusiasm has not been fully reignited. In February, Indian stocks continued to lag behind the broader Asian indices, and weakness in key sectors such as small-cap stocks further dampened retail investor confidence.

By contrast, the precious metals market has gained favor amid ongoing geopolitical risks and macroeconomic uncertainties. Analysts note that gold and silver ETFs have not only performed strongly recently but also serve as safe-haven assets, attracting capital flows. This rotation of capital suggests that, until corporate earnings broadly grow enough to sustain upward momentum in the stock market, gold will continue to hold an advantage in the short term.

Currently, market focus has shifted to upcoming U.S. employment reports and inflation data. These figures will provide further signals regarding Federal Reserve policy prospects and could directly influence capital flows in emerging markets, including India.

Weak Stock Returns Drive Capital Outflows into Gold

India’s recent stock market performance has failed to meet investor expectations, directly prompting this shift in capital. Data for January shows that funds flowing into gold ETFs exceeded those into equity mutual funds, marking a clear change in investment preferences. Although government initiatives through the budget and trade agreements have sent positive signals and reduced some uncertainties, analysts generally believe that maintaining a stock rally will require broader corporate earnings growth. Until then, gold’s recent strong performance and safe-haven qualities make it more attractive to investors.

Meanwhile, patience with small-cap stocks is waning. Traditionally favored by retail investors in India, small-cap mutual funds saw their lowest monthly inflows since June 2024 in January. Over the past year, small-cap indices returned only 4% to 6%, well below the 11% gain of the Nifty 50 and the 15% to 17% growth of major mid-cap indices. While long-term returns over two to three years appear healthy, the recent persistent weakness has prompted investors to seek alternative avenues for better returns.

Government Resumes Asset Disinvestment, Increasing Market Supply Pressure

The Indian government’s restart of its asset disinvestment program has also introduced a “double-edged sword” for the stock market. It announced plans to sell up to 5% of its stake in state-owned Bharat Heavy Electricals (BHEL) on February 11-12, with a floor price of 254 rupees per share, aiming to raise over 25 billion rupees. This marks the first divestment since the budget announced last week set a target of raising 800 billion rupees through share sales in the next fiscal year starting April.

While share sales help ease government revenue pressures caused by tax cuts, they also increase supply in the stock market. The benchmark indices have struggled to break through recent volatility ranges, with oversupply considered a key factor. This policy move, while bolstering the treasury, also constrains the short-term upside potential of equities.

REITs Expand Against the Trend, Commercial Real Estate Demand Remains Strong

Amid the overall market downturn, real estate investment trusts (REITs) have emerged as another bright spot attracting investor interest. According to Nuvama, driven by strong demand from global capacity centers (GCC) and domestic corporate expansion, office leasing activity remained robust in the December quarter. Currently, all Indian REITs are in growth mode. In stark contrast to the struggling broader market, stocks of REITs such as Embassy Office Parks and Brookfield India have risen approximately 25% over the past 12 months.

Furthermore, supportive policies from the Reserve Bank and market regulators have deepened investor confidence in this segment. A consortium led by Carlyle Group agreed to acquire a 73% stake in Nido Home Finance for about 21 billion rupees, further confirming the sector’s attractiveness.

IPO Market Remains Tepid, Valuation Concerns Surface

Meanwhile, investor sentiment in India’s primary market remains cautious and selective.

Despite a record number of listings driven by the AI boom in Hong Kong in January, India’s first AI-focused IPO, Fractal Analytics, received a lukewarm response. Even with marquee underwriters like Morgan Stanley and Goldman Sachs involved as cornerstone investors, the offering garnered only about 19% subscription on the second day.

Bankers note that this tepid response is not specific to this deal but reflects a broader hesitation among investors toward high-valuation tech offerings. While institutional investors often bid on the final day, the environment indicates that the equity capital market (ECM) remains cautious and risk-averse.

Risk Warning and Disclaimer

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