India's market is witnessing a 'shift from stocks to gold' trend: In January, gold ETFs saw their first net inflows surpassing equity funds, reflecting heightened risk aversion amid a sluggish stock market. Weakness in small-cap stocks and government asset sales have further pressured the equity market. Meanwhile, commercial real estate REITs have risen against the trend, while high-valuation IPOs have faced lukewarm reception, indicating a movement of capital from growth assets toward safe-haven and structural opportunities.
As the Indian stock market has recently fallen into a growth slump, investors' sentiment is undergoing a significant shift. In January alone, inflows into gold exchange-traded funds (ETFs) surpassed those of equity mutual funds for the first time in a rare occurrence, reflecting a rapid shift in market sentiment from pursuing high-risk returns to seeking safe-haven assets.
The core driver of this trend lies in the recent sluggish returns of the Indian stock market. Despite the introduction of a growth-supportive budget and several trade agreements reached between India and the EU as well as the US, these measures have failed to fully reignite enthusiasm in the stock market. In February, the Indian stock market still underperformed compared to broader Asian markets, while weakness in key sectors such as small-cap stocks further eroded confidence among retail investors.
By contrast, the precious metals market has gained favor due to ongoing geopolitical risks and macroeconomic uncertainties. Analysts noted that gold and silver ETFs have not only performed strongly recently but also become a safe haven for capital due to their risk-aversion characteristics. This rotation of capital indicates that, prior to widespread growth in corporate earnings supporting stock market momentum, $XAU/USD (XAUUSD.CFD)$ will continue to dominate in the short term.
Currently, market attention has shifted to the upcoming US employment report and inflation data. These figures will provide further signals on the Federal Reserve’s policy outlook and may directly impact capital flows in emerging markets, including India.
Weak equity returns drive capital 'from stocks to gold'
The recent performance of the Indian stock market has failed to meet investor expectations, serving as the direct cause for this capital shift. Data from January shows that gold ETFs attracted more inflows than equity mutual funds, marking a clear shift in investment preferences. While the government has released positive signals through the budget and trade agreements, alleviating some market uncertainties, analysts generally believe that maintaining upward momentum in the stock market will rely on broader corporate earnings growth. Until then, gold remains more attractive to investors due to its recent strong performance and safe-haven function.
Meanwhile, investor patience with small-cap stocks is wearing thin. Long considered a favorite among Indian retail investors, small-cap mutual funds recorded their lowest monthly inflows in January since June 2024. Over the past year, the return rate of small-cap indices ranged from just 4% to 6%, far below the 11% gain of the Nifty 50 Index and the 15% to 17% growth of major mid-cap indices. Although long-term returns over two to three years appear healthy, recent persistent weakness has prompted investors to seek alternative options for better yields.
Government restarts asset divestment plan, sharply increasing supply pressure on the stock market
India's government restart of the asset divestment plan has also brought a 'double-edged sword' to the stock market. The government announced it would sell up to 5% of state-owned Bharat Heavy Electricals on February 11-12, with a floor price set at 254 rupees per share, expected to raise over 25 billion rupees. This marks the first divestment action since last week’s budget announcement targeting 800 billion rupees in proceeds from share sales in the next fiscal year (starting April).
While share sales help alleviate revenue pressures caused by tax cuts, they undoubtedly increase the supply in the stock market. Benchmark indices have struggled to break through existing volatility ranges in recent months, with oversupply identified as one of the main reasons. This policy move, while replenishing government coffers, has also constrained short-term upward momentum in the stock market.
REITs expand against the trend as demand for commercial real estate remains strong.
Against the backdrop of an overall sluggish market, Real Estate Investment Trusts (REITs) have emerged as another highlight attracting investor interest.
According to a report by Nuvama, the office leasing market remained active in the December quarter last year, driven by robust demand from global capability centers (GCCs) and domestic corporate expansions. Currently, all REITs in India have entered growth mode. In stark contrast to the struggles of the broader market, shares of REITs such as Embassy Office Parks and Brookfield India have risen approximately 25% over the past 12 months.
Moreover, strong policy support from central banks and market regulators has further deepened this segment of the market. A consortium led by Carlyle Group agreed to acquire a 73% stake in Nido Home Finance for approximately 21 billion rupees, further underscoring the attractiveness of the sector.
IPO market shows lukewarm response as valuation concerns emerge.
Meanwhile, investor sentiment in India's primary market appears more cautious and selective.
Although the artificial intelligence boom drove record listings in Hong Kong's stock market in January, Fractal Analytics, India’s first AI-focused IPO, received a tepid response. Despite having prominent institutions like Morgan Stanley and Goldman Sachs as cornerstone investors, the stock offering was only about 19% subscribed by the end of its second day.
Bankers noted that this lukewarm reception is not specific to any single deal but reflects a general hesitation among investors toward high-valuation technology offerings. While institutional investors typically submit bids on the final day, this indicates that the current equity capital markets (ECM) environment remains marked by caution.
Editor/Doris
