In a sluggish stock market, Indian investors are turning to a frenzy of buying gold and silver ETFs

As the Indian stock market has recently fallen into a predicament of sluggish growth, the investor sentiment is undergoing a significant shift. In January, the inflow of funds into gold exchange-traded funds (ETFs) unusually surpassed that of equity mutual funds, indicating that market sentiment is rapidly shifting from seeking high-risk returns to seeking safe-haven assets.

The core driving force behind this trend is the recent lackluster returns in the Indian stock market. Despite the introduction of a growth-supportive budget and several trade agreements between India and the EU and the US, this has not fully ignited enthusiasm in the stock market. In February, the Indian stock market continued to lag behind major Asian markets, and the weakness in key areas such as small-cap stocks further undermined retail investors' confidence.

In contrast, the precious metals market has gained favor due to ongoing geopolitical risks and macroeconomic uncertainties. Analysts point out that gold and silver ETFs have not only performed strongly recently but have also become a safe haven for capital due to their hedging properties. This capital rotation indicates that, before widespread corporate earnings growth supports stock market momentum, gold will continue to hold an advantage in the short term.

Currently, the market's focus has shifted to the upcoming US employment report and inflation data. These data will provide further signals for the Federal Reserve's policy outlook and may directly impact the capital flows in emerging markets, including India.

Weak Stock Returns Lead to "Abandoning Stocks for Gold"

The recent performance of the Indian stock market has not met investors' expectations, which is the direct reason for this capital shift. Data from January shows that the funds attracted by gold ETFs exceeded those of equity mutual funds, marking a clear shift in investment preferences. Although the government has released positive signals through the budget and trade agreements, alleviating some market uncertainties, analysts generally believe that to maintain the upward momentum of the stock market, broader corporate earnings growth is necessary. Until then, gold, with its recent strong performance and hedging function, is more attractive to investors.

Meanwhile, investors' patience with small-cap stocks is wearing thin. As a long-time favorite of Indian retail investors, small-cap mutual funds saw their monthly inflow in January hit a new low since June 2024. Over the past year, the return of the small-cap index has only been 4% to 6%, far below the Nifty 50 index's 11% increase and the major mid-cap index's growth of 15% to 17%. Although the long-term returns over two to three years seem healthy, the recent sustained weakness has prompted investors to seek alternative options for better returns.

Government Resumes Asset Divestiture Plan, Increasing Supply Pressure on the Stock Market

The Indian government's resumption of its asset divestiture plan has also brought a "double-edged sword" to the stock market. The government announced it would sell up to 5% of the state-owned enterprise Bharat Heavy Electricals from February 11 to 12, with a floor price set at ₹254 per share, expecting to raise over ₹25 billion. This is the first divestment action since the budget announcement last week, which set a target of raising ₹800 billion through share sales in the next fiscal year starting in April Although the sale of shares helps alleviate the pressure on government revenue caused by tax cuts, it undoubtedly increases the supply in the stock market. The benchmark index has struggled to break through the existing volatility range in recent months, and oversupply is considered one of the main reasons. This policy direction, while enriching the treasury, also suppresses the short-term upward space of the stock market.

REITs expand against the trend, strong demand for commercial real estate

Against the backdrop of an overall market downturn, Real Estate Investment Trusts (REITs) have become another highlight favored by investors.

According to a report by Nuvama, driven by strong demand from Global Capability Centers (GCC) and domestic corporate expansion, the office leasing market remained active in the December quarter last year. Currently, all REITs in India have entered a growth phase. In stark contrast to the struggles of the broader market, REIT stocks such as Embassy Office Parks and Brookfield India have risen by about 25% over the past 12 months.

In addition, the strong policies from the central bank and market regulators have deepened this segment of the market. A consortium led by Carlyle Group agreed to acquire a 73% stake in Nido Home Finance for approximately INR 21 billion, further confirming the attractiveness of the industry.

IPO market response is tepid, valuation concerns emerge

Meanwhile, investor sentiment in India's primary market appears more cautious and selective.

Despite the AI boom driving a record number of listings in the Hong Kong stock market in January, India's first AI-focused IPO project, Fractal Analytics, has seen a lukewarm response. Even with well-known institutions like Morgan Stanley and Goldman Sachs as cornerstone investors, the stock offering was only about 19% subscribed by the end of the second day.

Bankers point out that this tepid response is not directed at specific transactions but reflects a general hesitation among investors regarding high-valuation tech issuance projects. Although institutional investors typically bid on the last day, this indicates that the current environment in the equity capital markets (ECM) remains filled with cautious sentiment