Demand for gold, real estate and other physical forms of savings in India could decline in the coming months due to an expected fall in inflation, Morgan Stanley said.
Gold, oil and real estate prices have risen many fold in the last one to two decades. They have risen faster in the last ten years due to a global influx of cheap money. Home prices have risen by about 20 times in the last 20 years.
India too has seen a rise in inflation, especially after the global financial crisis of 2008. While inflation in the rest of the world moderated after the crisis, in India, it increased. The rising inflation, in turn, discouraged Indians from saving in financial instruments like bank deposits, and to some extent, even in the share market, as high inflation hit company growth rates as well.
Morgan Stanley believes the new government under Narendra Modi, which has a comfortable majority in the Parliament, may be able to bring down inflation from around 10-11% to lower levels. This could lead a switch back into financial savings instead of asset-based savings such as real estate and gold. Unlike bank deposits, physical savings in real estate and gold do not give an assured return, and any fall in their prices due to a decline in demand, could lead to supply quickly overtaking demand and prices correcting.
“Financial savings should see a boost in the coming 24 months if the government commits itself to a reduction in inflation and, hence, a dovish rise in real rates… the anchoring to physical assets, especially gold, is likely to be shaken in the coming months,” Morgan Stanley said.
Morgan Stanley said equities are starting to give better returns than gold of late.
“We think real rates may continue to rise largely due to tempering of inflation – this means property and gold will give up share in total savings. Choice between equities and gold is driven also by the relative returns of the two asset classes. Here again, equities are gaining at the expense of gold and, therefore, the relative equity flows to gold could also reverse in the coming months While property has strong underling demand driven by nuclearization of families, need for better housing and good affordability (house prices relative to incomes), the investment demand for homes could also come under relative pressure as households make a shift in favor of financial assets.”
On the other hand, Indians could invest more in shares.
The stage is set for a return of retail investors – real rates are positive and likely rising, real returns on equities have turned up and retail portfolios are underweight equities, it pointed out.
It may be noted that the Indian stock market is nearly completely dominated by institutional investors such as banks, mutual funds and foreign institutions. Most retail investors cashed out when share prices started rising, first before the 2008 crisis, and later in 2009 and 2010.