With the Indian stock market at a record high, should we shift focus to precious metals like gold, silver?

With the Indian stock market scaling unprecedented heights and valuations soaring, experts suggest considering some profit-taking in equities and redirecting attention towards precious metals like gold and silver.

Benchmark Nifty 50 hit a fresh record high of 24,738.95 during the session on Thursday, July 18. The index has been on a record-setting spree this month, gaining 13 per cent year-to-date (YTD). However, gold and silver have outperformed the benchmark index. Until July 17, Indian spot gold prices had jumped nearly 17 per cent, and silver prices had surged 26 per cent this year.

Nifty has no valuation comfort, the upside could be limited

Nifty 50 is trading at a premium valuation, raising concerns over a potential correction in the market. According to Trendlyne, an equity research platform, the current price-to-earnings ratio (PE) of Nifty 50 is at 24, above its two-year average PE of 21.9. The index's current price-to-book ratio (PB) at 4.2 is near its two-year average of 4.1.

While the medium—and long-term outlook of the market remains bright due to the prospects of healthy economic growth, the beginning of the rate-cut cycle in the US and India, and the hopes of policy continuity, there is a risk of a correction in the market if the upcoming Budget is heavily populist and India Inc.'s ongoing Q1 earnings fail to meet expectations.

The Nifty is already at 24,700. Some experts see the upside as limited and expect it to reach the 25,000 mark by the end of the year.

"Our December 2024 target for Nifty is pegged at 25,000 wherein we have valued the index at 20 times PE on FY26 EPS (earnings per share) of ₹1,250, building in 16.3 per cent earnings CAGR over FY23-26E," said Pankaj Pandey, Head of Research, ICICI Securities.

Time to look at precious metals?

Precious metals have outperformed the benchmark index this year, but analysts remain positive about them. They recommend investors trim their exposure to equities and invest in gold or silver, as they appear to be in a sweet spot due to rate cut hopes, geopolitical uncertainty, and central bank buying.

"As the stock market trades at premium valuations, it's definitely time to shift investors' focus towards precious metals such as gold and silver," said Prathamesh Mallya, DVP- Research, Non-Agri Commodities and Currencies, Angel One Ltd.

"Slowing down in China's economy, the US Fed cutting interest rates sometime in the second half of the year, and the geopolitical crisis emanating out of Israel-Hamas, Russia-Ukraine is the combination of factors favouring gold and silver as an asset class to be diversified in to," said Mallya.

Mallya advises investors to have at least 15 per cent of their portfolio in gold for better diversification.

Suman Banerjee, CIO of Hedonova, also believes due to the Indian stock market's premium valuations, shifting focus to precious metals like gold and silver could be prudent.

Banerjee pointed out that these metals serve as safe-haven assets during market volatility, protecting against inflation and geopolitical uncertainty. They provide portfolio diversification due to their low correlation with stocks and bonds.

Rahul Kalantri, the VP of commodities at Mehta Equities, said investors generally allocate about 10-15 per cent of their portfolio to precious metals, with a focus on gold and little on silver.

"Although gold and silver are currently under-allocated in many portfolios, we advise investors to review their portfolios and take some profits from equities to invest in gold and silver, with the potential for further gains after the US rate cut. We recommend raising this allocation to 25-30 per cent," said Kalantri.

Kalantri pointed out that while equities bring in much-needed growth—high returns (more than the rate of inflation) to the portfolio in the long term—gold acts as a hedge in times of uncertainty.

"New investors often compare asset classes and choose the one with the highest returns, but this isn't always prudent. Gold hasn't beaten the Nifty 50 in recent years, but over the last 20 years, it has delivered returns that are almost on par with or slightly ahead of equities," Kalantri said.

However, precious metals have drawbacks, such as a lack of yield, storage and security costs, and potential price volatility influenced by market sentiment. Additionally, significant allocation to these metals may lead to opportunity costs if other asset classes outperform.

"Balancing these factors is crucial, and consulting with a financial advisor can help tailor an investment strategy that aligns with individual risk tolerance and long-term goals," said Banerjee.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.