In the world of finance, the relationship between the U.S. dollar and gold has long been characterized by a negative correlation. Typically, when the dollar strengthens, gold prices tend to fall, and vice versa. However, recent trends have defied this conventional wisdom, prompting experts to reassess the dynamics at play. Siddarth Bhamre, Head of Research at Asit C Mehta Investment Intermediates Ltd., sheds light on this intriguing phenomenon in a recent interview with ETMarkets.
The Current Landscape: Dollar and Gold on the Rise
Bhamre notes that the simultaneous strengthening of both the dollar and gold is an anomaly. “Generally, it’s the financial instability, geopolitical issues, or a weaker dollar that leads to higher gold prices,” he explains. The current scenario, where both assets are gaining strength, raises questions about the underlying factors driving these trends.
Market Volatility and External Influences
The financial markets are currently experiencing extreme volatility, fueled by a combination of factors including Foreign Institutional Investor (FII) sell-offs, fears of a trade war, muted earnings reports, and high valuations. Bhamre highlights that a month before the U.S. elections in November 2024, there was widespread anticipation of a victory for President Donald Trump, which intensified fears of trade wars. As a result, FIIs began to withdraw funds from Indian equity markets, redirecting their investments toward dollar-denominated assets.
The impact of rising interest rates, aimed at curbing inflation, coupled with a slowing global economy, has further contributed to the sluggishness in the Indian economy. Bhamre suggests that this economic slowdown may persist for some time, with corporate earnings unlikely to show significant improvement in the near future.
The FII Sell-off: Understanding the Drivers
With FIIs pulling out over ₹24,000 crore from the cash segment of Indian equity markets, it’s essential to explore the factors fueling this sell-off. Bhamre emphasizes that asset allocation decisions are influenced by various global factors, with the exchange rate being a critical consideration. As the dollar appreciates and U.S. bond yields remain high, investors are drawn to the better risk-adjusted returns offered by dollar assets.
“Until we see currency stabilization and bond yields rationalizing, it will be challenging for fund flows to reverse solely based on valuations,” he states. This highlights the interconnectedness of global markets and the importance of currency dynamics in shaping investment decisions.
Budget 2025: A Mixed Bag for Growth
Turning to domestic policies, Bhamre shares his perspective on Budget 2025. While he acknowledges that the budget may not offer significant immediate benefits, particularly in terms of capital expenditure (capex), he believes it lays the groundwork for long-term growth. “The government has taken various measures that may not be substantial in terms of funds allocated but are stepping stones in the nation-building process,” he notes.
However, he also points out that private capex has not picked up as anticipated in recent years, contributing to the economic slowdown. For a sustainable revival, government capex is essential to instill confidence in the private sector.
Earnings Outlook: Challenges Ahead
As the global economy shows signs of a slowdown, Bhamre expresses caution regarding the earnings revival cycle for Indian companies. He anticipates that the next two quarters may not yield positive surprises in earnings, particularly in sectors facing stress, such as retail unsecured lending. This could dampen consumption and negate some of the positive impacts of tax reforms.
The Geopolitical Landscape: Modi’s Visit to the U.S.
Bhamre also reflects on Prime Minister Modi’s recent visit to the U.S. and the implications of his meeting with President Trump. He emphasizes the importance of bilateral trade between the two nations, suggesting that both leaders are committed to ensuring stability in international trade. However, he warns that easier import norms could lead to increased competition in the domestic market, potentially impacting profitability.
The Dollar’s Strength: Implications for Equities and Bonds
The strengthening of the U.S. dollar against emerging market currencies raises questions about its impact on equities and bonds. Bhamre attributes this rise to the expansive economic policies under Trump’s leadership, which could reignite inflation fears. As the dollar appreciates, it creates a favorable environment for U.S. equities and bonds, attracting funds inward.
However, he cautions that the short-term effects on equities and bonds in other markets may be negative due to supply-demand dynamics. Ultimately, the direction of any country’s markets will depend on the interplay between earnings and the inflation-growth equation.
Trade Wars: Potential Impact on India Inc.
When discussing the potential ramifications of trade wars, Bhamre acknowledges the uncertainty surrounding the issue. He identifies the IT and Pharma sectors as particularly vulnerable due to their significant exposure to U.S. markets. However, he believes that the Indian economy, which thrives on domestic consumption, may not face major setbacks even in the unlikely event of a U.S.-India tariff war.
Small- and Mid-Cap Stocks: A Cautionary Perspective
Bhamre expresses concern about the performance of small- and mid-cap stocks, which have seen significant inflows in recent years. He notes that this segment is currently underperforming, and if corrections continue, it could lead to increased redemption pressures, validating market chatter about potential pain ahead.
Gold and Silver: A Unique Opportunity
Finally, Bhamre revisits the topic of gold and silver, emphasizing the unusual relationship between these precious metals and the dollar. Despite the traditional negative correlation, both assets are currently strengthening. He reiterates that this rise in gold prices alongside a strong dollar is not typical, suggesting that investors should remain vigilant in this unpredictable market landscape.
Conclusion
Siddarth Bhamre’s insights provide a comprehensive overview of the current financial landscape, highlighting the complexities of the dollar-gold relationship and the broader market dynamics at play. As investors navigate this volatile environment, understanding these trends will be crucial for making informed decisions in the months ahead.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times.)
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