Ukraine-Russia war: Should you increase exposure to gold, real estate?

Equity markets are witnessing their first meaningful correction since March 2020 amid a geopolitical crisis. If the Ukraine-Russia crisis turns out to be a prolonged affair, commodity prices will stay elevated for a long time.

Clearly, this will have an impact on the domestic inflationary scenario, where there already are significant undercurrents due to increasing pass-through of higher commodity prices with improving demand in manufactured products and even services.

All of this, analysts say, may move investors from equities to gold or real estate as the two could prove to be great hedging bets against inflation.

Emerging data are also backing that rationale. Consider this: Gold has emerged as the best-performing asset class so far in 2022, after underperforming most risk assets last year. 

The yellow metal is trading above $1,900 per ounce in the international and is at its highest level since June 2021. On the bourses, the metal is up over 4% year to date, against a 2-5% fall in major equity indices globally. 

According to Chirag Mehta, senior fund manager at Quantum Asset Management, Gold is set to benefit in the near term as risk-averse investors would increase exposure to it amid pullbacks in risk assets. However, in the event of this conflict getting extended, we are looking at more money printing to fund military actions, higher energy prices and economic sanctions against Russia.

“All these will fan the fire of already high inflation, take a toll on slowing economic growth and spur market volatility and risk aversion. This environment will be supportive of gold prices but will eventually clash with the Fed’s tightening cycle, which is expected to keep gold prices in check,” says Mehta. 

Expectations of higher interest rate will not only spur buying in gold, but also in real estate as investors may choose to invest in properties before the rate hike cycle kicks in, says AK Prabhakar, head of research at IDBI Capital.

HDFC Securities says that the real estate upcycle is driven by rising income levels, narrowing of the rental yields and interest rate corridor gap, market share gains by organised players, and confidence in strong economic growth. 

According to HDFC Securities, these tailwinds are favoring a real estate revival and have led to an unprecedented pick-up in sales. A large share of household savings is being directed into home purchases, which could lead to disproportionate gains for strong branded players. 

ANAROCK Group Chairman Anuj Puri told Business Standard that 80-85% of homebuyers are end-users now. With new supplies reaching pre-Covid levels in 2022, real estate prices may rise by 5-10%. Overall, mid-end and high-end housing segments will continue to drive demand.

That said, analysts caution against tweaking portfolio construction amid event-based risks and suggest changing the exposure mildly to ride the volatility.

Over the long term, equities have proved to be the best-performing asset class.

According to a report by Credit Suisse Research Institute in collaboration with London Business School, in the past 122 years, global equities have provided an annualised real return of 5.3 per cent in dollar terms, compared with 2 per cent for bonds and 0.7 per cent for bills.

Thus, diversification across stocks, countries and assets greatly improves the return-risk trade-off.