COMPARATIVE ANALYSIS OF THE PERFORMANCE OF GOLD …

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COMPARATIVE ANALYSIS OF THE PERFORMANCE OF GOLD AND EQUITY

HISTORICALLY, DURING PANDEMIC AND POST-PANDEMIC

SANJANA RAJEEV CHOKSI

School of Commerce, NMIMS University, Mumbai, Maharashtra, India

ABSTRACT

It is foremost to have an appropriate portfolio, mainly to diversify it with different instruments and thereby reducing the

overall risk of the portfolio along with maximizing returns. Based on historical research, it was concluded that gold is a

good portfolio diversifier, meaning that it has been a hedge against financial and economic turmoil. Stock market, on

the other hand,has been widely exposed to macroeconomic risks but is also a lucrative investment when the market is

doing well. This research paper is all about an in-depth comparison between the stock market index Sensex and the gold

market historically, during the outbreak of Covid-19 and the potential performance of the two securities post-pandemic.

The findings suggested that the stock market outperformed gold in the long run. However, a certain amount of gold in

the portfolio proved to be necessary to safeguard investors from macroeconomic risks.

KEYWORDS: Sensex, Gold ETFs, CAPM, Price-to-Earnings Ratio, Pandemic, Post-Pandemic, Debt to Equity Ratio &

Regression

Received: Jul 25, 2020; Accepted: Aug 15, 2020; Published: Sep 07, 2020; Paper Id.: IJBMRAUG20208

INTRODUCTION

Looking back at the history of turmoil, global economies have always been under a constant risk of going down the

drain, from the sub-prime loan crisis in 2008 to the pandemic that has caught the world in a frenzy. The WHO

(World Health Organization) declared Coronavirus as a pandemic on the 11th of March’20 as the number of cases

outside of China increased thirteen-fold. The alarming levels of spread of the novel virus led to the lockdown in

India as well as other countries. In India, it was announced on the 24th of March’20 and on the same day India’s

equity market index Nifty 50 stock prices fell by 25% from the day the outbreak was declared a pandemic followed

by the days leading up to the lockdown of the country. Not only that, the state-owned monopoly called the Indian

Railway Catering and Tourism Corporation (IRCTC) reached an all-time high of Rs. 2000 by the end of February

and tumbled nearly 50% by 17th of March’20.

The pandemic struck at a time when the global economy was already facing tough times. In the current

scenario, when the number of novel coronavirus cases rises with each day, investor sentiment has eroded even more.

In such harsh times, it is even more important for every individual to know the right investment strategy that would

maximize one’s returns along with minimal risks, and to diversify the portfolio with more and more risk-free assets

that would secure them from the fear of the global economy moving towards recession. It is very likely that there

will be liquidity crunch during this time due to the country-wide lockdown of businesses and livelihoods. Knowing

the different ways in which one can invest in equity and gold brings to light a series of questions such as how an

investor can make the most of the two securities and maximize one’s returns along with minimizing the risk to the

portfolio, which investment strategy (Long-only, Long-Short, Short-only) should be used in such harsh times, how

Orig

ina

l Article

International Journal of Business

Management & Research (IJBMR)

ISSN (P): 2249-6920; ISSN (E): 2249-8036

Vol. 10, Issue 4, Aug 2020, 61-88

© TJPRC Pvt. Ltd.

62 Sanjana Rajeev Choksi


the combinations of the various stocks and gold commodity impact the average returns of the investor.

Through this research paper, we will be dwelling deeper into these questions as we go ahead making tangible

comparisons between the historical as well as current performance of equity and gold. As far as the post-pandemic

performance is concerned, it cannot be predicted very accurately since markets are unpredictable. However, historical data

during similar outbreaks and crisis will be useful in careful analysis and potential performance of the two securities.

RESEARCH METHODOLOGY

Measurement Objectives

To understand the correlation of gold prices and equity markets in general, during a pandemic and post pandemic

through analysis of historical returns and price fluctuations.

To maximize the returns of an investor through proportionate allocation of securities in general and in times of a

pandemic.

Analysing and interpreting the historical performance of gold and equity in different time frames (short term and

long term)

Movements in prices of gold and equity during the pandemic when some macroeconomic news is announced by

the government.

Data Collection Processes

To develop a regression analysis, the major data sources of the daily/monthly/annual prices of equity were the

websites of BSE (Bombay Stock Exchange) and Yahoo Finance.

For the comparative analysis of gold and equity, the major data source of the daily/monthly/annual prices of gold

was the website of WGC (World Gold Council)

The SMB % (Excess returns of small-cap stock over large-cap stocks), HML % (excess returns of High B/M ratio

stocks over low B/M ratio stocks), RF % (risk-free return) and Rm-Rf (Excess of market returns over risk-free

return) data was taken from the IIMA (IIM, Ahmedabad) website.

Trailing P/E ratio and Forward P/E ratio are taken from Morningstar India to analyse different industries’

performance post-pandemic.

Reporting Plan

The annual returns and prices of gold and equity for a period of 5,15 and 30 years is graphed and plotted on a line

graph and column graph on Microsoft excel along with the average return and variance in returns. The daily

returns of the time when the outbreak was declared a pandemic till the latest date is also plotted.

Portfolio allocation through Efficient Frontier theory of gold ETFs and different industries that were hit hard due

to the lockdown along with the ones that performed well.

Financial ratios like Price/Earnings and Debt/Equity have been used to analyse the performance of stocks of

particular industries post-pandemic.

DATA ANALYSIS AND INTERPRETATION



As John Kenneth Galbraith, a famous economist once said “The function of economic forecasting is to make astrology

look respectable”, taking a humorous dig at the practice of predicting future happenings. Very evidently, forecasting is the

most fundamental practice in the stock market, but nobody is ever certain about the outcome, essentially because it

depends on the actions of billions of rational and irrational people, influenced by forces seen or unseen. Regardless, we do

forecast about the future returns of equity stocks and gold knowing that the markets are uncertain and particularly tricky.

The question is how do we go about the careful analysis of forecasting future returns of a company, an index fund or

commodities? The most fundamental way is to study the historical patterns of returns, variance and standard deviation of

the stock or the commodity when the markets are particularly in the phase of boom or bust. Before analysing the

performance of the equity market and gold during the current times, it is important to look back at the historic patterns of

returns and studying the economic upturns and downturns impacting the stock and commodities market. It is foremost to

investigate if a similar outbreak had stemmed in the past and the ways it disrupted the market along with interpreting the

different correlations between the variables. History doesn’t repeat itself, but it often rhymes. A handful of things can be

learnt from the past which may help investors to avoid blunders. The investor sentiment can be tracked back to previous

crisis or booms and applied to the present circumstances making forecasting an efficient and effective tool.

Historic Performance

A. 5 years (2015-2019)

The performance of the equity index fund (Sensex) and Gold can be analysed by their average returns and prices over the 5

years from 2015-2019. The average annual return of the Indian stock market index fund Sensex was -5% in 2015. There

were a couple of domestic and global factors that impinged on the Indian stock market. One of the major factors of the bad

performance of the index fund was attributed to the stock market in China which was down. Around mid-June the stocks in

the Chinese markets were tumbling. The failing markets took a toll on the exchange rates. Yuan had been devalued,

leading to a fall in the currency rates along with a spontaneous selling of stocks in China and India. Since Chinese stock

markets are heavily controlled by the government, any appearance of a connection between the currency and the

performance of the stock market may be artificial. The Chinese markets were in fact doing tremendously well before the

three-week plunge in the stock prices. This was due to the fact that many stocks were overvalued (Book-to-Market ratio

was very low) as the market was driven by momentum rather than fundamentals (financial statements). The effect doubled

due to the low earnings and poor performance of various Indian companies in the first quarter of the year.



Figure 1: 5 Year Comparative Returns.

Figure 2: 5 Year Comparative Prices.

The commodities market also did not do too well during this period. Again, a major reason for the downtrend was

the fact that more than 80% were individual investors in the stock market. They had borrowed from the brokers to invest in

the market. Hence there was an explosion in the so-called margin lending. Gold is usually considered a safe asset that can

yield good returns in such situations. But the investors who used it as collateral for buying shares had to flog it to meet the

margin calls. Considering China and India to be the largest consumer of gold, the demand had diminished leading to a

downfall in the gold market.

The Indian stock market had its fair share of ups and downs during 2016. In February, Sensex returns fell by 8%

due to weak quarterly earnings. This was accompanied by an increase in NPAs (Non-Performing Assets) of banks. As on

31st March 2016, banks had around 4.4 lakh crore of NPAs. Since they are highly dependent on the interest on loans lent to

individuals, naturally the earnings of these banks reduced and this in turn, had a direct impact on shareholders’ investment

in Indian banks. On 4th August 2016, The GST (Goods and Services Tax) bill was passed by the constitution to turn the

country into a unified market inducing



Figure 3: Bad Loans.

Source: PRS India

some positive sentiment among investors. But the gains were short-lived due to the announcement of the surgical

strikes on terror launch-pads in Uri, Kashmir. Markets were under pressure all over again due to the cross-border

uncertainty.

Just when the investors thought that the geopolitical situation was a mere bump in the road, came two

macroeconomic announcements that effectively shut the door on any possibility of a recovery of the stock market. On 8 th

November 2016, Prime Minister Modi announced the demonetization of Rs. 500 and Rs.1000 currency notes.

Demonetization affected the purchasing power of the citizens due to which the demand for many goods and services

decreased, taking a toll at corporate earnings and in turn, on the stock market. While the banking sector benefited from the

move as all the money came back to public and private banks. The other announcement was the US presidential election

result. Donald Trump was declared the president which weakened the stock market position. S&P 500 index was affected

and so did Sen sex due to the ideology of a “pro-America” established by the Republicans. When legislation on the H-1B

visa was proposed by the House of Representatives making the rules stringent by doubling the minimum salary of the visa

holders to $1,30,000, Indian IT stocks took the most beating. Gold being a safe haven for most of the investors performed

very well in 2016. It gave as much as 11% of average returns. The outstanding performance of gold was driven by the

weak dollar, easing monetary policy of the USA and global negative interest rates.

Figure 4: Fund Flow in Equity Market.



2017 saw a great improvement in the equity market. Sensex average returns over the year were as high as 18%.

India was the third best EM (emerging market) in the world after Argentina and Turkey. Small-cap stocks being more

volatile did better during this time. Investors shifted from physical savings to financial savings at this time after the blow of

demonetization. Gold’s demand particularly in India also soared in the form of jewellery, as GST stabilized. In turn, the

prices also increased. The average prices of gold during this year increased to Rs. 31000 from Rs. 26000 per troy ounce in

2016.

In February 2018, India’s finance minister Arun Jaitley comments to introduce a 10% capital gains tax on long

term equity shares (sold after 12 months). Due to this the average returns of Sensex fell to -5% in the month of February.

The effect of this announcement continued in the month of March as well with average returns of -4%. Otherwise, on an

average 2018 was less of a roller coaster than the earlier years. The average return was 15% for Sensex. Investors were not

surprised with gold not performing that well as the risky assets performed well during this time.

In 2019, the commodities market performed exceptionally well. The price of gold as we can see in the graph was

at its peak. There are multiple reasons to this. Crude oil prices rose during this year which led to an increase in gold prices

as well. The price averaged to about Rs. 1,08,120 per troy ounce. Markets did not perform well due to the surge in crude

oil prices. Investors were caught in a frenzy more so because of the US drone strike on an Iranian Military leader. US stock

markets have a very low correlation with Indian stock markets (around 0.36). So the Indian stock markets were not

affected by the geopolitical tensions, with Sensex yielding a steady average return of 8%.

Figure 5: 15 Year Comparative Prices.

Analysing the factors that affected the 5-year returns of gold and equity gives a slight idea about how stock and

commodities market can get impacted and the correlation between gold and equity during favourable and unfavourable

economic situations. Gold gave an average return of 8%, whereas Sensex gave 7% cumulatively over the course of 5 years

(2015-2019). So, the performance of the assets was more or less the same. However, if we go back to the price chart of the

assets, there is a stark difference that can be seen between the prices of the two assets. Gold is a very expensive investment

compared to stocks but it’s the price we pay to bail us out when other form of currencies and assets don’t work, which

essentially means that it always has some value as insurance against tougher times. In the duration of the 5 years, the

volatility of average annual gold returns (0.09) has been equal to the average annual stock returns (0.08) more or less.

However, gold has had slightly more volatile returns and a logical explanation to this could be the dramatic geopolitical

events and the structural reforms that have unfolded over these years due to which the investors have resorted to gold in a

frenzy, making the price soar to new peaks. 2019 saw the biggest spike in prices of gold.

B. 15 Years (2005-2019)



2005-2007 were remarkable years for the Indian stock market. The average annual return for Sensex was at around 45%

over these years. The market had transformed tremendously since the establishment of the statutory regulator SEBI

(Securities and Exchange Board of India) in 1992. It developed a modern, regulated market infrastructure which ensured a

steady increase in the market capitalization. There was an incredible surge in the holdings of FIIs (Foreign Institutional

Investors) in the Indian stock market.

The Gold market did not perform that well at a mere 6% average annual return in the particular year of 2005 due

to the outperformance of the stock market.

Figure 6: Comparative Returns of 15 Years.

The investors grew quite comfortable in the ever-increasing returns of the stock market in the following years.

Little did anybody know what 2008 had in store. The international financial crisis involving the sub-prime mortgage loans

originated in the US. With interest rates surging and home prices falling, there was a stark jump in loan defaults and

foreclosures affecting the banking institutions. Credit-rating agencies (S&P, Moody’s) and regulatory institution (SEC)

acted irresponsibly making the scenario uglier. While the Indian financial system did not directly get hit by the crisis due to

the banking sector’s limited integration with the global markets, it did suffer indirectly in the form of trade and capital

inflows. The recession abroad affected the exports of the country, especially the sectors that relied highly on it. IT sector

that generates most of its revenue through software services suffered the most. The FIIs that had just entered the emerging

market of India started selling the stocks and reallocated their funds to safer developed markets. Sensex’s average annual

returns were -52% in 2008 from 47% in 2007 as shown in the graph.

Between 2008 and 2012, the value of gold being a safe asset increased dramatically. This is related to the concept

of the types of investors, one being the risk-averse and another being the risk-takers. When investors have less appetite for

risk meaning that they become defensive, they prefer to trade in gold rather than stocks as the shiny metal is considered a

safe-haven with a very low-volatility, so it is negatively correlated (or at least uncorrelated) to stocks during a financial

turmoil, like the housing bubble in 2008.

There was a steady surge in prices of gold between these years. As we can see in the graph, the prices of gold

were as high as Rs. 89000 per troy ounce in the year of 2012. The average annual returns generated by it ranged from 17%-

32% during the course of these years.

Sensex performed its best in 2009 since 1991 when various structural reforms were introduced in the market. Its



average annual returns were as high as 81%. Investors were euphoric after the UPA (United Progressive Alliance) emerged

victorious in the general elections of 2009. The exponential gain made the Indian market the fifth best performer in the

world, after Sri Lanka, Russia, Brazil and Indonesia. FIIs, the main elevator of the Indian market had sold their entire stake

by the end of 2008. But in 2009, they bought at least $17.5 billion worth of shares in the Indian market. Firms were able to

recover from the losses of 2008 and improve their performance in 2009.

Between 2013 and 2015, The United States had witnessed the repercussions of the 2008 crisis in the years to

follow after that but along with that, the country was gradually recovering with real GDP growing by 4% in the second

quarter of 2014. However, there was a tapering in the US’s central bank QE (Quantitative Easing) program which was

meant to increase liquidity in the economy. This reduced surplus funds in the hands of investors affecting their capacity to

invest in gold. Hence, gold prices decreased and gave negative average annual returns in the course of these years.

If we see the overall performance of gold and equity over the course of 15 years (2005-2019), the equity market

outperformed the gold market. The cumulative average annual returns for equity were 17% whereas it was 13% for gold

making the stock market more lucrative in the long run.

The equity market (0.09) was more volatile than gold during this period (0.02) as against the result we found for a

period of 5 years (2015-2019). Therefore, in the long-term, stock market is more volatile than the gold market.

C. 30 Years (1991-2019)

We know about the structural reforms executed in 1991 of which a substantial part was directed towards the stabilization

of Indian Capital markets. The reforms included the formation of SEBI (Securities Exchange Board of India) which was

set up in 1988 but was given the status of a regulatory body and statutory recognition in 1992. It was mandated to create a

safe, regulated and modern environment which would facilitate the mobilization of resources through securities market.

Opening the capital market to the external sector was also a part of the reforms. It essentially led to an inflow of foreign

capital. FIIs (Foreign Institutional Investors) have had a tremendous role in driving the Indian Capital market.

Figure 7: Comparative Returns of 30 Years.

Liberalization has opened the Indian industries to international capital, making the companies competitive in the

International market.

Sensex yielded good returns from 1992-1994 averaging about 27% annually. The structural reforms in the capital

market started showing substantial gains after 1991. In the table below, the market capitalization of BSE (Bombay Stock



Exchange) was 3233.63 billion in the year 1991-92, more than thrice the amount in the previous year.

Figure 8: Comparative Prices of 30 Years.

An interesting observation that we make is that after 2000, gold returns climbed higher performing tremendously

well for the next 12 years. The economy had its share of downs in this decade. The dotcom bubble burst which was the

first of such hits that the economy took in 2000. The inevitable plunge in internet stocks, which were till then the market’s

favourite, saw investors fall back upon gold. Another important factor that contributed to the rise in prices of gold was the

per capita income in China and India over the course of the 10 years from 2000-2010.

Figure 9: Market Capitalization of BSE.



Figure 10: Correlation between Income and Gold Prices.

The demand for gold has increased dramatically with rising incomes of people in India and China. The two lines

on the graph are more or less moving steadily along with each other. Gold has a cultural value associated with it in India.

Around 50% of gold purchases in India are related to auspicious occasions like weddings. It was only in 2007 that the first

gold ETF was launched in India. Until then, only affluent investors could afford the expensive commodity. Investors with a

relatively smaller investible surplus could not invest in the same. Hence, ETFs quickly captured the interest of relatively

small retail investors. Even with the depreciating rupee making gold costlier, Indian consumers’ jewellery consumption

hasn’t changed much. India consumes over 700 tons of gold a year in the form of jewellery. Moreover, the sub-prime loan

crisis (2008) in the US drove the demand for gold much more.

As far as the outstanding performance of Sensex in 1999 is concerned, it was politically driven. The BJP-led

coalition had won the majority in the 13th Lok Sabha elections. The market sentiment yielded a 63% average annual return

in 1999.

Overall, in the course of 30 years, from 1991 to 2019, equity has outperformed gold by quite a margin. The

cumulative average annual returns for equity were 16% as against a mere 10% for gold. The volatility of the average

returns of stock market are also much higher (0.09) than the average return volatility of gold (0.01). The higher returns of

equity are explained by the relative risk component in stock markets. It is all about a trade-off between risk and reward.

Hence, historically, in the long-term, stock markets have outperformed gold by a substantial margin making it a

high yielding but an equally risky security.

A detailed analysis of the historical performance of benchmark index Sensex and the gold commodity that allows

investors to fall back upon in times of turmoil gives important results. Equity has, by a very far margin, outperformed gold

in the long term. There are multiple fundamental reasons to this. Stocks derive theirvalue from the active performance and

innovations of new products and services of companies. These companies build value continuously, making the shares

have a solid backing to it. Stock market’s success or failure is not purely defined by the economic climate, but more so in

the way people react to this through companies’ performance. Gold does not have a solid backing to it. It is a reactive

investment and can do nothing to enhance its value. It is solely reliant on the external factors to either make or lose its

value.



As the analysis of the two assets in different time periods of 5, 15 and 30 years is considered, investment in stocks

requires a minimum of 5 years to yield substantial returns relative to gold. Stocks gave a mere 8% return in relation to gold

which gave a 7% return over the duration of 5 years. But as we moved on to 15 years and then consequently 30 years, the

gap widened making stocks more profitable in the long run.

Regression using Capm (Capital Asset Pricing) Model

CAPM is a financial model that describes the relationship between systematic risk and expected return of assets,

particularly for stocks.

There are two kinds of risks associated with the stock returns, one being the idiosyncratic risk and the other being

the systematic risk.

The former is typically aligned with company-specific circumstances which can be diversified away by adding

various different stocks in the portfolio whereas the latter is associated with the market sensitivity and it cannot be avoided.

The formula for calculating the expected return of the asset is:

ERi = Rf +βi(ERm−Rf)

where:

ERi = expected return of investment

Rf = risk-free rate

Βi = Beta of the investment

ERm−Rf = Market risk premium

Using the model developed by Fama and French, the three factors of SMB % (Excess returns of small-cap stock

over large-cap stocks), HML % (excess returns of High B/M ratio stocks over low B/M ratio stocks) and Rm-Rf (Excess of

market returns over risk-free return) are considered to evaluate the sensitivity and outperformance of the monthly excess

returns of HDFC Gold ETF and HDFC Bank shares over the risk-free rate from the period of 2010-2019.

A beta of 1 indicates that the price of the security tends to move along the market.

A beta of less than 1 means it tends to be less volatile than the market.

A beta of more than 1 means it tends to be more volatile than the market.

Alpha measures the outperformance of the security in relation to its benchmark.

100% Gold (HDFC Gold ETF)



Figure 11: Regression Analysis of Gold ETF.

HDFC gold ETF was launched in 2010. The regression speaks about the performance of the ETF since its

inception till the end of 2019.

The coefficient of (Rm-Rf) which is denoted as Βi (Beta) is -0.2 means that there is no sensitivity in the returns of

gold in relation to the returns of the stock market. This value proves the fact that gold as a commodity is negatively

correlated to the stock market meaning that if the market is showing a downtrend, the demand for gold which is considered

to be a safeasset escalates leading to a surge in the prices of gold ETFs.

Alpha being a measure of the outperformance of a security is 0.04. Gold has not shown any substantial

outperformance in the past 10 years.

R-square being close to 0 further emphasizes that the risk of gold is not explained by the stock market but by its

underlying characteristics.

100% Equity (HDFC Bank Shares)

Figure 12: Regression Analysis of Equity Shares.



The regression analysis of HDFC bank shares over the period of 2010-2019 gives the following results:

The coefficient (Beta) of Rm-Rf is 1.07 which means that it amplifies the movement of the stock market. The

stocks of HDFC bank are more volatile than the market. Basically, if the stock market goes up by 10%, the share prices of

HDFC bank go up by 10.7% and vice versa. Hence, these stocks are riskier than the market.

The coefficient of SBM being -0.18 signifies that the stocks are inclined towards large market capitalization

which makes complete sense. The coefficient of HML being -0.22 signifies a low book-to-market ratio. (Overvalued

stocks)

The stocks have outperformed its CAPM benchmark since alpha is 0.83.

R-square is around 60% emphasizing that a large proportion of the risk is systematic and a mere 40% is

idiosyncratic. So, a major chunk of the volatility of the stocks is explained by the market forces.

50% Gold, 50% Equity

Figure 13: Regression Analysis of Gold ETF and Equity Shares.

The regression of a 50-50 portfolio of HDFC bank shares and Gold ETF gives important results.

The outperformance of the portfolio is denoted by alpha which is 0.43, less than the alpha obtained for a 100%

equity portfolio. But, a striking component is the stark reduction in the sensitivity of the portfolio to the uncertain market

conditions. Adding gold reduces the risk of the entire portfolio bringing the sensitivity of the portfolio in relation to the

market to 0.43.

Experts suggest a 5% allocation of a portfolio to gold ETFs in order to remain safe in times of turmoil. So, even if

the market falls by 10%, the fall in the prices of the portfolio in this scenario will only be 4.3%.

Although, the allocation of different stocks and commodities depend on the risk appetite of an investor, most

experts suggest gold to have some part in a portfolio to minimize the risk and shield the investors from tough times.

The R-square is only 30% which means a higher proportion of the risk of the portfolio is explained by

idiosyncratic risk which can be diversified away. So only 30% of risk is explained by the market which is unavoidable as

against a 100% equity portfolio which has a large 60% of risk explained by the market.



Performance During the Pandemic (COVID-19)

Throughout history, the world has seen highly improbable events that catch everyone by surprise and often off-guard.

These have the tendency to potentially disrupt businesses and livelihoods. Such kinds of incidents are called black swans.

The name stems from a historical story in which the Dutch explorers were taken completely aback by the sight of the black

swans for the very first time in Australia, rendering null their belief that swans can only be white. Thus, the term ‘black

swan’ modified into describing an event that occurred despite seeming non-viable. It is the occurrence of an event that is

highly uncertain and also has a profound impact. The outbreak of Coronavirus is one such crisis that has taken a hit not

only at the global stock markets but also the economy.

The performance of Sensex and Gold from 1st of March’20-22nd of May’20 has been analysed below:

Traditionally, in times of turmoil, gold prices tend to move upwards but between the end of first week and the

second week of March, the returns of gold were at their worst since mid-December in 2019. The whole quarter from

January-March of 2020 had experienced a drop in the prices and returns of gold simply due to the high volatility in the

prices and economic uncertainties. Moreover, the fear of liquidity crunch in the economy aggravated it. Driven by the

imminent havoc that the pandemic would create, gold was being used to raise cash to cover the losses of other asset

classes. Investors were selling it off to gain liquidity. The correlation of gold and stocks generally turns negative as stock

prices tumble. However, the unprecedented outbreak seems to be an exception that plummeted the gold prices as well.

Figure 14: Returns of Sensex During Pandemic.

Gold returns jumped back to a high of 4.2% on 18th March’20 as the novel coronavirus started spreading in India

with 134 cases and 2 deaths in the country. Investors moved back to the safe haven in the fear of furthermore spread of the

disease.

Since WHO appealed every country to test every suspect of the disease, on 16th of March’20, central government

ordered all institutions, shopping malls, theatres and gyms to be shut till 31st March.

Furthermore, Prime Minister Narendra Modi declared a nationwide lockdown on 24th of March’20 for 21 days as

the number of cases crossed 500, restricting movement of a population of 1.3 billion people as a measure to counter the

spread of the virus. It was announced after the voluntary public curfew on 22nd of March when the average returns of

Sensex plummeted to -13% over concerns that the pandemic could shut the economy down.



Figure 15: Returns of Gold During Pandemic.

Even gold imports plunged to over a six-year low as demand for the metal fell due to the announcement of the

lockdown disrupting the businesses and livelihoods of people. The lockdown brought the economy to a standstill and led to

a crash in sentiment across equity, commodity and bullion markets.

However, surprisingly Sensex gained about 2.5% returns on 24th March when Nirmala Sitharaman announced that

an economic package was underway along with other measures to fight the covid-19. On 27th March, RBI announced a

three-month moratorium extended till 31st May. This would potentially help the businesses curb their cash flow problems

and restart their units as and when deemed fit. All borrowers, including home loans, term loans and credit card out

standings also got the benefit of this.

The market experienced some gains on 7th April over slight optimism that the pandemic may be waning in some

key epicentres.

Figure 16: Prices of Gold and Sensex During Pandemic.

Sensex had a positive performance from 27th-30th April over the claim that India’s month-long lockdown had

saved lives and proved to be an important step for the country. Moreover, the end of the month performance was driven by

metal and automobile stocks in the hopes of improvement in demand as major world economies started resuming their

businesses and lifted major restrictions imposed in the wake of the pandemic. However, the gains were short-lived as



Sensex nosedived 5.5% due to heavyweight financials and metal stocks on 4th May. Several leading automakers such as

Mahindra & Mahindra, Maruti Suzuki India Ltd. and others reported zero domestic sales at the end of April due to the

lockdown. Not only that, Reliance Industries Ltd. (RIL), the country’s most valuable company reported its worst profit

slide in 11 years.

In the beginning of May, Mr. Narendra Modi announced a stimulus package of Rs. 20 lakh crores in response to

the hard-hit economic turmoil. He emphasized that the package would focus on land, labour, liquidity and laws. It would

also deal with sectors such as cottage industries, MSMEs. He also talked about empowering the poor, labourers and

migrant workers, both in the organized and unorganized sectors. The stimulus package was mainly to make India self-

reliant so that any other crisis that may emerge in future could be efficiently tackled. However, Nirmala Sitharaman

provided the break-up of the package on 17th May which was declared in five tranches, did not cheer investors much due to

which the performance of Sensex plummeted to -3.5%.

As far as the physical gold is concerned, considering the auspicious and cultural value of it in India, its demand

has eroded as jewellery and bullion businesses resumed operations from 19th May’20 in Gujarat. However, the demand for

gold ETFs has gone up with investors turning towards ‘digital gold’ form. Investments in gold ETFs grew by 9% from

March to April.

Analysts indicate that most of the investors who moved towards gold ETFs from the highly volatile stock markets

were HNIs (High Net Worth Individuals).

Figure 17: Change in Demand for ETFs.

Apart from the performance of the stock market, thousands of Indians have begun trading in stocks as the

lockdown keeps them indoors and the valuations become cheaper with each day. Nearly 1.2 million new accounts were

opened with CDS (Central Depository Services) in March and April, increasing by a third over the previous two months.

The digital trading platforms like Zerodha and Upstox witnessed a tremendous rush on the site. All the new investors are

mostly 30 years old or younger which means they will remain in the market for a longrun probably with a greater risk

appetite as well.



Figure 18: Growth in Investor Accounts.

Source: Bloomberg

Sectors worst hit by the crisis are as follows:

1. Aviation

Aviation is one of the worst-hit sectors during the pandemic due to the travel ban globally. The governments all across the

globe are cancelling the visas of foreign people and locking down the significantly affected areas, which is also one of the

major reasons behind the slowdown of the aviation industry. As far as Indian aviation companies are concerned, all of

them suffered heavy losses. One of them is Indigo Airlines, the parent company of which is InterGlobe Aviation Ltd.

Various portfolio combinations of the stocks of Indigo airlines and UTI gold ETFs are presented to assess the

overall performance of gold ETFs and equity of a company that was hit badly during the pandemic through a theory of

Efficient Frontier.

The Efficient Frontier theory developed by Harry Markowitz is the combination of securities with optimal

portfolios offering highest expected return for a defined level of risk. Optimal portfolio can be understood with a simple

example; In the NBA (National Basketball Association), Los Angeles Lakers and Detroit Pistons clashed in the finals of

season 2003-04. Now, Lakers had its top 5 players named MVP once in their careers which means the individual players

were unbeatable, unlike the players from the Pistons who knew their positions and game well enough and they made a

well-coordinated team to be precise. What team would you expect to win in this situation? Well, it was the Pistons who

won that season (4-1) with a very good score. A portfolio behaves in a similar fashion. When a financial advisor designs a

portfolio, one needs to keep in mind the Expected Return and the Asset correlation as well. The Pistons had a well-

coordinated team along with good expected performance whereas the Lakers only had an exceptional performance by the

individual players and no correlation as such. Similar is the case with securities and commodities. One needs to design an

optimized portfolio instead of a dominated one.



Figure 19: Efficient Frontier of Aviation Stocks and Gold ETFs.

Indigo UTI Gold

Mean -0.35 0.22

variance 17.73 1.72

std deviation 4.25 1.32

correlation 0.03

In this particular scenario, all the points plotted, represent a specific combination of the Indigo airline stocks and

UTI gold ETFs along with a given risk-return mix.

Point (1.28,0.17) represents the minimum-variance portfolio meaning that it maximizes returns whilst minimizing

the risk component. In the event of a crisis, investors prefer such combinations that shield them with more and more risk-

free assets like the UTI gold ETFs. The weight of the ETF in the minimum-variance portfolio is 90% whereas the Indigo

stocks have a mere 10% share.

All the portfolios above the minimum-variance portfolio are optimal whereas the ones below it are sub-optimal. It

is profitable to choose any of the portfolios above the minimum-variance combination.

Point (1.32,0.22) and (1.38,0.11) nearly have the same average standard deviation but the former has a greater

return.

There are various portfolios of gold and stocks that can yield different return-risk combinations, an investor must

choose the one which is the most suitable to his/her risk appetite along with keeping the economic conditions in view. A

pandemic would compel investors to go with a combination that yields a given return with the least risk, hence the

minimum-variance portfolio is suitable in case the funds are blocked in poorly performing stocks along with gold ETFs.

2. Oil as a Commodity

Global oil demand has been at its lowest as coronavirus forced people to remain indoors and avoid unnecessary travel.

Disruption of business operations further reduced the global demand for the commodity. The demand fell by 30 million

barrels per day over the course of the lockdown. On top of this, dating back to March, Russia and the cartel of 15 countries

of oil producing nations, OPEC had a disagreement over maintaining the production levels of the commodity which started

an Oil war between the leader of the OPEC Saudi Arabia and Russia making the scenario even worse. Saudi Arabia that

was of the opinion to cut the production levels by 1 million barrels per day, did so resulting in low prices. The upshot of



the decision was that Saudi grabbed the opportunity of meeting the very low demands of Asia by having a cheaper product

to sell. A downside to this is that oil prices are globally affected, hence it went down pretty much everywhere. Moreover,

the oil price crash led to two of the many private oil companies in the USA such as Diamond Offshore Drilling and

Whiting Petroleum filing for bankruptcy. According to Bloomberg, at least seven companies in North America have gone

under since the start of the year.

Bharat Petroleum Corporation Ltd. - The stocks of BPCL were at its lowest on 24th March’20, the same day

lockdown was in force in the country.

Figure 20: BPCL Stock Prices.

Source: Money Control

3. Automobile

The automobile sector is one of the worst-hit during the lockdown. With zero sales reported in April, the domestic

automobile sector issued a writing to the government seeking some relaxation from the lockdown to restart operations of

the entire value chain. The entire value chain, from the manufacturers to the retailers, have suffered losses. The industry

which accounts for 7% of the country’s GDP is witnessing a revenue loss of about Rs. 2300 crore per day.

Mahindra and Mahindra Ltd. – In congruence with the aviation industry, the company’s stocks performed the

worse on 25th March’20, a day after the lockdown was enforced.

Figure 21: Mahindra & Mahindra Stock Prices.

Source: Money Control.

4. Tourism

The closing down of the iconic Taj Mahal just after the lockdown is a symbol of how India’s travel and tourism industry

has changed due to Covid-19. According to a report by KPMG, the Indian tourism and hospitality industry is staring at a

potential job loss of around 38 million, which is 70% of the total workforce. The states that rely on tourism as their main



source of income have pleaded the government to provide some relaxations to kick-start the industry. The tourism industry

in Goa which contributes more than 9% to Goa’s GDP, has been hit very hard over the course of the lockdown. Although

the tourism industry expects that the effects of coronavirus on travel will continue for up to a year since the lockdown in

India, but it is hoping that business and work travels will pick up in the month of July considering the relaxations of

lockdown 5.

Cox & Kings Ltd. – The performance of the tourism company Cox & Kings showed deterioration even before the

announcement of the lockdown due to the impact of coronavirus showing in other countries way before India which

reduced the foreign tourist arrival.

Figure 22: Cox & Kinds Ltd. Stock Prices.


5. MSMEs (Micro, Small and Medium Enterprises)

MSMEs are the backbone of all Indian sectors and majority of them are engaged in manufacturing and export activities.

They add a significant 30% to the nominal GDP, 45% to manufacturing output and 48% to the merchandise exports.

Today, almost all the MSMEs are out of action due to the pandemic, blocking all production activities at major firms

across sectors. Nirmala Sitharaman announced a relief package of Rs. 3 lakh crores in the form of collateral free loan

scheme for MSMEs. But, the benefits of the package are far from substantial. Banks are turning their backs on these

enterprises whilst getting ridiculed for making enquiries about non-existing schemes (The Credit Guarantee Fund Trust for

Micro and Small Enterprises). The scheme made a debut in early 2000 and since then many versions of it have been in

operation. The relief package was simply an addition to the funding of up to Rs. 3 lakh crores at a concessional rate of

9.25%. However, banks haven’t received any notification of the same yet. MSMEs are in dire need of working capital to

pay wages to the already hard-hit employees of the enterprises but they are helpless and if the situation continues, many

small units will be on the verge of shutting down.

As far as the SMEs listed on the stock exchange are concerned, more than 80 of these companies have shed more

than 75% of their value over their offer price, the data by Prime database shows.

Tranway Technologies Ltd.



Figure 23: Tranway Tech. Stock Prices.

Source: Money Control.

Sectors that did well in the pandemic are as follows:

1. Pharmaceuticals

The Indian pharmaceutical industry supplies affordable and low-cost generic drugs to millions of people around the world.

Furthermore, its active pharmaceutical ingredients (APIs) market is predicted to attain a total revenue of $6 billion by the

end 2020. Apart from that, India is the biggest manufacturer of hydroxychloroquine which is an anti-malarial drug that is

proving to be effective in the fight against Covid-19. India approved to export the drug to various countries like the US,

Canada, UK, Bolivia, Mauritius etc.

However, in the recent years India has seen some competition from China, which has been able to leverage due its

cost advantage.

Various portfolio combinations of the stocks of Sun Pharmaceuticals Industry Ltd. and UTI gold ETFs are

presented to assess the overall performance of gold ETFs and equity of a company that did well during the pandemic

through the theory of Efficient Frontier.

Since, both the securities performed exceptionally well during the pandemic, majority of the portfolio

combinations are optimal. Point (1.32, 0.25) is the minimum-variance portfolio (90% UTI gold ETFs, 10% Sun Pharma

stocks). But pharma stocks are very valuable, and they must yield higher returns in the future due to the ever-increasing

problems in the world. So, a larger weight of those stocks in the portfolio would yield very positive returns in the future.

According to Bloomberg, a scientist known as the “bat woman”, Shi Zhengli, the deputy director of the Wuhan

Institute of Virology, said that coronavirus is just the tip of the iceberg. Further studies on unknown animal viruses are

needed if the world wants to avoid such infectious outbreaks. Hence, investing in pharma stocks is going to be quite costly

but with steady returns in the future. In fact, if we see the mean return of Sun pharma stocks, it is much more than gold

ETFs with an average daily return of about 0.51 as against 0.22 for gold ETFs during the pandemic. So, a larger proportion

of pharma stocks in a portfolio is only going to benefit an investor in the long run.



Figure 24: Efficient Frontier of Pharma Stocks and Gold ETFs.

Sun Pharma UTI Gold

Mean 0.51 0.22

variance 13.67 1.72

Standard deviation 3.73 1.32

correlation 0.19

2. E-commerce

Very evidently, online shopping has boomed as the movement of people were restricted by the lockdown. Whether it is

fresh vegetables, apparels or toys, everything is just a click away.

Companies like Amazon have reported an increase in consumer demand particularly for household essentials.

Surprisingly, the company has hired an additional 1,75,000 employees to deal with the ever-increasing demand when all

the other sectors are laying-off employees over a working capital shortage.

Mindtree Ltd. (Myntra) – The company did not perform well due to the lockdown which shut the operations

entirely in March. But since then, in the month of May and June the stock prices have started picking up over ease in

restrictions of delivery.

Figure 25: Myntra Stock Prices.


3. Logistics

In a world where a virus is disrupting everyday life, it is important to bring some change in lifestyle to safeguard ourselves

by getting goods delivered to our destinations. Logistics companies are seeing a surge in demand for their delivery



networks as more people order goods online instead of buying them physically in person.

Allcargo Logistics Ltd.

Figure 26: Allcarge Logistics Ltd. Stock Prices.


Performance Post – Pandemic

Stock Market

A vital question that the investors should ask during the ongoing pandemic is, which publiclytraded companies can make it

to the other side? Such investors naturally keep the balance sheet position of these companies in mind while deciding.

Companies with a higher Debt to Equity ratio will get pulled down during such hard times.

The companies that have a sustainable business model or the companies that effectively adapt to the changing

times will certainly cater to the consumer needs and thrive after the pandemic is over.

In such times, one basic rule of investing is especially pertinent. Income approach of firm valuation involves

discounting future cash flows/incomes to a present value at an appropriate interest rate. Basically, the value of a business

today is made up of a long string of profits extending out into the future. So, the true worth of the stocks of a company is

embedded in its share price today.

FMCG

At a time when most of the sectors are performing sub-par, FMCG industry is likely to withstand the pandemic. It is

considered a safe haven as it produces goods that are essential and staple to everyday needs and wants. The earning

visibility is good for companies like HUL (Hindustan Unilever), ITC (Indian Tobacco Company), Britannia, Colgate and

many more.



Figure 27: HUL Financials.

Source: Morningstar

Figure 28: Ratios of HUL.

Source: Morningstar

The Price/Earnings ratio (Current price of share/Earnings per share) of HUL is 67.57 as of 8th June 2020. A high

P/E ratio generally suggests a higher earnings growth expected by the investors whereas a low P/E ratio indicates that the

company is either undervalued or it has performed well compared to its previous trends.

So, the high P/E ratio of 67.57 only indicates that investors are expecting a substantial growth in the earnings of

the company in the future.

Forward P/E ratio (Current price of share/Estimated Future Earnings per share). If the forward P/E ratio is lesser

than the trailing P/E ratio, it essentially indicates that the analysts are expecting an increase in the earnings whereas an

increase in the forward P/E ratio relative to the trailing P/E ratio indicates a reduction in earnings of the company. The

Forward P/E ratio of HUL is 53.48 suggesting that the FMCG company is going to level up its performance in the future. It

indicates that HUL is a valuable company that is expected to withstand the pandemic and increase its earnings even more.

As discussed earlier, companies with low debt component during the pandemic are safe from falling into the drain

of the economic crisis. The Debt/Equity ratio of HUL is 0.10 indicating that it its capital structure carries much more

equity than debt.



Figure 29: Financial Health of HUL.

Source: Morningstar

2. Automobile Sector

Automobile sector is also one of the worst-hit during the crisis. Most of the companies reported zero sales in the month of

April. The estimates for the sector post-pandemic don’t look so well either.

Maruti Suzuki India Ltd. being the market leader recorded a steep decline of 47.4% in sales for the month of

March.

Figure 30: Maruti Suzuki Financials.

Source: Morningstar

Figure 31: Ratios of Maruti Suzuki.

Source: Morningstar

Trailing P/E ratio = 28.01

Forward P/E ratio = 34.13



Forward P/E ratio is higher than the trailing P/E ratio indicating that the future earnings are going to reduce. The

pandemic has brought the automobile sector to a complete standstill, which was already suffering from a slowdown since

2018. The recovery of the industry will take longer than usual, probably 3-4 years to gain momentum.

3. E-commerce

With more people’s lives getting endangered due to the virus, there is a paradigm shift in the preference of people from

physical shopping to more frequent online shopping.

Groceries, electronics and apparels just one click away delivered to our doorsteps has revolutionized the consumer

buying behaviour.

Amazon is one distinguished company that is performing tremendously well during the pandemic and is likely to

emerge even stronger post-pandemic.

Figure 32: Amazon Financials.

Source: Morningstar

Figure 33: Amazon Ratios.

Trailing P/E ratio = 120.48

Forward P/E ratio = 102.04



Not very surprising, Amazon’s growth in earnings looks very positive with a reduction in Forward P/E ratio.

Online retail is an industry that is going to see a tremendous boom even after the pandemic. When the new rules and laws

were put into place, the world was suddenly caught in frenzy. This panic led to making impulse buying. However, as

people adapted to the changing environment and enforced new practices, E-commerce products saw a surge in demand

which is going to continue post-pandemic as well.

Other sectors that are likely to grow after the pandemic are the Telecom sector, Pharmaceuticals and Logistics &

Transportation sector.

Industries that must take steps to prepare for post-lockdown market:

Restaurant and hospitality – The fate of this industry can very well take a positive turn if the companies adapt

their business models to the changes in the environment.

Restaurants, in particular should plan to advertise a more spacious seating to cater to the needs of the customers.

Instead of treating the pandemic as a one-time difficulty, companies should make substantial efforts in designing long-term

strategies to shield themselves from any crisis that unfolds in the future.

Entertainment – Even movie theatres need to develop strategies that reinsure people about the safety of sitting

between large crowds. They may have more luck selling tickets by blocking out seats between groups.

The economic fallout from the covid-19 will dramatically alter consumer behaviour and expectations to which

companies would have to respond by designing self-sustaining long-term strategies.

Companies like Amazon adapted overnight to the surge in demand of essential staple goods during lockdown.

Hence, it is a valuable company to its investors as it was able to withstand the crisis and make gains.

GOLD

The current shock seems to be extremely deflationary. Demand of non-essential goods is plummeting. A major example of

this is the oil industry. The lockdown disrupted the business operations to a large extent and due to the uncertainty of the

market forces going further, the demand for oil has collapsed. There is high unemployment in the world currently with 27

million jobs lost by the youth in the age group of 20-30 in India alone. US recorded a rise in unemployment to 15%. Due to

the high unemployment globally, even after the businesses resume, they will have to resort to discounting the products

aggressively. Even after bearing a marginal loss, the demand is going to shrink in the economy due to unemployment and

less liquidity. The stimulus package that mainly includes loans, liquidity measures and structural reforms but very little

spending by the government, is starkly inadequate to compensate for the steep Rs.17-18 lakh crore loss in the GDP this

fiscal year. The uncertainty that has loomed over the economy will compel investors to fall back upon gold even after the

pandemic. Stock markets will be highly volatile irrespective of the resumption is businesses. Stocks of only a few sectors

like Telecom, Pharmaceuticals and E-commerce will be valuable but also expensive. So small retail investors will still

resort to gold in such uncertain times.

CONCLUSIONS

Summing it up, investing in stock market can give lucrative returns in the longrun since growth of earnings in a company

depend on innovation and adaptation to the dynamic business environment which is an ever-growing process. All these

factors are embedded in the stock price of a particular company. Gold is a reactive commodity that bails investors out in



times of extreme turbulence. However, Covid-19 compelled many small retail investors to sell gold off to generate

liquidity leading to a drastic fall in prices of the commodity. People in India consider gold a symbol of cultural

significance. Majority of them are surprisingly shifting from investing in jewellery and bullion markets to gold ETFs which

is a much more liquid investment. The correlation between the stock markets and gold has been negative historically and it

is safe to say that the trend has continued till this day. Post pandemic markets look positive for some industries like the e-

commerce, pharmaceuticals, telecom and logistics since their earnings show a considerable growth. Whereas, industries

like hospitality, restaurants, entertainment need a revival through redesigning of their business models and strategies to

cater to the changing consumer behaviour.

REFERENCES

1. Benjamin Graham (2017). The Intelligent Investor. New York: Harper Business.

2. Peter A. Abken (1980). The Economics of Gold Price Movements. FRB Richmond Economic Review, Vol. 66.

3. Naliniprava Tripathy (2016). The Study on Dynamic Relationship between Gold Price and Stock Market Price in India.

European Journal of Economics, Finance and Administrative Sciences.

4. Barinder Singh; J.B. Nadda (2013). Gold VS Stock Market: A Comparative Study of Risk and Return. International Journal of

Business Management and Research, Vol. 3 No. 2.

5. Manorama Kanuri, Afifa Jahan. "Effect of Non-Exposure To Sunlight on Vitamin D Status of Free Living

Population."International Journal of Agricultural Science and Research (IJASR) 6. 1, Feb 2016, 299-304

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Jewelers Vanish. Retrieved from

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COMPARATIVE ANALYSIS OF THE PERFORMANCE OF GOLD …

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