Environment

How a Covid Vaccine Discovery can Affect Various Asset Classes

by Satakshi-Gauri
Aug 26, 2020 13:14

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The world is eagerly waiting for the discovery of a COVID-19 vaccine in the hope that normalcy will return soon after. While experts say that it will definitely boost the economy, the impact may not be positive for all investment asset classes. For instance, gold, which has had a dream run this year, may correct, while equity might see a rally in the short term as it may have already factored in the vaccine discovery event. Further, there may not be room for further cuts in interest rates, which are already at historic lows. This may impact investments such as debt funds, which perform well when interest rates plummet. Here’s how various asset classes are likely to react and what you should do to be prepared. Experts believe that gold prices may correct post after a vaccine is approved. “As the uncertainty over the pandemic has supported the price of gold, the discovery of vaccine may result in a correction of gold prices. Gold had a substantial run over the past one year and as no asset class can move in a straight line forever, gold prices are expected to correct as soon as an approved vaccine is discovered," said Chirag Mehta, senior fund manager, alternative investments, Quantum Mutual Fund.

Gold prices closed at an all-time high of ₹55,922 per 10gram on 7 August. The yellow metal has already rallied 34% this year, as on 20 August, as its demand has increased due to the uncertainty over the impact of the COVID-19 pandemic on the economy and the ongoing geopolitical tensions between the US and China. However, we saw gold fall sharply as the news of Russia discovering a vaccine came in. It fell over 6% and close to ₹3,500 per 10gm in a matter of five days. However, the metal has gained some footing since then as gold futures are expiring on 5 October 2020 and is currently hovering around ₹53,300 per 10gm. Mehta believes that the correction in gold prices after the discovery of the vaccine may be temporary and may not be sharp as economies across the globe have been under stress even before COVID-19 set in.

“In order to support economic growth, countries will continue to hold interest rates low. Plus, the printing of currencies, especially the US dollar, to fund economic stimulus will support gold prices over the next two-three years," said Mehta. Experts believe that the recent correction in gold prices has more to do with the speed of the rise. “The rally in gold prices was so steep it has overshot its fundamentals as of now. Investors took some money off the table leading to a steep correction," said Kishore Narne, associate director and head, commodities and currencies, Motilal Oswal Financial Services Ltd. The brokerage remains bullish on gold with targets of close to $2,450 by the end of 2021. In rupee terms, this could be ₹65,000-68,000 per 10gm.