Those choosing the systematic investment plan (SIP) route should avoid pumping money into overvalued small- and mid-cap stocks and focus instead on large-cap, flexi-cap and hybrid funds, said S. Naren, executive director and chief investment officer at ICICI Prudential Asset Management Company Ltd, which manages assets worth over ₹9.18 trillion.
Edited excerpts:
You are known to outperform your peers when the markets are under stress. How do you stay on top of the current financial landscape punctuated by global headwinds and slowing earnings growth back home?
As of February 2025, the goal for most investors should be to protect the money they’ve made over the last five years. Most investors who invested in equities or real estate during this period have likely earned good returns. However, if you go back to 2020, the goal was to make money because, from 2013 to 2020, returns in both equities and real estate were minimal.
Currently, mid- and small-cap stocks are highly overvalued, while large-caps are relatively more reasonable. FIIs have sold over ₹1 trillion of large-caps in the last few months, creating this valuation disparity. Small- and mid-caps have rarely been as expensive as they are today, except perhaps in 2007. Given the current risks, we recommend a diversified asset allocation strategy that includes equities, debt, real estate, global stocks, and gold/silver. The best equity strategy today is not to put all your money into equities, especially mid- and small-cap stocks. SME IPOs and unlisted stocks are even more risky.
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Asset allocation is crucial during volatile times, and such an approach helps manage risk while capturing long-term growth.
What would you do as a SIP investor?
SIPs (systematic investment plans) should be directed toward cheaper asset classes. Today, large-caps, flexi-caps, and hybrid funds offer better value compared to mid- and small-caps. We recommend asset allocation as a core strategy, focusing on large-cap, flexi-cap, and hybrid funds for SIPs and avoiding overvalued segments like small caps and mid-caps.
Which sectors do you prefer at this point? What’s your take on consumption-driven stories and rate-sensitives like auto and realty?
We prefer sectors like banking, telecom, oil and gas, and insurance. We expect consumption-driven sectors to do well, but many of them are currently trading at high valuations. Even if the fundamentals remain strong, much of the upside may already be priced into current stock prices. The long-term outlook for sectors like auto and realty is positive, but current valuations are not cheap. Investors should remain cautious as much of the expected growth may already be reflected in stock prices.
The biggest challenge for any monetary policy in any market is the uncertainty around the US interest rates and monetary policy.
The MPC provided the much-needed rate cut but kept the stance intact. How should equity markets view this rate-cutting cycle?
The biggest challenge for any monetary policy in any market is the uncertainty around the US interest rates and monetary policy. For global rates to decline, long-term US yields must come down. If this happens, and if the US dollar weakens, our policymakers will have room to adopt a more dovish policy stance than they currently have.
Is this a shallow rate-cut cycle or do you see more of it?
We don’t expect too many rate cuts from here unless the US also starts reducing rates. If US policy turns more dovish, we may see further cuts; otherwise, the scope for additional rate reductions is limited.
Viewed along with the budget, which gave a nil tax to income earners up to ₹12.75 lakh per annum, will this move the needle in terms of consumption and private capex?
Private capex is typically a function of increased capacity utilization. If consumption improves and leads to higher capacity utilization, private investments will follow automatically.
Post the MPC, bank net interest margins or NIMs will be under pressure because only those loans linked to repo will be repriced, but deposit rates are stickier. How do you view banking/NBFC stocks now?
Banking stocks are currently trading at attractive valuations relative to the market. We believe they won’t be significantly affected by the drop in the repo rate. The bond books of banks may see a gradual positive impact due to a slow decline in yields over time. Therefore, we don’t expect the monetary policy to have any major negative impact on banks.
There is also the fact of mid- and small-cap companies raising equity rather than opting for bank loans and the risk of unsecured lending. How do bank assets grow and stocks perform when on P/B (price to book) basis, they are way costlier than global peers?
Banks with strong balance sheets could benefit as some mid- and small-cap companies may choose to raise equity instead of relying on bank loans. Although banks are cautious with unsecured loans, their lower-cost base compared to American peers should help sustain growth. Unlike mature banking systems in developed markets with limited growth potential, India’s banking system is well-positioned for long-term growth. Risks such as a rise in NPAs remain, but they don’t appear significant at present.
The retail investor is giving FPIs an exit route. Do you see this as a risk if the present correction extends?
If FPI selling continues for an extended period, it could pose a risk. However, we believe that at some point, the strength of the US dollar and global conditions will reverse, mitigating this risk.
Do you see any short-term blip in new SIP openings?
We believe that the Indian market is a structurally long-term growth story. While short-term investor behaviour is uncertain, the long-term outlook remains positive.
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