Naren also discussed his broader market outlook for 2025, highlighting equities and other asset classes he considers promising for the year ahead.
Below is the verbatim transcript of the interview.
Q: This year the Nifty, at one point, we thought we would run away with the 20% gain. But okay, at 13.5%-14% this year is a fairly decent one. Smallcaps were all the abuse thrown at them and fears that we had is still ending the year with close to 30%. How does 2025 at the outset look to you?
A: There were three years when we always used to say, consumers look overvalued and it will underperform, and it kept outperforming. For the last two years, we are the butt of jokes. People saying you are always cautious on mid-caps and small caps, and small caps and mid-caps keep outperforming. So, you have a situation where the only seller in the market is the foreign institutional investor (FII) and FIIs keep selling only large caps. So, the small and midcaps are the biggest outperformers in the market from 2021.
So, the small caps and midcaps have become much more overvalued, but they never fall because the FIIs are only selling large caps and that has been the situation from 2021 onwards, that we are the butt of jokes in this entire segment that at all points of time ICICI Prudential is cautious on mid-caps and small caps, but midcaps and small caps always outperform large caps.
Q: How will 2025 pan out in terms of this US exceptionalism, which is what drew away all the FII money, or much of it? Does this exceptionalism continue? After all, US growth rates are good and the Trump trade has worked for that country. Do you think 2025 also will continue to see FII drawdowns?
A: This exceptionalism cannot continue forever because all said and done, India’s growth rate is much higher than the US and it will continue to be because structurally India’s growth is much better than that of the US. So, I do not think it can continue forever. Can it continue for a few quarters? Yes, it’s possible, but it won’t last for a long period because India’s macro is in very good shape. If you look at current account deficit or fiscal deficit or inflation, and compare where we are at this point, we are in very good shape. So, I don’t think it can go on forever.
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So, at some point in time, FIIs are likely to come back into the country and that too into large caps, but the real problem at this point is that the domestic investor sees equity as a riskless asset and has been investing, if you look at the number of loss-making companies that domestic investor is comfortable investing into, whether that at some point of time will change is the question that we do not have an answer to and at that point of time there can be a problem because domestic investors are not looking at valuation. The foreign investor is saying, I want my money back in the US at any cost, in dollars. So, they have been digging out money. But the domestic investor is possibly not risk averse at all, and for the last 10 years, we have not had a down year. So, people perceive that equities are a riskless asset, which it is not.
Q: There is also one level of scepticism with the domestic market, especially after the recent numbers. We first thought the July-September 2024 (Q2FY25) earnings were bad because of the base effect, and margins and there were a whole lot of other reasons. Then we got the shock of the Q2 gross domestic product (GDP) number going down, and the Chief Economic Advisor (CEA) also said that if you guys do not pay enough, then there will not be enough consumption. Do you worry about the consumption aspect of India, and will that cast a shadow on the way you pick stocks?
A: We do not worry so much about all these things because, at the end of the day, the growth is very much there. Look at some of the areas; look at airline passenger growth or total tariffs or something like that, you can look at those areas and be very positive on India. Even if you look at two-wheeler growth this year, it has been very good at this point. So, I do not think we are worried about growth. We have been worried about valuations and not growth and fundamentals, and the fact that people are not discriminating. So, if you look at it, that is the bigger challenge we have been worried about.
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We have not been worried about growth at this point, per se, and how all these numbers are calculated is also a challenge. So, if you look at the last quarter’s numbers; I mean, some of the oil marketing companies moved from very different numbers one year back to where it is at this point that also reflects the earnings.
Look at banking earnings, banking is one of the most important indicators of the economy. I think those numbers were very good. So aren’t banking earnings more important than oil marketing companies? That’s how we look at it. So, I don’t think we are worried about growth or something like that. We have always been worried about valuations. We are worried about the fact that investor risk appetite domestically is very high, and globally, for India, is not high, it is very low.
Q: Let’s discuss the domestic themes in that case. You came up with some examples. If you look at airlines and if you look at hotels, Indian consumption looks very good. So, would discretionary be a good theme? And would FMCG or any kind of mass consumption not be your favourites?
A: Basically, we are, by nature, contrarian. So, what we do is we try to see where people are not so positive. So, by nature, we like areas like rural or quality stocks or things like that where things have been negative for quite some time and therefore there is opportunity for the future. Whereas we are more negative on things which have done very well.
If you look at the hotel stocks at this point, if you look at the five-year compound annual growth rate (CAGR) in hotel stocks, it is outstanding from 2020 to 2024. So, by nature, we believe that some of the very good news gets priced into equities, but that is the nature of the equity market. Whereas if you look at some of the rural areas, stocks like fast-moving consumer goods (FMCG) and all that; we used to be very negative on FMCG, but over the next few years, maybe FMCG is kind of an area to invest in and cement could be another area to invest in because these are the areas like midcap cement or FMCG and those kind of sectors could be the areas where you should invest in because the maximum prism areas are always the best areas to invest in.
In 2020, it used to be metals, telecom, public sector undertaking (PSU) etc. Today it could be something else at this point.
Q: What should be the other themes that you will look at? Will you look at electronic manufacturing services (EMS)? Will you look at e-commerce? Train our eyes to other such sectors.
A: You are telling me all the areas. EMS is the other area where the PE itself is more than ₹200-300. For example, in 2020 people used to tell us, that quality is the area which is most favoured because they will never go out of fashion. So, for the last four years, quality has been the area which has just done the worst. So, we like quality, we like rural, we like all these themes which have done badly and where we think from here on the outlook would be good.
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In 2020 we used to like all the opposite of these things. We used to like PSUs, we used to like urban consumption. We used to like these sectors. So, I would say that finally, cycles play out. There are cycles which are at the bottom, there are cycles which are at the top. We have to be careful in cycles which are at the top. If you look at EMS, today it is just like 2007 infra. If someone signs an agreement today for the next 10 years profits are already priced into the stock on that day – that is the way the sector behaves and we have seen from our experience of 2007 infra, that there are a lot of things which go wrong five years after the contract is signed.
Q: Tell us about asset allocation. I mean, would you take a good look at, say, corporate bonds, fixed income, gold? What would be your asset allocation strategy?
A: We are fond of multi-asset because it gives you opportunities in real estate investment trusts (REITs). We have been very positive on REITs. We like the entire office space, for example. We like corporate bonds, for example, but the best way to do it is through hybrid funds at this point. So, over the last few years, we have been trying our best to get money into hybrid funds because people are just not willing to invest in debt funds. So, we thought, at least the way to get money in debt is through investing in hybrid funds.
A particular area is multi-asset because that is the way you can get investments, even in REITs, Infrastructure Investment Trusts (InvITs), exchange-traded commodities, and derivatives. For example, in gold and silver; you would have never got money easily, but through the multi-asset route we managed to get a lot of money invested in gold and silver in our funds, and luckily, thanks to the good work done by the mutual fund distributors and investors, we managed to make our multi-asset fund a very large fund. Thanks to the work done by them.
For the entire interview, watch the accompanying video
