Investors should reset return expectations: ICICI Pru AMC's Anand Shah

Donald Trump’s tariff announcements have knocked the wind out of market’s sails in the last few trading sessions. ANAND SHAH, chief investment officer — PMS and AIF Investments at ICICI Prudential Asset Management Company, tells Puneet Wadhwa in an email interview that a staggered, diversified flexicap strategy will allow investors to participate in the markets while mitigating timing risk. Edited excerpts:

 

Will the markets remain subdued for most of 2025 due to US tariffs and their impact?

 

The tariff measures announced have the potential to weaken global trade and consumption, putting pressure on both margins and volumes for export-oriented manufacturers. This could lead to slower growth and higher inflation, particularly if countries implement retaliatory tariff barriers to protect domestic markets.

 

However, governments in Europe, China, and, to some extent, India may counteract this by introducing fiscal stimulus to support local demand, potentially offsetting some of the global drag. In this context, businesses focused on domestic markets are likely to benefit the most.

 

From a broader market perspective, we believe the phase of profitability normalisation is largely behind us. Going forward, growth is likely to mirror nominal gross domestic product (GDP) — around 10-11 percent annually. With valuations already reflecting high expectations from previous years, investors should reset their return expectations accordingly.

 

Moving forward, stock selection will become increasingly crucial as both beta and alpha stabilise, and sustained (portfolio) performance will hinge on solid bottom-up research and disciplined allocation.

 

Have market valuations become appealing enough to start buying?

 

The market’s reaction to the US tariffs may vary across sectors. Largecap indices seem to offer better valuation comfort; however, mid and smallcap indices —especially the former — are still trading at a premium to their historical valuations, making them less attractive on a relative risk/reward basis.

 

The key is to focus on bottom-up stock selection rather than a broad-based ‘buy’ signal based solely on valuations. There are select pockets of the market that present opportunities; our investing template remains grounded in identifying fundamentally strong businesses with long-term earnings growth potential and improving capital efficiency.

 

What’s your expectation for 2024-25 (FY25) January-March quarter (Q4) earnings?

 

Earnings are likely to be driven by capital expenditure (capex)-oriented sectors, as the revival in capex — both from the government and private sector — is supported by robust balance sheets and enhanced operational efficiencies. In contrast, we expect consumption-led sectors to report weaker earnings growth.

 

Many analysts are forecasting modest growth for Q4FY25. In the long term, earnings for 2025-26 (FY26) should show improvement, supported by increased government spending and capex. Structurally, we believe India Inc can sustain an earnings growth rate of 10-12 per cent in line with nominal GDP growth.

 

As a fund manager, what have been your biggest hits and misses of the financial year?

 

This year, our proactive reallocation strategy worked well. We reduced exposure to mid and smallcaps and selectively trimmed positions in certain largecap companies in the banking, telecommunications, and industrial sectors. These moves have positively contributed to our performance.

 

On the other hand, our call on metals — where we anticipated a decline in Chinese exports — did not unfold as expected. Looking ahead to FY26, we plan to maintain this disciplined, bottom-up approach, continuously evaluating sector fundamentals and valuations to adjust our asset allocation accordingly.

 

What asset allocation strategy would you recommend to a first-time investor at the current juncture?

 

Although the macroeconomic environment remains relatively stable, growth has been challenging in recent quarters. Increased government spending, monetary easing, and a revival in private capex and consumption should improve the economy and growth outlook for FY26.

 

Corporate balance sheets have strengthened, and banks have seen considerable improvements in asset quality and capital adequacy. However, valuations —particularly in mid and smallcaps — have been a concern. These stocks have corrected significantly from their peaks, and now, valuations in certain market segments have become more reasonable, presenting a potential buying opportunity.

 

With the expectation that fiscal spending and monetary easing will gradually stimulate growth, a staggered, diversified flexicap strategy will allow investors to engage with the markets while reducing timing risk.

 

How are you approaching the consumption theme in light of a potentially harsh summer? 

We remain cautious on the traditional consumption space at present. The sector is fragmented, and while companies enjoy higher margins, penetration levels are already high, which may result in slower growth. High valuations further complicate this challenge. We are being selective, focusing on a few robust companies within consumption services that exhibit sustainable growth potential. Sectors like aviation, leisure, hospitality, travel, and retail offer more value and growth than traditional consumption stocks.