Pickup in consumption, capex key to earnings revival: ICICI Pru MF ED & CIO

Even as the equity market has corrected sharply in the past few months, the valuations in midcaps and smallcaps are concerning, according to SANKARAN NAREN, executive director and chief investment officer of ICICI Prudential Mutual Fund. In an interview with Abhishek Kumar in Mumbai, Naren says investors should take a hybrid approach to navigate global uncertainties. Edited excerpts:

 

How do you see 2025 panning out for equity as well as debt market investors? 

2024 was a tale of two halves. While globally, economies grappled with high inflation, rising debt, and geopolitical tensions, India showed resilience. In 2025, we see this trend continuing. To navigate this landscape, investors should focus on asset allocation strategies and equity schemes with the flexibility to adapt across market capitalisations and sectors.

 

On the fixed-income side, there is a need for a cautious yet strategic approach in light of global and domestic uncertainties. Long-duration bonds may face volatility due to global cues such as policy shifts in the aftermath of the US elections and China’s stimulus measures.

 

Short- to medium-term corporate bonds appear attractive, given the favourable spreads in the yield curve. Active duration management is recommended, and excessive risk-taking is discouraged. Overall, the focus should be on balancing accrual opportunities with prudent risk management.

 

Broadly, India’s economy is expected to grow near its potential, with inflation likely to stay within the Reserve Bank of India’s tolerable range.

 

When do you expect earnings growth to pick up? 

In recent years, there has been robust margin expansion across industries. Now, there is little scope for this to continue. Hence, for earnings growth to pick up — especially in light of the earnings downgrades observed over the past two quarters — strong top-line growth will be critical. This growth hinges on a recovery in actual spending, whether through government expenditure or household consumption.

 

Currently, households are undergoing balance sheet repairs, which is evident across consumer segments. Simultaneously, government finances are in a consolidation phase. Once the government begins allocating more towards capital expenditure and there is a resurgence in household spending, we can expect to see considerable top-line growth. However, the margin expansion story appears to be limited in its scope moving forward.

 

What’s your take on valuations? 

The real concern is high valuations in midcaps and smallcaps and the lack of investor discrimination in stock selection. The exuberance among domestic investors remains high, reflected in the record initial public offering (IPO) activity. However, the quality of IPOs is concerning. Largecaps now appear relatively more attractive due to recent corrections but are not majorly undervalued.

 

Largecaps have outperformed midcaps and smallcaps so far this month. Do you see this reversal in trend sustaining? 

We see potential in megacaps and largecaps. Over the past few years, midcaps and smallcaps have outperformed markedly, primarily because foreign institutional investors (FIIs) have focused their selling on largecaps, and domestic retail investors have shown a strong appetite for midcap and smallcap equities.

 

FIIs have been withdrawing funds, mostly from largecap stocks, due to what I call ‘US exceptionalism’ — a preference for US markets driven by strong growth and the Trump trade. However, this cannot continue indefinitely.

 

India’s macroeconomic fundamentals, including growth, current account deficit, and fiscal deficit, are in excellent shape. Over time, FIIs will likely return to Indian markets, especially in largecap stocks.

 

Which sectors are you bullish on? 

We are bullish on sectors that align with our contrarian approach, focusing on areas that have faced headwinds and are currently undervalued.

 

First, we see opportunities in the rural recovery and fast-moving consumer goods (FMCG) sector, as growing urbanisation is likely to indirectly boost rural consumption. Improved rural incomes and favourable policy tailwinds are expected to drive growth in this space.

 

Second, the infrastructure sector, one of the most structurally robust pillars of India’s economy, presents potential opportunities in select pockets from a valuation perspective.

 

Lastly, high-quality stocks, which have underperformed in recent years, are now attractively valued and present a compelling investment opportunity.

 

Rural consumption has shown signs of recovery after a few subdued years. Since you have launched a rural opportunities fund, do you see this pickup sustaining? 

Our philosophy has always been to launch themes where there’s scepticism. The rural opportunities fund fits into this framework, as rural-related sectors have underperformed over the last decade. This fund focuses on both rural development and consumption themes, covering diverse sectors such as FMCG, cement, insurance, and agrochemical. Government initiatives and upcoming elections provide a structural tailwind for rural growth.

 

You have been advising investors to opt for hybrid funds for nearly two years now. With the market correcting, are pure equity funds a better alternative now? 

We still recommend hybrid funds, especially multi-asset funds, which allow investors to diversify across asset classes like equity, debt, real estate investment trusts, infrastructure investment trusts, gold, and silver. We see hybrid funds as a way to bring debt investments to retail investors.

 

Largecaps, while not cheap, are becoming relatively more attractive due to recent corrections. Systematic investments in largecap or flexicap funds with a largecap bias make sense at this juncture. As always, the key is to align investments with one’s risk profile and financial goals.