The market is irrational right now: ICICI Prudential AMC's Anish Tawakley

Tawakley talks about his hits and misses in 2024 as a fund manager, and the opportunities and key risks for the markets in the year ahead

With the calendar year (CY) 2024 drawing to a close, all eyes are now on Donald Trump’s inauguration in January 2025 and what it will bring to the global financial markets. ANISH TAWAKLEY, co-chief investment officer for equity at ICICI Prudential Asset Management Company, spoke with Puneet Wadhwa about his hits and misses in 2024 as a fund manager, and the opportunities and key risks for the markets in the year ahead. Edited excerpts:

 

What have been your hits and misses in CY 2024 as a fund manager? Which investment strategies worked for you, and which ones didn’t?

 

We did well in the banking sector, where we had very low weights at the start of the year and then increased our exposure during the year. We also did well to avoid the fast-moving consumer goods sector. Holding cash instead of investing in small and midcap stocks has hurt us.

 

The market is irrational right now, and you can’t outperform by remaining rational in an irrational market. Hence, we are not chasing returns but focusing on capital protection. We hope to deploy this cash when valuations become more favourable. Being underweight on information technology didn’t work in our favour.

 

What are the key concerns for the Indian and global equity markets as they approach 2025?

 

For global markets, the biggest risk lies in a spike in US bond yields. At this stage of the economic cycle, with the economy already close to full employment, tax cuts would be inappropriate as they would lead to overheating. The bond markets showed signs of nervousness in October and early November. These concerns could resurface if US fiscal policy is not disciplined.

 

For Indian markets, the biggest issue is that valuations in the small and midcap space remain elevated. A lot of new, inexperienced investors are being drawn into these segments of the market. Moreover, many companies with relatively weak business models — and some with questionable governance histories — are taking advantage of these conditions to sell stock. There could be long periods of low, or even negative, returns after such a heady period in the small and midcap space.

 

Do you consider the recent fall a normal correction within a larger bull market, or are we headed towards bear territory?

 

Let me put this in the context of our economic outlook. We expect the economy to regain momentum after the soft patch in the first half of the year. This should happen as government spending picks up pace and, if necessary, the Reserve Bank of India eases monetary policy.

 

In this context, I would say the correction in the largecap space is normal. Valuations are not cheap, and near-term returns are likely to be modest, with the downside appearing limited.

 

In the small and midcap space, we are more concerned. Many companies with weak business models are being valued as gems. Investors need to be very cautious in this space.

 

How do you see foreign and domestic flows playing out in the Indian context?

 

I don’t try to predict flows for three reasons. First, I haven’t found a reliable model for predicting them. Second, predicting flows as an investment strategy amounts to relying on the greater fool theory. Third, even with strong inflows, markets can flatline or correct. This can happen because supply from promoters and private equity can overwhelm the inflows. This is what has happened recently — promoters and private equity have taken advantage of the inflows to offload stocks at high valuations. Rather than predicting flows, it is better to assess whether the actual flows are creating valuation distortions that can be exploited.

 

Will CY 2025 belong to developed markets?

 

Both developed and emerging markets are heterogeneous, so I don’t think it’s appropriate to group all developed and emerging markets into single categories. Based on our contrarian approach and valuations, China is looking attractive, while the US appears expensive. China is shaping up to be a classic value play. It’s cheap, but investors need to be patient. With value opportunities, it’s difficult to predict when the turnaround will happen.

 

To what extent are global financial markets pricing in the Trump presidency, especially on the tariff front?

 

It is impossible for the markets to fully price in the Trump presidency, which, in our opinion, is marked by several conflicting priorities. Markets will eventually react to what policies are actually implemented, and these may differ from the ones that have been discussed.