It will be tougher to generate market-beating returns over medium term, says ICICI Pru AMC's Shah

Mint

2 days ago

The Indian market is entering a phase of subdued returns over the medium term as it will be tougher to generate alpha or excess returns over an underlying benchmark, according to Anand Shah of ICICI Prudential Asset Management Co.
'I think the biggest event (ahead) will be the end of the 90-day tariff pause— that remains the key event," said Shah, chief investment officer-portfolio management services and alternative investment funds at India's second-largest asset manager.
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The real challenge for equities is sentiment and behaviour, he said. While corporates and banks remain cautious, markets have priced in overly optimistic global outcomes—risking disappointment, as seen since September 2024, he said.
Edited excerpts:
How do you interpret the current market volatility? There is noticeable uncertainty surrounding Trump's tariff policies.
In the short term, the market will always be volatile on either side. And with every result, you will have a different reaction. The more important aspect is the medium-term.
If you look at the period from 2010 to 2020, the GDP growth rate was normal—around 11 to 12% CAGR (compound annual growth rate). However, India Inc. was suffering. So, India Inc.'s profitability from 2010 to 2020 was very low—in the single digits, around 2 to 3% CAGR.
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If I break that down further, the NSE 500 profits-to-GDP fell from 4.7% in 2010 to almost 2.7% in 2018–19, and then to 2% in 2020, which was a Covid year. But that sharp drop in profits-to-GDP meant GDP grew, but profits did not.
If I break that down even more, that fall was sustained by the ₹60,000 crore capital-intensive businesses between 2015 and 2019 across about 19 sectors. The profit growth we saw from corporate India in 2020 to 2024, and likely up to March 2025, has been quite strong. And that, too, was led by the cyclical, capital-intensive businesses and the banks.
Whereas the defensive sectors—FMCG (fast-moving consumer goods), IT, pharma—were actually beneficiaries of lower commodity prices. They were doing well all the way up to 2020, and even into 2021. But from 2021 till date, they have been big underperformers. They had become very expensive by the end of 2021.
Another segment of the market—more cyclical and value-oriented—started to perform better. So that sort of reversal is happening in the market in the medium term.
For us, if you see the last four years—2020 to 2024—profit growth has been around 35% CAGR for India. This year also looks strong. So over five years, it should be in the 30%+ CAGR range, which is much higher than what we saw in the previous decade.
What about the medium-term expectation?
For the next few years, which is the medium term, I believe it will be more subdued. So while we had a 20–25% earnings growth rate in recent years—which benefited the market, plus added alpha—that was because if you were in cyclical, capital-intensive, corporate banks, PSUs, you did extremely well compared to the market.
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If you were in defence, you were in base capital-intensive sectors—everything was at 50%, 60%, 70% discount to book value. You had tons of value, and India was trading below the book value in many areas.
So that part of the story is also, I won't say completely done, but has played out to a large extent. And to that extent, going forward, we should expect the earnings growth rate to again normalize, around the nominal growth rate of 10–11%, maybe a bit lesser.
Alpha-rich opportunities will also be fewer and far between. It will be tougher to generate alpha going forward. So I think we are entering a new phase of the market—still positive, but the returns will be far more subdued than what you have seen in the last few years.
What kind of returns do you expect from Nifty 50?
Over the 15-year period from 2010 to 2025, GDP growth has averaged around 11.3%, with NSE 500 earnings growing at about 11.6%. While stock performance has been notably strong in the last four years, over the full period, NSE 500 returns have broadly tracked earnings, averaging close to 11%. So, I think the market's long-term growth links closely to nominal GDP and profit growth. EPS (earnings per share) growth is key, and I expect it to be around 11 to 12% at most, which will be reflected in the broader market.
From here, stock-picking becomes crucial. You'll need to focus on select sectors and avoid others to generate alpha.
Does that imply investors should consider increasing their exposure to fixed income and precious metals?
Investors should consider increasing exposure to fixed income and precious metals for a balanced portfolio. Over the long term, diversification remains essential—balancing equities, fixed income and alternatives. Even if the market delivers 10–12% compounding returns going forward, that is still better than most other asset classes. So, maintain the right equity exposure based on your goals and risk profile. If you are significantly overweight on equities, it may be a good time to review your portfolio and consider reducing your exposure.
How do you balance between large-, mid- and small-cap segments, especially given the recent sharp recovery and the broader market correction of 20–30%? With alpha-generating opportunities becoming limited, where do you see the potential now—are large-caps set to lead, or do mid- and small-caps still offer better prospects?
We were significantly overweight on mid- and small-caps starting in 2022, but we reduced our exposure shortly after. Post-FY24, mid- and small-caps saw a sharp correction, which made those segments relatively less risky. It had been an unprecedented rally, with almost everything doing well.
Looking at the data from late February to early April—when the market bottomed—that period presented a good opportunity to increase our exposure to small-caps. On the way down, we selectively added to our mid- and small-cap positions, remaining stock-specific in our approach.
Mid-caps, as a basket, still look expensive, while small-caps and large-caps appear more reasonably valued. That said, despite high valuations in certain areas, a few select stocks stood out and were added to our portfolio.
What are the factors that we need to watch out for?
I think the biggest event will be the end of the 90-day tariff pause—that remains the key event. India has signed a UK FTA (free-trade agreement), and we are also looking forward to a potential FTA with the US.
Relatively speaking, some developments are already priced in or at least partially expected—for example, the rate cuts anticipated from the Reserve Bank of India (RBI). That's the third major factor: policy direction and potential rate cuts.
Another important area is commodity prices. You cannot ignore crude prices, especially given our import dependence and energy needs. With crude and other commodities coming off (peaks), that is clearly a positive. We are closely watching developments in Russia, Israel, Iran and the US—all of which are influencing global prices.
And last, but not least, government spending is helping drive recovery, and a large part of the slowdown in the domestic economy could be attributed to the cautious fiscal stance around elections.
What about private capex?
Private capex has started picking up, but not in a significant way. While cash flows are improving and interest rates are easing, companies remain cautious. We are still far from the scale seen between 2004 and 2010, when private investment surged—that kind of momentum is missing.
Multiple uncertainties have contributed: Covid, the Russia-Ukraine conflict, India's elections, China's slowdown and uncertainty around US policy. All of this is making the private sector hesitant to commit large capital.
China plays a key role here. Its excess capacity and export redirection to countries like India are putting pressure on domestic margins, creating further investment hesitation. However, in the medium term, this could present an opportunity. As global supply chains diversify, countries like Vietnam, Bangladesh, Mexico—and potentially India—stand to benefit.
In sectors like textiles, India isn't uncompetitive, but tariff differentials with countries like Bangladesh and Vietnam are a disadvantage. Trade deals like the UK FTA could help address this and spur investment.
So while near-term caution remains, some of these headwinds could turn into tailwinds for private capex if global and policy dynamics shift in our favour.
Given the recent concerns and the noticeable flight of capital from the US, I wanted to get your perspective on how India is positioned within the broader global investment landscape. From the foreign portfolio investor (FPI) inflow point of view, do you see capital moving more aggressively toward China, or do you think the shift will be more balanced — perhaps favouring both India and China equally?
Despite the US running a large deficit, the dollar has continued to remain strong. If that were to reverse—if the currency were to weaken from here—financial investors holding US assets, especially equities, could start diversifying out.
We're already seeing signs of that. European equities have seen some flows, and in India, while flows are mixed, some have turned positive, with increased interest in Indian equities.
China is a more complex story—there's direct uncertainty, and it's hard to say how that will play out. But yes, parts of the markets, like Taiwan, have benefited, and the Taiwanese dollar has appreciated significantly. European currencies like the euro and Germany's economy are also seeing some support. Latin American currencies, too, to some extent, are appreciating, making financial assets there more attractive.
If this shift continues, it could support countries like India, helping both the government and RBI stimulate the economy more effectively.
Of course, all of this is speculative for now—we're watching closely. The biggest investors remain in US equity and bond markets, and how they react, especially in terms of carry trade positions, will be key.
Which sectors are you overweight and underweight on?
We continue to be overweight on manufacturing and still like metals. We are also positive on allied businesses like some corporate banks, where we remain overweight.
When it comes to the consumption space, we believe it is evolving beyond just products. The data shows that while premium consumption is steady, especially among HNIs (high-net-worth Indians), there is also an emerging class moving up the pyramid. Traditional consumption—like FMCG products such as shampoos and packaged goods—seems to be saturating.
Today, discretionary spending is shifting more toward services: financial services, healthcare, travel and organized retail. Even the way people purchase goods is becoming more experience- and status-driven.
One thing that you think investors are probably underestimating?
I think the biggest risk today is in investor expectations. People have gotten used to a market that hasn't seen any major correction—not even a 10% drop—from June 2022 to September 2024. That's made investors complacent, and that's a bigger risk than any real economic concern.
From a macro perspective, India is fine. Economic conditions are stable, the currency is holding up, forex reserves are healthy, and current account deficits are at manageable levels. India remains one of the fastest-growing large economies and the largest democracy, so there are no major structural concerns there.
The real challenge for equity markets is sentiment and behaviour. Corporates are being cautious, not overspending, and private capex is still conservative. Banks are also lending carefully, especially for capex-heavy projects. In contrast, market participants have priced in a more optimistic global scenario than what may actually play out—and that can lead to disappointments, as we've seen since September 2024.
Minor corrections are not just likely, but healthy. Valuations had become stretched, especially for retail-heavy stocks. Flows have slowed, and if you look at cross-sector investment activity, it has moderated—which is the right thing.
The rally of the past four to five years was exceptional, but that can't continue at the same pace.