ICICI Pru AMC’s S Naren on contrarian investing, AI risks and navigating a volatile market

Summary

In Mint Money Guru, S Naren discusses oil, US rates, AI risks and small-cap valuations, and explains why contrarian investing can extend beyond value stocks as he launches a contra fund.

With stock markets going through a difficult phase amid ongoing geopolitical tensions, rising crude oil prices and the 10-year US Treasury yield at multi-year highs, S Naren, executive director and chief investment officer of ICICI Prudential Asset Management Company, shares his market outlook, where he sees opportunities and why his fund house is launching a contrarian fund.

What is your outlook for Indian markets given high US interest rates, elevated oil prices, high US 10-year Treasury yields and geopolitical tensions?

Our view has been that near-term returns could happen if oil prices decline sharply. With oil at $107-108, coupled with high transportation costs, it remains a significant headwind for Indian markets in the near term. If oil prices decline, markets could recover.

Our broader view remains focused on asset allocation, unconstrained investing and moderate returns. This view is driven by several factors such as high US interest rates, geopolitical tensions and global equity market valuations remaining elevated.

Our broader view remains focused on asset allocation, unconstrained investing and moderate returns.

Which sectors do you favour, and where are you concerned?

Anything connected to US AI, anywhere in the world, is not cheap and is priced for continuous growth. If those areas face challenges to their growth assumptions, there could be significant derating.

Following the recent sharp fall in insurance stocks, insurance is a sector worth considering. We have also been reasonably positive on banking, as it is one of the few sectors that remains relatively inexpensive and has a favourable near- to medium-term outlook. The only constraint with banking is that the investment industry already has significant exposure to the sector.

How are you viewing the Indian IT sector in light of AI?

Initially, we did not realise that the sector was even partially disrupted. We have now concluded that AI has indeed disrupted the sector to some extent. Valuations are cheap, so it may make sense to have some exposure, but it is difficult to take an aggressive position at this point. We are not significantly negative on the sector, but we are unsure whether to take a positive view and, if so, to what extent.

How is a contrarian strategy different from a value fund? Can it add differentiation for investors who already own a value fund?