Near-term return could be subdued due to high valuations: Sankaran Naren of ICICI Prudential

Sankaran Naren, Chief Investment Officer and Executive Director at ICICI Prudential Asset Management Company, was surprised by the resilience of mid- and small-cap stocks in 2024.

"By the end of 2024, mid- and small-cap stocks were even more overvalued, yet they never experienced a significant correction during the period from 2022 to 2024," Naren remarked during the fund house's market outlook presentation for 2025 on Monday.

Despite these stocks' strong performance, Naren remains wary, highlighting that they are riskier and more overvalued than large-cap stocks.

In 2024, the BSE Sensex rose 8.1 per cent, in stark contrast to the BSE Midcap and BSE Smallcap indices, which posted gains of 25.84 per cent and 29.04 per cent, respectively.

Naren attributed the large-cap's underperformance to foreign capital flight, with domestic investors showing stronger support for mid- and small-cap stocks.

While confident in India's long-term growth, Naren signalled that the near-term return environment could be subdued due to high valuations. "We believe local investor exuberance remains, but we will become more positive once this exuberance subsides," he said.

'Dangerous' IPOs and optimism on hybrid funds

Naren also raised concerns about the quality of SME IPOs, calling them "the most dangerous" part of the current market.

However, Naren expressed optimism about hybrid funds and asset allocation strategies, particularly focusing on quality stocks—a theme that has underperformed in recent years.

He also said that ICICI Prudential AMC is placing its bets on the rural economy due to the government's increasing focus there. As part of this strategy, the fund house launched the ICICI Prudential Rural Opportunities Fund.

Also read: Why did Motilal Oswal, Invesco and Bandhan funds outperform in 2024?