The last two years have not been easy for investors in the Indian stock market. Investors who invested in lump sums suffered losses, while those who invested money through SIPs also got very meager returns. Amidst this sluggish environment, S Naren, Executive Director and CIO of ICICI Prudential Mutual Fund, presents the market reality. He says that right now the one-sided pace of American Artificial Intelligence (AI) is overshadowing the whole world. For this reason foreign capital is being pulled out of developing markets like India. But this will not always be the case. As this AI boom by American companies slows down, foreign investors’ eyes will once again focus on India with strong economic growth.

The impact of the American AI boom changed the global landscape

Globally, stock markets are currently trading at very high prices. History is witness to the fact that when markets become more expensive than necessary, they are bound to decline or recover sooner or later. S Naren believes that huge investments from around the world are currently going towards the US AI sector. With this there is tension in many places in the world. This is the reason why foreign investors cannot buy openly in many emerging markets including India. This pressure is not only on India, but foreign money has also flowed out of major markets like Taiwan and Korea. If the momentum of the American AI sector continues like this, the Indian market may remain under pressure for some time yet. But as the momentum stalls there, the trend of foreign investors in India will quickly reverse.

Huge crowd of IPOs, increasing flow into small caps

Currently there is a flood of new IPOs in the stock market. Naren cautioned against this trend, saying that many new IPOs are coming at much higher prices than older and established companies in the market. It seems that there is a bigger boom in IPOs than in the main market. On the other hand, he has expressed similar views on smallcap and midcap stocks. Investors’ money is pouring into these companies, due to which their shares are no longer cheap. While it is also true that many of these companies are growing fast and some are even faster than large cap companies, it can be dangerous to rely solely on expectations at very expensive prices.

Investment opportunities in private bank, insurance sector

In the current environment, Naren is opting for a contrarian investment strategy, ie betting on sectors that are quiet but strong. He says the gap between the sectors that have performed very well and those that have lagged behind has widened. At present there is no obstacle to the growth of private sector banks. Along with this, the insurance sector is also looking attractive. The new regulations that have come out for the insurance sector in recent times will give a big boost to this business in the long run. The experience of the mutual fund industry shows that whenever regulations are made for the benefit of customers, the industry as a whole grows rapidly. In contrast, the growth of companies in the IT and FMCG sectors is still a major challenge.

What should investors do?

Foreign investors’ returns are largely dependent on American interest rates. US government bonds currently offer excellent interest rates of 5.3 to 5.5 percent without any currency risk. Unless there is a global interest rate reduction environment, it will be difficult for foreign institutional investors to repatriate huge sums of money to India. However, Naren believes that US interest rates are now near their highs and that the trend will probably stop after one or two hikes.

What should ordinary investors do in such an environment? Naren’s clear advice is to focus on asset allocation rather than chasing just one sector or just equities. Be sure to include gold in your portfolio, as it provides support in ups and downs. Also, avoid rushing to invest money in foreign markets just by looking at recent returns. When a market has already grown a lot, putting new money into it can prove to be the most risky.