S Naren of ICICI Prudential AMC explains the three factors plaguing markets and what should investors do

Indian markets are currently facing headwinds from elevated crude prices, capital flight to the US artificial intelligence theme, and a massive supply of equity paper, according to S Naren, Executive Director and Chief Investment Officer at ICICI Prudential AMC.

Naren made these remarks in an interaction with CNBC-TV18 on Tuesday, September 29.

The recent surge in oil prices and rising US 10-year treasury yields have steadily increased the risk-free rate, drawing foreign flows away from emerging markets. The US 10-year bond yield is at the highest level since 2007, while the 30-year bond yield is at the highest since 2004, now nearing levels of 5.6%.

Domestically, the relentless pace of initial public offerings, block deals, and offers for sale is absorbing mutual fund inflows. Indian IPOs have already raised more than ₹1 lakh crore so far across 80-plus issuances in 2026.

"There isn't substantial surplus money as we speak because of the quantum of fundraising that is happening at this point of time," Naren explained, adding that equity issuance will continue as long as companies can secure high valuations. While the US artificial intelligence trade and equity supply are medium-term challenges, a meaningful drop in oil prices is the only factor that could trigger an overnight market recovery.

Given these conditions, Naren strongly advocated for asset allocation over pure equity investing. He cautioned against the prevailing belief that equities will consistently deliver 15-20% annual returns, urging investors to consider debt, balanced advantage, and multi-asset funds.

Assessing market segments, Naren mentioned that large caps currently offer reasonable valuations alongside moderate growth. Mid caps remain costly despite historical growth, leaving a lower margin of safety, while small caps present a wide variety of opportunities but show no signs of risk aversion.

Financials present a strong outlook for the next two years with reasonable valuations, though high institutional ownership remains a hurdle, the ICICI Prudential AMC CIO said, adding that the information technology sector is viewed as "partially disrupted" by artificial intelligence, placing it somewhere in the middle of the risk spectrum.

On gold, Naren maintains a "neutral" stance on it as a standalone investment, though it remains justified as part of a broader asset allocation strategy.

Identifying specific opportunities, Naren pointed to insurance as a prime contrarian bet. The space has underperformed for an extended period and is currently out of favour with investors. Shares of PB Fintech, Turtlemint have declined over 40% each in just four trading sessions since the IRDAI draft guidelines on the distribution norms were released.

"Anything contrarian, whenever something like that happens, there is a level of over reaction and therefore gives an opportunity for long term investment," he noted.

To capitalise on such out-of-favour themes, ICICI Prudential is launching a Contra fund guided by a proprietary "CLOUD" framework. The strategy focuses on calculating research, avoiding highly leveraged or over-owned companies, targeting higher upside, and remaining cautious of industry disruption.

For the full interview, watch the accompanying video



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