Exclusive | Can cheap valuations shield IT stocks from AI disruption? S Naren explains

As Indian IT stocks grapple with concerns that artificial intelligence could disrupt traditional services models, valuations have turned relatively attractive. But is that enough to protect investors? S Naren, ED and CIO at ICICI Prudential AMC, argues that low multiples alone offer limited comfort unless there is clarity on long-term growth and the true impact of AI on the sector.

Edited excerpts from a chat on market outlook, sectoral opportunities and whether smallcaps are attractive enough to buy now:

Given that big triggers of the US-India trade deal, Budget and Q3 earnings season is now behind us, how has your outlook towards the Indian equity market changed in the last 2-3 weeks?Over the last year, valuations across global markets have moved higher, and today there are virtually no cheap markets left. One potential trigger for India to outperform could be a correction in overvalued artificial intelligence related stocks globally. If the excesses in AI-led narratives unwind, Indian equities could relatively outperform.After the hyper growth seen post-Covid, we appear to be in a moderate to low return environment since the last 1.5 years. How long do you think this consolidation phase can last?

Currently, it is difficult to predict how long a moderate-return phase may last. Such phases typically continue until markets move to either of two extremes, i.e. either become very expensive or become very cheap. At a different point, the market may move into a phase from where we may change our view to high returns or low returns.You had warned investors against the smallcap mania about a year ago. Those who followed your advice are now happy. There’s hardly any froth in smallcaps now but are the valuations attractive enough to be incrementally positive now?Small cap investing works in cycles. Currently, there are select small cap stocks that are reasonably valued. Hence, investors who want exposure to small caps can consider starting long term SIP in a small cap fund now, ideally with a five to ten-year horizon.Your call on multi-asset funds, silver and gold also played out extremely well. Do you think that silver has topped out and gold has more legs?Silver market is relatively small compared to gold, which makes it prone to speculative excesses. As a result, it is a risky asset class for anyone considering to trade this metal. Gold, on the other hand, has a role to play in asset allocation. But traditional valuation models do not apply to precious metals. Unconventional models like the Nifty-Gold ratio do not suggest a large long term allocation to gold at present. However, in the near term, gold may continue to benefit from momentum, but we do not have a clear view on the near term outlook for gold.

You have been a big advocate of asset allocation. Retail investors were earlier chasing smallcaps at any price and now it is about gold and silver. AMFI data on heavy inflows in gold and silver ETFs also shows this. For someone with a moderate risk appetite and a long-term horizon of at least 5 years, how much allocation would you recommend in gold, equity and debt?There are no one size fits all allocation. It depends on an investor’s age, goals, and risk tolerance. It is best to consult a financial advisor who can guide on the allocation proportion. From an asset class perspective, currently, no asset class appears to be cheap and that includes even international equities. Therefore, investors should broadly stick to their long-term asset allocation frameworks instead of considering any tactical shifts.

Any contra bet that you think can surprise on the upside in the next couple of years?If artificial intelligence does not impair the growth prospects of Indian IT services companies but instead enhances them, the sector could see a strong rally. However, at this stage, the long-term impact of AI on Indian IT services remains unclear.

Indian IT stocks have been under selling pressure as investors see AI as a threat rather than an opportunity. What are your thoughts on the IT pack and how are you dealing with the sell-off?The sector is in a flux along with heightened fear. If the growth risks do not materialise, there is scope for meaningful returns. However, clarity on long-term growth is essential before becoming decisively positive.

Do you think that relatively cheaper valuations and high dividend yield can protect the downside in IT stocks?In a sector which is facing disruption, cheap valuation alone will not suffice. What matters most is the confidence that disruption will not permanently impair industry growth. Without that clarity, cheap valuations may not mean much.

ICICI Prudential AMC has launched two SIFs – iSIF Equity Ex-Top 100 Long-Short Fund and iSIF Hybrid Long-Short Fund. How should an investor decide which one suits her requirements?Investors with a belief that long-term investment in a defensive manner in small and midcaps is an attractive investment proposition, can consider the Equity Ex-Top 100 Long-Short fund. Meanwhile, the Hybrid Long-Shot Fund is designed for investors seeking a more balanced approach. In both cases, investors should invest if they believe in our current view of a moderate-return environment in the near term.

Consumption was touted as a big theme after GST cuts were introduced before Diwali. Since then auto appears to be the biggest winner in the consumption cycle. Do you think durables and other consumption plays are up for an upcycle in FY27?Many non-auto consumption sectors have been underperforming for several years, which has created some margin of safety. However, despite this underperformance, valuations are not very cheap, even though they have come off their peaks.

Which other sectors are you bullish on for the next 2-3 years?There are no cheap sectors in the market today. Opportunities are more likely to arise from investor impatience i.e. when stocks are sold due to short-term disappointment. Such phases often create attractive entry points for long-term investors.

How should an investor go about with fresh equity investments?Our primary framework for investing is asset allocation based approach with a higher equity tilt than a year ago. Within equities, large caps appear to be relatively better placed on valuation basis. Investors can also consider equity strategies with flexibility to move across sectors and market capitalisations.