50% US tariffs are harsh and unsustainable, change certain: Anand Shah, ICICI Prudential AMC

Anand Shah, CIO-PMS and AIF Investments, ICICI Prudential AMC, in an interview that he expects tariff resolution through dialogue. He advises tilting portfolios to 50% equity allocation given current valuations, and favours consumer services and manufacturing over IT and FMCG.

After gaining close to 15% between April-June 2025, the benchmark BSE Sensex has become volatile in July and August. It lost over 4% in the last two months. How do you view the current market environment?

The market today is primarily shaped by global macroeconomic factors, with persistent global uncertainties continuing to dominate sentiment. While the impact of the US tariffs on India’s GDP may be limited, heightened volatility has emerged due to concerns over slower global growth and unstable capital flows.

Muted domestic demand is exerting pressure on corporate earnings and revenue growth. Although an earnings recovery is underway, it remains slow and uneven. Fiscal and monetary tailwinds are expected to offer some stability, but the market has broadly adopted a wait-and-watch stance, with significant movements confined to select pockets.

Despite near-term challenges, the long-term growth story in India is intact, underpinned by structural reforms and resilient economic fundamentals. The latest first-quarter GDP update for 2025– 26 reaffirms India’s growth trajectory and its position as one of the fastest-growing major economies.

Nevertheless, in the short term, global uncertainties will continue influencing market dynamics. Investors should maintain a cautious approach in navigating this volatile environment.

Where are the markets heading?

The Indian equity market underperformed for nearly a decade between 2010 and 2020. While the GDP continued to grow, profits-to-GDP ratio kept falling, driven largely by subdued profit growth in the manufacturing sector and stress in the corporate banks.

However, there was a strong rebound over the next four years (March 2020 and March 2024) led by a cyclical upswing in manufacturing, a resurgence in the capital-intensive sectors, accelerated growth across allied industries, and a notable recovery in corporate banking. During this period, the earnings growth was 35% whereas the markets registered a 34% compounded annual earnings growth.

The earnings momentum softened in the last financial year (2024-25) amid a slowdown in the capex cycle due to the impact of general elections. As a result, earnings growth fell back to around 10% and market growth was closer to 6%.

We are now back to nominal GDP-like growth rates of 10-11% for India Inc., which will be the medium-term trend. In the near term, global uncertainty is likely to keep the market in a low-upside, low-downside scenario.

How do you see 2025–26 earnings shaping up?

While the expectations are muted, tailwinds from RBI policy, government spending and the approval of GST rationalisation could drive overall earnings growth in 2025-26, expected to surpass that of 2024-25. The IT sector is likely to remain soft, while the banking sector may face pressure from spread compression amid declining interest rates. The metals sector is expected to perform better, supported by safeguard duties that could enhance profitability, though its outlook will remain closely linked to volatility in global commodity prices.

Do you expect sector rotation to play a key role in the upcoming quarters? If so, which sectors appear to be entering a leadership phase, and which are likely to lose investor favour?

Sector rotation has already played out in 2021-22. During that time, sectors like FMCG (fast moving consumer goods) and IT (Information Technology), which had been long-term performers began to underperform, while manufacturing, allied industries, and corporate banks saw a sharp surge in activity.

From here, rotation back to consumerfacing businesses is unlikely due to the subdued growth and high valuations. Comparatively, cyclicals are still better placed, despite being expensive in some pockets. The continuation of strength in manufacturing and related businesses looks more likely than a reversal to the consumption-led sector.

We like consumer services such as telecom, insurance, organised retail, asset management and wealth management. Banking appears reasonably priced, although not as attractive as it was in 2021. In manufacturing, our bottom-up stock picks remain positive on metals, textiles, and auto ancillaries. We continue to be cautious on IT, FMCG, and pharmaceuticals.

What’s your view on the US imposing 50% tariffs on goods from India?

The tariffs are harsh and are not sustainable. These effectively amount to an embargo. No business can absorb a 50% duty, so change is inevitable. A resolution is expected through ongoing dialogue between the two countries.

Where are the growth opportunities?

After a strong four-year run (2020 to 2024), most opportunities have already been discovered. From here, generating excess returns, or alpha, will become more challenging and will rely heavily on bottom-up stock selection. This approach begins with a detailed analysis of individual companies, focusing on valuations and earnings growth, while assigning only secondary importance to the broader economic or industry trends.

Moreover, the beta will be subdued due to a lack of re-rating opportunities. The market is expected to deliver returns in line with the nominal GDP growth rate of 10-11%. A wide variation in the performance of companies within the sectors will be visible in the future.

In terms of market capitalisation, midcaps were significantly more expensive than large-caps in October 2024 but have since corrected. While they still trade at a premium, the valuation gap has narrowed. We are not making any major top-down calls on market-cap segments; instead, we recommend a bottom-up approach to identify quality stocks within each segment.

You sound cautious about equity markets. Why is that? Do you believe hybrid investment strategies offer a better risk-reward balance?

In equities, the first rule is don’t lose money. That means we will always remain cautious. Whether managing equity or hybrid strategies, caution is non-negotiable. Given the prevailing uncertainties and valuation concerns, we do not recommend an aggressive stance on equities. Asset allocation should not be tactical or seasonal in nature. It should be structural and based on an individual investor’s profile. So, balancing equity with debt and commodities, like gold and silver, would be prudent.

Your advice for equity retail investors?

Stay flexible in your approach—avoid concentrating on timing a specific market-cap segment. Maintain a disciplined and systematic investment strategy, utilising the current market phase to build equity positions for the next growth cycle.

If you had to invest Rs.10 lakh today for a 1–2 year horizon, how would you construct the portfolio? What key risks and opportunities would guide your allocation?

For a 1-2 year horizon, the primary principle is capital preservation. Being overweight in equities for the given period may not be productive, due to the short-term risks.

For an average investor, a 65% equity and 35% debt allocation is generally suggested. But given the current market valuation, an ideal approach would be to tilt closer to a 50% equity allocation and 50% exposure to debt and commodities. Such an approach will balance risks and rewards by leveraging potential gains from the equities, while the debt component will limit the downside risk.

Which alternative asset classes can prove effective now?

Investors can consider Alternative Investment Funds (AIFs)—in both equity and debt—as well as private equity. However, these are not separate asset classes; they are simply additional vehicles to access equity and debt markets. Investors with a higher risk appetite, comfort with closed-ended products in both equity and fixed income, and a longer investment horizon may explore these alternatives. While such assets carry higher risks, they also have the potential to deliver superior returns.

Options are also available in corporate debt and commercial real estate products. Compared to traditional mutual funds, they offer the potential for higher yields, though with longer investment horizons. Also, the risk– return profile of these products is elevated relative to mutual funds within the same asset class. These products are more suited to the seasoned or high-networth individuals who understand the risks involved.

What is your core investment philosophy, and your methodology for stock selection?

We believe companies, not markets, create wealth. We focus on strong businesses with consistent outperformance in sectors growing faster than the GDP, emphasising those with resilient margins that can weather economic cycles.

Industry structure matters. We prefer consolidating industries where dominant players gain market share and generate superior returns, while avoiding fragmented, competitive sectors that struggle to create value.

Management evaluation centres on governance, competence, execution ability, and capital allocation skills. Finally, valuation drives position sizing: we avoid expensive stocks, take small positions in reasonably priced ones, and invest when stocks are inexpensive.

How has your stock selection strategy evolved in response to recent market cycles?

This approach works best during downturns, as companies with strong competitive advantages tend to be more resilient in volatile market conditions. However, the strategy tends to underperform in bullish markets, when momentum drives prices higher and even weak businesses with subdued cash flows get aggressively bid up in a strong growth environment.

What are the primary risk factors you monitor in your PMS holdings, and how do you mitigate them?

Among the various risk factors, global risks remain the most significant. Examples include the surge in energy prices in Europe following the Russia– Ukraine war, which impacted the region’s economic growth, and rising concerns of a slowdown in US markets after the recent tariffs imposed by the US administration. Businesses with significant global exposure are particularly vulnerable to such economic slowdowns.

While India enjoys a demographic advantage, the same is not available to most of the western world. In the absence of immigration, such countries will face a declining population. Businesses exposed to economies with declining populations are prone to significant risks. To control such risks, we stress-test businesses with global exposure carefully.

Your view on gold as an asset class?

Gold has long served as a reliable store of value and, in many ways, a currency in its own right. Traditionally, the US dollar has served as a global haven. However, the recent policy shifts have introduced uncertainty around the dollar’s long-term strength.

In the event of a weakening US dollar, gold is well-positioned to benefit. Although it doesn’t yield dividends, it plays a vital role in preserving purchasing power. For this reason, investors should consider including gold as a strategic component of their asset allocation. Particularly for those anticipating further depreciation of the US dollar, gold warrants a meaningful place in the portfolio.

RAPID FIRE

Q. The biggest lesson the market has taught you?
Inertia has often proven powerful. Sometimes the best-performing portfolio is the one left undisturbed.

Q. A financial habit every young investor should adopt?
Buy adequate term insurance, and second, build wealth through SIPs.

Q. Your personal asset allocation?
90% in equity and 10% in debt and commodities.

Q. A book you would like to recommend?
I recommend The Dhandho Investor by Mohnish Pabrai for light, yet insightful reading.

Q. Global market that fascinates you the most? Why?
China, the anti-involution strategy (aimed at curbing excessive competition). If successful, it will benefit companies and markets.

Q. Your biggest investing superstition that you know is totally irrational?
Our biggest gains come after something goes wrong.