S Naren on market sentiment: Retail investor activity set to cool; overvaluation can result in significant undervaluation eventually; expectations of major shifts post-Budget

While opportunities exist in sectors like FMCG, particularly with the middle-class boost, the broader market is likely to face further corrections.

Sankaran Naren, Chief Investment Officer of ICICI Prudential AMC, believes that retail investor activity, which surged to record highs in 2024, is unlikely to maintain the same intensity in 2025 as the excessive enthusiasm for loss-making companies in 2024, largely driven by retail investors, has peaked.

He pointed out that the excessive enthusiasm for loss-making companies in 2024, largely driven by retail investors, has peaked.

"The retail force that existed last year will not repeat with the same intensity this year. The enthusiasm for loss-making companies has reached its limit," said Naren in an exclusive interview with Moneycontrol.

This cooling effect, Naren suggests, will likely be compounded by SEBI’s regulatory measures aimed at reducing speculative trading, such as limiting the number of expiries in derivatives. As a result, retail activity is expected to be lower in 2025, signalling a shift in market momentum.

However, this shift in retail investor behaviour is not the only factor shaping the market post-budget, he says. He also emphasised the valuation concerns that have been building up in recent years.

"The problem is not with the budget itself, but with valuations that need to become more reasonable in small-cap IPOs and mid-caps," Naren noted, warning that investors had been too eager to buy into small-cap and mid-cap stocks at inflated prices.

“Investors have been buying anything and everything, believing that equity markets are a place where you can never lose money,” he said.

The budget measures also provide an opportunity for the FMCG sector to regain momentum after years of stagnation, creating potential for both growth and valuation adjustments in the sector. He pointed out that the budget’s focus on boosting middle-class income and consumption could help revitalise a sector that has underperformed relative to GDP growth for the last few years.

"At some point, if GDP growth and volume trends in FMCG and retail sectors align with mid-class consumption, valuations will start to become reasonable again," he said.

While Naren sees promise in FMCG sector, he is cautious about the broader market, that have been overvalued for some time. From a Nifty point of view, he believes this froth is not so significant as observed in large caps. But otherwise (small and mid-cap), there aremany companies trading at P/E ratios that don’t align with their fundamentals. Therefore, he predicts a potential 20-30 percent correction in the near future as valuations adjust.

"The broader market conditions are not certainly cheap,’ he said while iterating on need for valuations to be recalibrated.

Naren expanded on the scope for corrections in the broader market, stating, “typically, markets cannot go down beyond where the valuations would require them to go. But there are exceptions like China, Japan etc where valuation rules are just not obeyed. I am not sure which one India will be like.”

“While small and mid-caps do have much scope to decline, large caps don't. It isn’t merely a question of how far we are from fair valuations, but because when stocks become overvalued, they also become undervalued eventually (when they fall),” he said.

He said that in the last four years “investors were willing to buy anything and everything, believing equity is a market where you can never lose money. But people have been putting in money only to the more unsafe parts of the market.”

“The challenge is not about the budget itself, but the need for valuations to become more reasonable, which is something the budget cannot directly help," he \concluded.