Where are the best risk-reward opportunities for the next 12 months? Anand Shah of ICICI Prudential AMC explains

With markets turning volatile and valuations looking stretched, stock selection is becoming more important than broad market moves. In this interaction with BT, Anand Shah, CIO - PMS & AIF Investments at ICICI Prudential AMC, shares his insights on how he is positioning portfolios, sectors to favour or avoid, current market valuations, and what retail investors should realistically expect from equities over the next few years amid global uncertainty and changing market cycles.

Q). Where do you see the best risk-reward investment ideas for the next 12 months—large caps, select mid-caps, or specific themes?

Anand Shah: Markets are entering a phase where bottom-up stock selection will matter more than themes or sector calls. Earnings revisions across large, mid and small caps have stabilised, with selective upgrades beginning to emerge, which points to stock-specific opportunities rather than index-led returns.

Q). How are you structuring portfolios in PMS and AIFs amid high valuations and global uncertainty?

Shah: In constructing portfolios, our investment framework of Business-Management-Valuation (BMV), remains the guiding principle. Under the Business filter, our focus is on selecting companies that possess strong competitive advantages, wider moats and are growing at a rate faster than their industry, which in turn should be outpacing nominal GDP growth.

In terms of Management, we prioritize businesses with a solid track record in corporate governance (including ESG considerations). We look out for management's decisions regarding capital allocation and their strategies for increasing market share, as these are crucial for driving growth. Regarding valuations, we remain cautious about the price we are willing to pay. We recognise that high valuations without corresponding growth drivers do not offer a sufficient margin of safety.

In the current market environment, the prevailing valuation has already priced in much of the macro-optimism, so the focus is on businesses with strong competitive advantages, clean governance, visible cash flows and reasonable valuation.

Q). Are there any sectors or stocks you are avoiding this year, and what risks do you see there?

Shah: We are relatively cautious on export-oriented sectors, particularly pharmaceuticals and information technology. Large-cap generic pharma companies could face earnings headwinds, while IT continues to have limited growth visibility, elevated valuations relative to global peers and uncertainty around the impact of AI.

Q). Which sectors do you like most for 2026, and why?

Shah: We are positive on financial services, domestic cyclicals, commodities and services-led consumption. We believe that policymakers will continue to invest in strategically important sectors such as power and energy security. With risks of power deficits likely to resurface and the government's goal of achieving energy independence by 2047, sectors such as power, renewable energy, energy storage, and electric vehicles (EVs) are likely to be the beneficiaries over the medium term.

We are also positive on telecommunications and high-growth new-age sectors. The significant room for growth in consumption is expected to drive the digitization of consumption and services across areas such as quick commerce, online travel, health and personal care services, and digital payments.

Q). For long-term investors starting today, what kind of returns should they expect over the next 3–5 years?

Shah: Equities remain the preferred asset class for long-term investments, but returns are likely to be more measured than the previous cycle. Outcomes will be driven primarily by earnings growth and not valuation expansion. Hence, stock selection becomes critical.

Q). With Indian markets looking expensive, should investors allocate more to global equities?

Shah: Prices in some parts of the Indian equity market may seem high, but that should not be the only criteria that decides whether or not to invest. While global equities have done well over the last year, given the rally, even these markets are no longer cheap. For an investor with a long-term horizon, India remains an attractive market given the sustainable growth prospects the country offers. The same cannot be said about the other economies.

Q). Foreign investor flows have been volatile. What global factors are you tracking most closely?

Shah: We are keeping a close eye on how the global economy is shaping up, especially in the US and China, since any meaningful slowdown there can dampen investor sentiment. Global monetary policy also matters, as do geopolitical developments, particularly the shifts in trade relationships among the world’s major economies, which can influence how investors view emerging markets. Against this global backdrop, India continues to stand apart.

Domestic demand has held up well; corporate balance sheets are in much better shape, and policy support remains broadly growth friendly. Together, these factors are improving visibility on earnings over the medium term. As global risk appetite begins to improve, capital typically flows toward markets offering more consistent and sustainable growth, and India is well placed to attract those inflows.

Q). How could changes in interest rates affect markets in the near term?

Shah: In the near term, supportive domestic interest rate conditions help maintain confidence by keeping borrowing costs manageable. However, more important, is the delayed effect of previous monetary policy decisions, which gradually influences growth and earnings visibility.

Changes in the US interest rate environment also play an important role. When US interest rates rise, they often trigger short term volatility in emerging markets and strengthen the Dollar. On the other hand, a more benign US rate outlook tends to improve global liquidity and investor risk appetite.

Q). How are you factoring rupee depreciation into your investment decisions?

Shah: When building a portfolio, Rupee depreciation is seen more as a macroeconomic factor than as a reason to make an investment. We like companies with strong balance sheets, pricing power, and clear earnings, as they are in a better position to handle currency fluctuations. Changes in currency can affect investor sentiment in the short term, but companies with strong domestic demand and pricing power tend to do better in the medium to long term.

Q). The Sensex, Midcap and Smallcap indices have delivered muted returns recently. What is your outlook for 2026?

Shah: Much of the macro-optimism is already reflected in prices, which means returns will be driven by earnings growth rather than valuation expansion. Businesses linked to domestic growth, improving consumption, financial services and selective cyclicals are better placed, while areas with limited earnings visibility may lag. Overall, 2026 is shaping up as a year where patience, discipline and bottom-up stock selection will matter the most.