'Mega gains are unlikely now': ICICI Prudential's Naren urges investors to rethink expectations

After four years of strong gains, investors hoping for another run of outsized returns may need to reset expectations.

ICICI Prudential CIO S Naren, in a podcast earlier this week, said current market conditions suggest moderate long-term returns rather than the kind of "mega money" seen between 2020 and 2024.

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Addressing concerns over global tariffs and US policy shifts, Naren said markets themselves are navigating uncertainty. "I don't think a market knows what is going to happen to tariffs. What the market realises is that you can't have only US markets going up and the US dollar going up all the time," he said while speaking to Groww.

"We don't even know what US government policy is going to be over the next two to three years," he said, but added that it doesn't mean that all the time only US markets have to go up and the US dollar has to go up. "Other markets can also go up."

Large caps vs small caps

On valuations, Naren drew a clear distinction. He said large caps were not "meaningfully overvalued", while small and midcaps were "overvalued significantly." However, he cautioned against assuming overvaluation automatically means a correction. "Just because a market is overvalued doesn't mean it needs to fall. Like I tell people, does it mean that Lutyens' Delhi real estate is going to fall, or Palace Orchards Bangalore real estate is going to fall, or Malabar Hill Bombay real estate is going to fall? It doesn't need to fall."

He said rampant selling by foreign institutional investors between September and February had corrected much of the earlier excess in large caps. "The extent of overvaluation (in large caps) had become almost very very small. But markets are complex things. How they will play over the next few years is not clear," he added. 

Why 'mega money' is unlikely now

The veteran fund manager suggested that the investors should trim their expectations as only moderate returns are likely from this point.  

"I believe we are in a situation where you can make moderate money over the long term from here. You can't make mega money. To make mega money, you need very cheap valuations, and you need fear. You neither have cheap valuations nor do you have extreme fear. So you can't make mega money," he said. 

On the other hand, valuations are slightly above average and a little bit of fear. "With this kind of an environment, you can make a moderate return in the long run. That is what is clear." 

According to him, if you are an investor, you have to decide whether you are trying to protect capital or trying to make mega money. He said 2020 was a year when "you had to actually try to make mega money."

"Why you had to try to make mega money? You had extreme fear, and valuations were low. When you have extreme fear and valuations low, you should actually try to make mega money. If you have greed and valuations very high, like September 2024, what you have to do is you have to try to protect capital."