ICICI Prudential’s S. Naren warns ‘1990s Like Risk’ as Indian stock market hits frothy valuations

India’s stock market is booming, but one of the country’s most respected fund managers is sounding a note of caution. S. Naren, Chief Investment Officer of ICICI Prudential Asset Management, who oversees Rs 6.5 lakh crore in assets, says today’s exuberance carries eerie echoes of past cycles that ended badly for retail investors.

“Markets have been cheerful for years,” Naren said in a recent CNBC TV18 interview. “But what worries me is that investors have become the principal capital allocators. I don’t know if they realize the risks that come with it.”

A flood of IPOs

In the 1990s, when stock markets were the main source of capital, a flood of IPOs was followed by disappointing earnings, leaving investors with decade-long losses. In the late 2000s, it was banks that over-financed projects, creating a wave of bad loans.

“Today, like in the ’90s, the stock market is financing the economy,” Naren said. “Through IPOs, qualified institutional placements, promoter exits, and MNC stake sales, investors are effectively funding companies.”

Valuations at present

At the heart of his concern are valuations. Many Indian stocks today trade at 50–60 times earnings, while loss-making firms are commanding sky-high prices. “When you buy a stock at 25 PE with no earnings growth, you’re paying for 25 years of profits upfront,” Naren explained. “If the earnings don’t come, investors face capital destruction.”

He pointed to the “Lost Decade” of 1994–2004, when overvalued small and mid-cap stocks collapsed. Only large caps survived. The same risk, he warns, exists today.

Equity obsession

Despite repeated advice from fund houses to diversify into debt, gold, or REITs, Indian households remain overwhelmingly focused on equities, fueled by steady SIP inflows. “Flows can extend overvalued markets for two or three years,” Naren said. “But in the long run, only corporate earnings determine valuations — and right now, earnings growth is not happening.”

Lessons from the 1990s

Naren urged investors to avoid the three mistakes that burned portfolios in the 1990s bull run:

Compromising on quality by chasing weak companies.

Sacrificing liquidity by loading up on illiquid stocks.

Reducing capitalization by over-investing in small caps.

His Playbook: Global, Gold, and Selective Bets

Instead of blindly holding, Naren advocates a more balanced approach:

Global diversification: “Most international markets are cheaper than India. Investors should look abroad for multi-year opportunities.”

Partial allocation to gold: Not cheap, but still valuable as a hedge.

Short-term tactical plays: He seeks 10–20% upside in select stocks, booking profits quickly. “Volatility is my friend right now,” he said.

Domestic opportunities: Oil & gas stocks remain reasonably valued, pharma is a long-term growth story, and banking will bounce back once equity-driven financing cools.

In summary, Naren cautioned Indian investors to tread carefully in today’s overvalued equity market, emphasizing that only quality stocks offer the long-term advantage while excessive valuations and weak earnings pose significant risks. He highlights the importance of learning from past mistakes, diversifying into global markets, gold, and selective sectors like oil, pharma, and banking, and using short-term opportunities to manage risk. With domestic credit growth subdued and corporate earnings yet to recover, Naren stressed patient, disciplined investing, combined with careful sector and asset allocation.