Where to invest Rs 10 lakh in this market? Ihab Dalwai of ICICI Prudential AMC answers

While India-Pakistan tensions and global trade wars appear to be cooling down, risks remain due to high global debt and potential slowdowns, especially in the US.

Ihab Dalwai, Senior Fund Manager, ICICI Prudential AMC, believes that even with corrections in certain pockets, valuations of Indian equities are above their historical averages and earnings growth is likely to moderate.

Indeed, corporate earnings have been mixed, signalling a transition from high-growth to more normalised growth. In this phase, quality companies with strong balance sheets and consistent earnings are likely to outperform.

In an interview with Moneycontrol, Dalwai shares his outlook for Indian equities, which market cap is the best, and how investors should invest Rs 10 lakh today.

India-Pak tensions seem to be over for now and we are nearing a post trade-war world globally. Will the party continue in the Indian market?

While recent geopolitical concerns have somewhat eased, the market environment remains nuanced. Global uncertainties — such as lingering trade tensions, a potential US slowdown, and high global debt levels — still pose risks. Domestically, even with corrections in certain pockets, valuations are above historical averages and earnings growth is likely to moderate. Hence, we believe the upside is likely to be aligned with fundamental earnings and not be driven by sentiment alone.

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What is your take on India Inc’s results, and what are your expectations for the next few quarters?

Corporate earnings have been a mixed bag. While some sectors and companies have delivered resilient numbers, the overall earnings trajectory is moderating. We believe we are entering a phase of more normalised earnings growth compared to the earlier high-growth cycle. In this phase, companies with consistent earnings profiles and strong balance sheets, typically found in quality portfolios, are likely to perform well.

What do you think is the most important indicator for the market right now?

The key indicator would be the sustainability of earnings growth in the face of elevated global uncertainties. Domestically, corporate profit-to-GDP is near historical highs, implying limited headroom for earnings to significantly outpace nominal GDP growth. So, earnings quality, not just growth, will matter more going forward. Apart from these, geopolitical developments and tariff related news flows are some of the variables to watch out for.

Are largecaps still the best bet, or are you favouring small and midcaps?

In a moderate earnings growth environment, largecaps tend to be better placed than mid and smallcaps. That being said, we are open to quality picks across capitalisations — including mid and smallcaps — where we see sustainable ROEs and reasonable valuations.

How do you expect the quality factor to perform in the current macro environment?

Quality as a style tends to do well in moderate growth environments, where the market values earnings stability over cyclical spikes. Given the current macro setting — marked by subdued global growth and moderate inflation — quality companies with durable moats and stable cash flows are well-positioned to outperform.

How do you define ‘quality’ in the context of your investment process?

We define quality based on a rigorous set of qualitative and quantitative filters. Under quantitative parameters we look for companies with high ROE (return on equity), ROIC (return on invested capital), strong capital allocation, low leverage, and predictable cash flows.

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Under qualitative filters, we look for companies which have built high barriers vis-à-vis the competition, such as a strong brand image, large customer base, product or service excellence, sustainable profitability, and reinvestment potential, to name a few. More importantly, we aim to buy quality at a reasonable valuation, not at any price. This discipline allows us to participate in long-term compounding while managing valuation risks.

One piece of advice to investors looking at major developments and market gyrations every single day?

Avoid reacting to daily noise. Markets will always have periods of volatility. A long-term investment mindset focussed on quality businesses at reasonable valuations tends to deliver superior risk-adjusted returns. Patience and discipline are often an investor’s best allies in the wealth creation journey.

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If someone has Rs 10 lakh to invest right now, what should be the asset allocation strategy for equity (midcap, smallcap, largecap) and other asset classes?

We recommend a multi-asset approach; spreading your investments across various asset classes like equity, debt, commodities, etc. Given the prevailing uncertainty in global markets and economies, the optimal approach would be to have a quality-focussed equity fund with flexibility across market caps. This can serve as a core part of the portfolio. In terms of portfolio breakup, it is best to consult a financial advisor as the risk appetite and financial goals of each investor varies.

How are you balancing risk and returns in this volatile market?

Being invested in segments of the market which are under-owned and where expectations are muted reduces equity risk to a great extent. And if the research is right, returns tend to follow with such an approach. This, we believe, is an optimal way to balance risk and return.

Which sectors do you see as long-term structural bets for India?

Consumption as a basket is a long term structural story. The noteworthy aspect is that several of these consumption companies have dominant market share in the areas they are present in.

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