India awaits AI pivot as global capex concentrates in the west
Talking to ET Now’s Ayesha Faridi about India’s potential as an anti-AI trade if Western AI investments falter, Naren acknowledged the possibility but noted the pivot has not yet materialized. He suggested that India, positioned as an AI user rather than infrastructure builder, could benefit significantly when global sentiment shifts from semiconductor manufacturers to service providers.
The CIO pointed out that emerging market funds currently favor Taiwan and Korea for their memory chip and semiconductor exposure while showing less interest in India’s IT services sector. However, recent sharp declines in U.S. software companies this week could signal the beginning of a transition that would benefit India’s services industry.
Budget 2026 STT hike: A long-term positive despite market knee-jerk action
Addressing the market’s negative reaction to the hike in the Securities Transaction Tax in the recent budget, Naren defended the government’s move as beneficial for long-term market health. Drawing from his experience as a stockbroker from 1994 to 2004, he emphasized that he had never seen individual investors profit from derivative markets.
The government’s strategy aims to shrink the derivatives market while expanding the cash market, which Naren believes is essential for creating genuine investment opportunities and enabling new companies to raise capital. While acknowledging concerns about reduced trading volumes, he suggested that healthier volumes should shift to the cash market with its lower STT rates.
Silver: The smallcap stock without fundamentals
Naren issued a stark warning about silver trading following a 37% single-day correction, comparing the precious metal to a smallcap stock that lacks earnings, dividend yield, or any traditional valuation metrics. He noted that silver’s global trading nature makes it susceptible to manipulation, referencing the Hunt Brothers’ attempt decades ago.
In contrast, Naren characterized gold as a mega cap; with more stability due to significant central bank holdings globally. He advised investors interested in precious metals exposure to consider multi-asset funds rather than concentrated positions, drawing parallels to the cryptocurrency boom and bust that preceded the current silver frenzy.
Smallcap cycle requires patience, not at behavioral bottom yet
For investors hoping for a quick smallcap recovery after the October 2024 peak, Naren counseled patience. He cited historical precedent, noting a previous smallcap cycle that lasted from 1990 to 1995-96 before restarting only in 2002-03, leaving investors without gains for six to seven years.
While euphoria has clearly dissipated from the smallcap segment, Naren indicated that markets have not yet reached a behavioral bottom. He described the current positioning as somewhere in the middle; rather than at the extreme fear levels that typically signal major buying opportunities.
Asset allocation critical in unprecedented ‘everything expensive’ environment
Naren highlighted an unusual market condition where nearly every asset class appears expensive. Residential real estate in premium locations, precious metals, equities, and even debt markets are all trading closer to historical lows in yields rather than highs. This creates what he termed a ‘boring cycle’ where no asset class offers obvious value.
Drawing on teachings from investment guru Howard Marks, Naren explained that markets typically oscillate between extreme fear and extreme greed. The current environment sits uncomfortably in the middle, with silver being a rare exception showing extreme speculation. He categorized market cycles into five phases: bust, best, boring, boom, and bubble, placing current conditions firmly in the boring category.
Budget expectations need recalibration for modern India
Having witnessed 36-37 budgets over his career, Naren argued that investors need to adjust expectations for what budgets can achieve in the modern economic framework. With GST decisions occurring outside the budget process and major tax reforms like last year’s income tax cuts being annual rarities, he suggested the days of dramatic budget-driven changes have passed.
Rather than focusing on budget scorecards, Naren emphasized India’s stable macroeconomic indicators including current account deficit, fiscal deficit, inflation, and growth rates. He highlighted improvements in income tax computerization that have broadened the tax base, with virtually anyone holding fixed deposits or trading in markets now required to pay taxes.
The CIO noted that while central government fiscal deficit stands at historic lows, state government deficits remain a concern and could benefit from improvement of approximately 1% compared to levels from five to six years ago.
Investment strategy: Higher equity allocation than last year, but not all-in
For investors navigating the current environment, Naren recommended maintaining discipline through asset allocation. While equity allocations should be higher than one year ago given market corrections, he cautioned against converting everything to equities. Debt instruments retain their attractiveness even in today’s market.
The key to success, according to Naren, lies in patience and readiness to capitalize when specific asset classes experience dislocations. He acknowledged that investors want both good news and cheap markets simultaneously, but reality delivers good news with expensive markets or bad news with cheap markets. The challenge lies in having the discipline to act when opportunities arise during periods of extreme sentiment.
India equity markets have fundamentals unlike precious metals
When contrasting India’s equity markets with speculative assets like silver, Naren emphasized that Indian equities possess genuine fundamentals including price-to-earnings ratios, cash flows, and dividend yields. As the services capital of the world, India has created numerous quality companies with measurable metrics.
While acknowledging that Indian markets are not as cheap as they were in 2020 or 2013, he stressed the fundamental difference between investing in companies with earnings and speculating in commodities without traditional valuation frameworks. The mutual fund industry has experienced consistent growth from 2013 to present, and despite $22 billion in foreign outflows and challenging conditions for smallcaps in 2024-25, the underlying investment ecosystem remains intact.