Private sector banks are the best contrarian bet for the next 3 years, says S Naren

The continued rise in leverage among retail and high-net-worth investors through derivatives and margin trading facilities (MTFs) remains a key concern for the market, S Naren, Executive Director and CIO of ICICI Prudential AMC said at ICICI Securities India Investor Conference 2026.

While there has been significant discussion around the sustainability of mutual fund inflows and SIP contributions, Naren believes leverage in the derivatives market poses a much bigger risk than any moderation in mutual fund investments.

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“The level of leverage in the derivatives market and the amount of margin trading funding taken from brokers have continued to increase. That is a concern because leverage among retail and HNI investors is rising,” he said.

According to Naren, even if SIP inflows witness a marginal slowdown, it is unlikely to pose a significant challenge as mutual fund investors are typically long-term participants who invest without leverage. In contrast, derivative traders often operate with borrowed money, increasing risks during periods of market volatility.

He noted that margin trading facility exposure is currently at its highest-ever level, highlighting the growing appetite for leveraged market participation.
Against this backdrop, Naren sees an interesting contrarian opportunity emerging in segments that have witnessed relentless foreign institutional investor (FII) selling over the last 20 months.”If you look for something contrarian today, it would be stocks where FIIs have been persistent sellers over the last 20 months,” he said.

Among these, private sector banks stand out as one of the most attractive investment opportunities for long-term investors, according to Naren.

He believes private banks could emerge as the best-performing sector over the next three years. One key reason is the significant reduction in foreign ownership resulting from sustained FII selling.

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“FIIs used to have nearly 40% of their India portfolios allocated to private banks. Whenever they wanted to reduce exposure to India, private banks became the natural source of liquidity,” Naren explained.

As a result, FIIs have consistently sold private banking stocks over the last 20 months, creating a valuation opportunity for long-term investors willing to take a contrarian view.

Beyond equities, Naren remains optimistic about India’s debt markets following recent policy measures aimed at improving foreign investor participation.

According to him, two critical factors that influence foreign investment in debt markets—currency stability and taxation—have both moved decisively in India’s favour.

“In debt, there are two factors: currency and taxation. Both have turned very positive, which significantly improves India’s attractiveness,” he said.

Naren believes these developments improve India’s chances of gaining inclusion in global bond indices such as the Bloomberg Global Aggregate Bond Index and have contributed to a highly optimistic mood in the domestic debt market.

He pointed out that bond yields have moved well below policy rates in several segments, particularly in three-year corporate bonds, creating attractive investment opportunities.

However, Naren cautioned that the global fixed-income environment today is very different from what prevailed during the 2013 taper tantrum period.

At that time, interest rates across much of the developed world were close to zero, making India’s bond yields highly attractive to international investors. Today, investors can earn meaningful returns even in developed-market government bonds.

“US 30-year government bonds are yielding around 5%, and even Japanese government bond yields are at levels not seen for decades,” he said.

As a result, the yield differential between India and developed markets has narrowed significantly compared with 2013.

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While India has strengthened its macroeconomic position considerably over the past decade, global investors now have a wider range of attractive fixed-income options available to them.

Naren also highlighted the relatively small size of foreign portfolio investor exposure to Indian debt compared with equities.

According to him, FPI debt investments remain only a fraction of FPI equity allocations. In contrast, foreign investors had built substantial equity positions in India during a period when domestic valuations traded at significant premiums to other emerging markets.

He noted that Indian equities became exceptionally expensive after 2023 as domestic investors increasingly channelled savings into equities rather than debt.

“Valuations in India reached levels that were several times higher than markets like China. In such an environment, FIIs logically chose to reduce equity exposure,” he said.

At the same time, India has historically adopted a cautious approach towards opening its debt markets to foreign investors.

Naren believes this measured approach has helped preserve financial stability while gradually increasing foreign participation in government securities.

With improving debt market fundamentals, supportive policy measures, and attractive opportunities emerging in sectors overlooked by foreign investors, Naren sees both fixed income and select equity segments offering compelling opportunities for long-term investors.

Commenting on the recent correction in Kospi, Naren said that it is a healthy correction but even now I don’t think on market cap terms it is cheap.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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