Evaluate hiking equity exposure over the next few weeks: Prashant Jain

The prevailing valuations of Nifty of 17.5x one-year forward earnings are reasonable and have room for some rerating apart from returns driven by nearly 12 per cent earnings CAGR over the medium-term.

Investors should, in line with their risk profile, evaluate increasing exposure to equities preferably in phases over the next few weeks despite the ongoing West Asia conflict, wrote Prashant Jain, chief investment officer (CIO) and fund manager at 3P Investment Managers in a coauthored note with Ashwani Kumar, their portfolio strategist and co-fund manager.

 

The prevailing valuations of Nifty of 17.5x one-year forward earnings, they said, are reasonable and have room for some rerating apart from returns driven by nearly 12 per cent earnings CAGR (compounded annual growth) over the medium-term. 

 

 

“The 18-month time and 10-15per cent price correction in large-caps and higher correction in small / midcaps has created room for some rerating over time. Expected earnings growth of 12 per cent CAGR is in any case a strong tailwind for markets and returns. Markets thus offer a favourable risk reward over time,” the note said. 

 

 

Since the war started, the Nifty 50 has slipped 8.2 per cent, ACE Equity data shows, with the Nifty Smallcap 250 index slipping nearly 6.9 per cent during this period. The developments have kept foreign investors, who pulled out Rs 88,180 crore (around $9.6 billion) from the Indian equities so far in March, data shows. 

 

Jain and Kumar, however, feel that this selling should abate/moderate as and when the war situation / crude oil markets stabilise. "Sharp underperformance of India versus the other EMs in last year, normalisation of India’s premium over EM’s, underweight positioning of FIIs, the size of India’s economy, strong growth prospects and strong macros should encourage FIIs over time to not just not sell but to buy," they suggest.

 

DIIs to the rescue

 

Even from a demand-supply perspective, there are reasons to be optimistic, the note said. While the popular refrain is when the FII flows come back will, Jain and Kumar believe, it matters little as primary markets have been a large source of supply of stock.  

 

“With nearly 2 out of 3 issuances under water, in our opinion the capital that will be raised by such issuances will be sharply lower in the foreseeable future. This means that bulk of the flow of equity capital with domestic institutional investors (DIIs) should get deployed in secondary markets,” they said.

 

Oil price impact

 

From the sharp rise in crude oil prices viewpoint, Jain and Kumar suggest that the Nifty Index has low exposure to companies that have direct impact of higher crude and gas prices. 

 

Impacted sectors like oil marketing companies (OMCs), paints, ceramics, city gas distribution (CGD) companies, autos, airlines, cement, food processing, etc. are a relatively small part of NIFTY / markets. 

 

"Further, in most of these sectors the impact would be transient as higher input costs would over time be passed on to consumers. It is also pertinent to remember that equities are a hedge against inflation as companies’ revenues / earnings tend to grow faster in line with inflation," they said. 

 

Oil prices, meanwhile, averaged around $70 per barrel (bbl) in fiscal 2025-26 (FY26). While it is tough to forecast oil prices especially for next few quarters, even if they average $100/bbl for the entire FY27, Jain and Kumar peg the rise in India’s oil imports by $45-50 billion, (around 1 per cent of GDP). 

 

“Other things remaining the same, current account deficit (CAD) would rise to nearly 2 per cent from around 1 per cent in FY26. This is quite manageable at least for a year or two given the Foreign Exchange Reserves of $700 billion,” they said.