Equities may be nearing an upward breakout after a 15-month period of consolidation, says Prashant Jain, founder of 3P Investment Managers and one of India’s most seasoned fund managers. Speaking on The Wealth Podcast’s Diwali Blockbuster series with N Mahalakshmi, Jain said that such “time corrections” are healthy and typically precede sustained market rallies when they occur in an environment of earnings growth.
“Eventually, markets will break out and move higher,” Jain said. “It has been observed that after prolonged periods of consolidation or time correction in an environment of growth, markets eventually break out upwards.”
According to Jain, the markets had surged ahead of fundamentals after the pandemic due to a combination of ultra-low profitability, rapid earnings recovery, and an influx of first-time investors. “If you go back to post-COVID, the earnings base was extremely low. The profits-to-GDP ratio was very low, and from that very low base, profit growth was extremely high,” he said. “Along with that, a very large number of new-to-market investors joined the market. This all came together and briefly drove the markets ahead of fundamentals.”
That exuberance, he noted, has since corrected. “This one year of time correction has been extremely healthy. It has brought balance back to the markets, and the excesses in large caps have virtually gone,” Jain said.
Valuation dynamic
In his latest note to investors, Jain elaborated that markets are now trading at 20 times FY27 and 18 times FY28 earnings, levels roughly 18% higher than historical averages — but still reasonable, in his view, given India’s structurally lower cost of capital for both domestic and foreign investors.
“Large and sustained local flows to equity markets have sharply lowered volatility,” he wrote. “A significant tax differential between income from equities and debt has also increased the attractiveness of equities. These factors have lowered return expectations of local investors.”
For foreign investors, he added, the reduction in volatility, smaller market impact from FII selling, and a sharply lower USD premium have together lowered their cost of capital as well.
Even so, FIIs have been consistent sellers through the correction phase. “In this 15-month time correction, FIIs have been net sellers to the tune of $18 billion,” Jain noted. “Even prior to this, flows have been weak. FII ownership of India continues to move lower, and they are presently underweight compared to a generally overweight stance in the past.”
Despite these outflows, Jain said the markets have held up resiliently — a sign of deepening domestic strength. “The markets have withstood two to three rounds of FII selling, and earnings expectations are now quite close to reality. Over the next one year, I think market returns should be positive,” he said.
Supply balances the surge
Jain also pointed to a resurgence in primary market activity as a stabilising force. “Capital raising after a brief moderation has bounced back strongly. The pipeline is large and continues to grow,” he said in his note. “This large supply prevents a runaway market on one hand and is providing capital to entrepreneurs and businesses on the other.”
He added that while the surge in new listings has broadened access to capital and innovation, investors should temper expectations. “The long-term outcome of most issuances is likely to be weak and below participants’ expectations,” Jain wrote.
In his note to investors, he described the current market state with a cinematic flourish, quoting a line from Yaadon Ki Baaraat (1973): “Isko liquid oxygen mein daal do. Liquid isko jeene nahi dega, aur oxygen isey marne nahi dega.” “Similarly,” Jain noted, “strong domestic flows are not allowing markets to fall, and the large supply of stock is not allowing them to move higher.”
The Long Game
Looking beyond the near term, Jain said the India story remains intact. “It’s been going on for many decades, and we all know the Sensex is up 800 times in the last 46 years,” he said. He expects low double-digit compounding over the next few years, supported by steady earnings and macro stability.
“India is a low-inflation economy, and we cannot lose sight of that,” he added. “After this time correction, there is greater confidence that the returns from here on should be in low double digits compounding annually.”
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