No need to panic, says Prashant Jain: Outbound FDI fall may offset oil shock; large-cap downside limited to 10%

Prashant Jain, 3P Investment Managers

• Large-cap stocks may see moderate downside, around 10 percent.
• Small- and mid-caps are more vulnerable to deeper corrections.
• Phased investments in large-caps are advised amid volatility.

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Amid rising geopolitical tensions and the surge in crude oil prices, veteran fund manager Prashant Jain believes the impact on Indian equities will largely depend on how high oil prices climb and how long they remain elevated. However, he believes that small- and mid-caps will see a deeper correction than large-cap stocks.

Q: How much downside do you see for the markets from here?

It really depends on how high crude oil goes and how long it stays at elevated levels. India could see some pressure on the current account and also on the fiscal side because we import and subsidise fertilisers etc. However, I don’t think this is a panic situation for India.

Q: Why do you believe the impact may not be as severe for India?

We have seen much higher crude oil prices even 15 years ago. Since then, India’s oil intensity has come down significantly. The economy today is better positioned to deal with higher energy prices than it was in the past. Besides, outbound FDI could reduce sharply.

In recent years, India’s net FDI has been close to zero because of private equity exits and MNC stake sales. These will slow sharply and net FDI should be positive thus aiding BOP. This may even more than offset the impact of higher oil prices!

Q: How much downside risk do you see in the near term?

Markets are largely driven by sentiment in the short term. While It’s hard to say exactly where they will bottom out, but for large-caps after the long consolidation, reasonable valuations and the sustained domestic flows, downside is moderate, maybe 10%.

Q: What about mid- and small-caps?

Prashant Jain: Mid- and small-cap stocks are far more vulnerable. While the impact will vary sharply across companies, as a category valuation support is not there. The large gap in returns between large caps and SMIDS should eventually be bridged in my opinion.

Q. What is a good investment strategy in this environment?

On one hand, this highlights the need for continuous discipline in investment strategy once again, when risk attaches itself is hard to forecast. On the other hand adversity often brings opportunity along. I feel this time will be no different. Phased investments over few weeks / months with a focus on large-caps should be well-rewarded over time.

Also Read | Markets could see up to 10% fall on Middle East tensions, time to deploy money: Vikas Khemani

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