Small, mid-caps likely to see further selling pressure, large-caps fairly valued: Prashant Jain, 3P Investment Managers

3P Investment Managers' Prashant Jain

• Small- and mid-cap stocks remain expensive and may see further correction
• Large-cap stocks offer better risk-reward and are fairly valued now
• Jain advises caution on IPOs and warns against chasing short-term gains

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While the large-cap space has seen a prolonged time-correction, the pain in the small- and mid-cap space is likely to continue, said Prashant Jain, Founder and CIO, 3P Investment Managers, speaking at the 14th annual AIBI conference on Thursday. He added that valuations in the small- and mid-cap space had run well ahead of fundamentals after the sharp rally seen post the COVID crash.

Jain believes the adjustment process in the broader market is still incomplete. “I think this space is still expensive to my mind, and it should probably both time and price correct more… I don’t think we are at the end of this adjustment,” he said, referring to small- and mid-cap stocks. Over the past six months, the Nifty Smallcap 100 index has tumbled over eight percent.

In contrast, he sees a more balanced setup in large caps. “In large caps, I think the risk-reward is now favourable,” he said. Large-cap stocks, in his view, are no longer cheap but are reasonably valued. “They are now at fair multiples,” Jain said, adding that over a three- to five-year horizon, benchmark indices are likely to deliver modest but steady returns. “If you take a three to five-year view, Nifty should deliver low double-digit returns, around 11 to 12 percent,” he said.

However, he also warned that prolonged periods of poor returns could still test investor patience. “If for five years you don’t make money, then clearly it will lead to a lot of pessimism, and it could start showing up in the flow numbers,” Jain said.

According to him, a major driver of the excesses was the surge of new investors who entered the market after the pandemic. “If you look at the number of demat accounts today, 70 or 80 percent of demat accounts have been opened after COVID. So these investors have no experience of the pre-COVID market cycle,” Jain said, noting that many have believed the strong returns of the last five years will continue well into the future. “That is what has driven these prices much above fair valuation.”

Jain also pointed out that India’s nominal GDP growth is unlikely to exceed 11 to 12 percent on a sustained basis, while competition across industries is intensifying due to new business models and abundant capital from private equity and primary markets. “It also means that the marketplace will become a lot more competitive. So there is very limited margin upside in any sector,” he said.

On the IPO frenzy, Jain urged investors to temper expectations and avoid chasing listings purely for short-term gains. “One should approach IPOs just like you are investing in the secondary market,” he said. “Do not have a FOMO in the IPO market.” He stressed that investors are often at an informational disadvantage in primary issues and should focus strictly on business sustainability and reasonable valuations.

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