Consumption or capital goods stocks? Prashant Jain makes a case for diversification instead

Prashant Jain, Chief Investment Officer at 3P Investment Managers, believes that Indian stocks are moving into a stage of reasonable valuations, where large-cap companies are in a better spot to provide consistent returns. In an interview with ET Now, Jain warned investors not to get caught up in pricey trends in capital goods and new-age consumption, and instead suggested a balanced and diversified approach.

“The dispersion in valuations has narrowed significantly post-Covid. Both extremes—overvalued and undervalued pockets—have moderated. In such an environment, it makes sense to remain diversified rather than overweighting a single theme,” Jain said.

While consumption may see short-term outperformance due to its defensive nature, Jain noted that valuations in consumer staples remain stretched. “This sector tends to correct more through time rather than price, and with some tailwinds, near-term outperformance is possible. But longer term, valuations are above comfort,” he explained.

On capital goods, Jain expressed caution, noting that the current cycle cannot be extrapolated from the boom of 2003–08. “This time is different. While growth prospects are better than consumption, valuations are too rich. Bottom-up opportunities exist, but top-down, the sector remains expensive,” he said.

Rising competition and structural shifts eroding consumer staples’ moats

Discussing new-age consumption companies, Jain said markets are pricing in overly aggressive growth expectations despite limited visibility on profits. At the same time, he flagged rising competition and structural shifts eroding traditional consumer staples’ moats, pointing to the rise of private labels, organised retail, and e-commerce.

On sectoral positioning, Jain recommended sticking with largecaps in banking, life insurance, telecom, software, pharmaceuticals, automobiles, and utilities. “These sectors appear attractive, and Nifty heavyweights could outperform. Largecaps offer a better risk-reward in the current setup,” he added.

Jain also highlighted India’s improving macroeconomic fundamentals. With current account and fiscal deficits under control, low corporate leverage, and benign NPAs, he said the country is on a “strong wicket.” However, he cautioned investors to temper return expectations.

“In the last 25 years, Nifty has compounded at 12–13%. With inflation now at around 4% and nominal GDP growth closer to 10–11%, equity returns cannot meaningfully exceed that trajectory. Investors should expect wealth creation in line with real growth of 6–7%,” he said.

Looking ahead, Jain advised investors to maintain equity allocations over the next three to six months, given reasonable valuations and India’s lower cost of capital. “Equities remain a long-term asset class. Markets may consolidate, but if the economy continues to grow, equities will continue to create wealth over time,” he said.