Indian Stocks Reach Reasonable Valuations, Experts Advise Balanced Approach

According to Prashant Jain, the Chief Investment Officer at 3P Investment Managers, Indian stocks have moved into a stage of reasonable valuations as of August 2025. Jain notes that the dispersion in valuations has narrowed significantly since the COVID-19 pandemic, with both overvalued and undervalued pockets moderating.

In this environment, Jain recommends that investors maintain a diversified approach rather than overweighting a single theme. He expresses caution about the capital goods and new-age consumption sectors, warning that the current cycle in capital goods cannot be extrapolated from the boom of 2003-08, and that markets are pricing in overly aggressive growth expectations for new-age consumption companies despite limited visibility on profits.

Jain suggests that investors should stick with large-cap companies in sectors like banking, life insurance, telecom, software, pharmaceuticals, automobiles, and utilities, as these appear attractive and the Nifty heavyweights could outperform. He also highlights India's improving macroeconomic fundamentals, with current account and fiscal deficits under control, low corporate leverage, and benign non-performing assets.

However, Jain cautions investors to temper their return expectations, noting that in the last 25 years, the Nifty has compounded at 12-13%, and with inflation now around 4% and nominal GDP growth closer to 10-11%, equity returns cannot meaningfully exceed that trajectory. He advises investors to expect wealth creation in line with real growth of 6-7%.

Looking ahead, Jain recommends maintaining equity allocations over the next three to six months, given the reasonable valuations and India's lower cost of capital. He emphasizes that equities remain a long-term asset class, and that markets may consolidate, but if the economy continues to grow, equities will continue to create wealth over time.