The Trump Tariff tsunami has rocked global markets yet again and India too, like most global peers, is in a state of nervous anticipation. However, in what could be good news for India, Prashant Jain, Founder and CIO at 3P says the impact on India’s economy and markets might be marginal and a lower crude price and US bond yields trending lower may work to India’s advantage.
Sharing his outlook for FY26 and the impact of US tariffs on India, Jain said “The overall impact of the tariffs on the Indian economy and markets is expected to be minimal. Over time India may even benefit. The recent fall in Crude prices (from $75 to $60 per bbl) and US 10-year yields (from 4.4% to 4%) will also work to India’s advantage.” However he pointed out that, “these tariffs and any counter-measures by other nations will create uncertainty, which is detrimental for both business investments and economic growth.”
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One of the key reasons the 3P report stated that the impact on India’s economy and the market will be marginal is because, “in terms of sectors, Banks, Consumer, Construction & Engineering, Energy, Financial Services, Insurance, Materials, Pharmaceuticals, Ports, Retail, Telecom, Tobacco and Utilities that collectively constitute 80% of the Nifty index, are not directly impacted.”
That apart, “Auto OEMs, apart from Tata Motors, do not face any direct impact.”
One sector that could potentially see some impact though is the tech sector. This is because Jain explained that “the IT sector, while not directly impacted, could experience challenges if tariffs / related developments lead to a weak US economy, potentially affecting demand for Indian IT services.”
He added that the “impact on Pharmaceuticals is still uncertain.”
Risk-reward of small and midcaps a big worry
The investment managers at 3P believe that the recent market correction was, “a result of demanding valuations, elevated earnings expectations and a large supply of equities both from capital raising and FII selling. SMIDs corrected the most due to their high valuations.”
But that does not improve the appeal of the small and midcaps still. They believe that, “after the recent correction, risk-reward for largecaps is now favorable over the medium to long term. However, in our opinion, risk-reward for SMIDs remains unfavorable despite the sharp correction.”
This is despite the fact that the small and midcaps indices corrected significantly more than the Nifty. While the Nifty corrected 10%, the Nifty Midcap 150 and Nifty Smallcap 250 indices corrected 15% and 19% respectively.
Jain added that “48% of SMIDs (small and midcaps) have fallen more than 20%. Despite the recent underperformance of SMIDs, the risk reward is not yet favourable in our judgement.This is because of the considerable gap in both valuations and returns between SMIDs and largecaps. In our opinion, underperformance in SMIDs is likely to continue but probably at a slower pace.”
Valuations favour large caps
According to them, the Nifty is currently trading at 18x FY27 earnings and this level “the risk reward is favourable for largecaps over the medium to long term even for a 10-12% earnings growth especially given the fall in India’s cost of capital.”
Jain added that what further supports large caps is the “recent fall in the gap between bond yield and earnings yield also signals an improved risk reward in largecaps. An improved risk reward in largecaps is also supported by the sharp reduction in supply from both primary / secondary issuances and FII selling.”
Expect markets to improve over time
Jain in his note, outlined that “it has been observed in the past that a dollar appreciation correlates well with Emerging Markets’ underperformance in the near-term. This time appears to be no exception.”
“It is interesting to note that the movement of Dollar Index, FII outflows and correction in markets between October, 2024 to now follows the similar pattern of the past. It is therefore reasonable to infer that this is a passing phase and that markets should improve overtime,” he concluded on an optimistic note.