Iran-Israel war: Are small-cap stocks most exposed to Middle East tensions amid high valuations?
Indian stock market: Geopolitical tensions are once again flaring up in the Middle East, as hostilities between Iran and Israel continue for the fifth consecutive day, making investor sentiment jittery towards riskier assets.
Global markets have been on edge, with the conflict adding fresh strain to an already fragile global economy, one that is still grappling with the effects of trade tensions and the ongoing Russia–Ukraine war.
For the Indian stock market, the Iran–Israel conflict has added to existing concerns around stretched valuations. Although India does not have significant trade dependence on either country, the tensions have triggered a sharp spike in crude oil prices, dampening market sentiment.
While local equities initially reacted negatively to the developments, they later rebounded sharply, with strong resilience in large-cap stocks providing much-needed support to frontline indices, helping them trade higher despite global concerns.
During periods of heightened market volatility, stocks with rich valuations tend to correct more than those with reasonable valuations. Although the overall market appears stretched following a sharp rally over the last three months, analysts believe small-cap stocks may face further pain if geopolitical tensions persist, as they are more richly valued compared to large-cap counterparts.
Vinod Nair, Head of Research at Geojit Financial Services, said, 'Despite ongoing geopolitical tensions between Israel and Iran, the market moved higher, supported by gains in large-cap stocks, as investors maintained their focus on long-term fundamentals during volatile times. Geopolitical developments in the Middle East are likely to influence near-term market sentiment, with any signs of de-escalation being closely monitored. Small-cap stocks are expected to underperform in the short term, given their elevated valuations and lack of immediate triggers.'
Recent data also indicates a shift in retail investor preference towards large-cap stocks, with ownership in mid- and small-cap counters falling to a nine-quarter low amid a broader market sell-off during the March 2025 quarter, according to the NSE report titled 'India Ownership Tracker.'
Meanwhile, allocation towards large caps has risen, reflecting a growing inclination for the relative safety of blue-chip stocks amid market turbulence.
According to the domestic brokerage firm Kotak Institutional Equities, small caps witnessed the largest cuts on their FY2026 EPS estimates. The brokerage notes that continued weakness in parts of the economy has resulted in continued downgrades to consensus earnings across market caps for FY2026E/27E.
However, small caps lead the EPS cuts with a 6% cut in their FY2026 EPS estimates versus 2% for large caps and 3% for mid-caps. The downward revisions have been broad-based, with consumer-facing businesses seeing larger cuts.
The same can be seen in earnings cuts of individual stocks of the Nifty 500 Index, with 70% of stocks seeing downgrades versus 30% of stocks seeing upgrades over April-June 2025, noted the brokerage.
The Nifty SmallCap 100 is trading at a 1-year forward price-to-earnings (P/E) multiple of 27.2x, significantly higher than its long-term average and much closer to the Nifty MidCap 100's P/E of 28.3x. The spike in Nifty small-cap-100 forward P/E valuation to near mid-caps and at a premium to Nifty-50
This is unusual, as small-cap stocks typically trade at a discount to mid-caps due to their higher risk profile and lower liquidity. The sharp rise in valuations places the index near its historical peaks, levels that were last seen during previous periods of overheated sentiment, such as mid-2021 and pre-2018, as per the analysis done by domestic brokerage firm InCred Equities.
In contrast, the Nifty 50 is trading at a more reasonable 20.7x forward P/E. The narrowing gap between small- and mid-cap valuations is causing discomfort among investors, particularly in an environment of persistent global uncertainties and uneven earnings visibility.
Without a strong pickup in earnings growth, such elevated valuations leave little room for upside and increase the risk of a valuation-driven correction.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Hans India
35 minutes ago
- Hans India
Strong demand, stable activity in economy
India's economic indicators are becoming more supportive of growth, according to the report released by Motilal Oswal Private Wealth (MOPW) on Friday. The report highlights that several positive trends are emerging on the domestic front, including higher GDP growth, easing inflation, and strong tax GDP grew by 7.4 per cent in the fourth quarter of FY25, which is the highest reading in the last four has remained below 4 per cent for four consecutive months, and GST collections have been rising steadily. These signs indicate strong demand and stable activity in the formal sector of the report also notes that India's policy environment is now moving in a unified direction. Fiscal, monetary, and regulatory policies are all aimed at maintaining growth increased tax exemption limits that came into effect from April 2025 are expected to improve disposable incomes and boost the same time, the government's capital expenditure continues to rise, supporting the investment the global front, the environment remains mixed. In April and May, markets faced worries over tariffs and geopolitical tensions. However, the situation improved with a delay in global tariff implementation and a ceasefire announcement between India and Pakistan. This improved global sentiment has helped global equity markets, with the MSCI World Index reaching record highs. Meanwhile, rising bond yields in Japan and China's shift towards gold show that global investors are moving away from US could become a concern as the US faces refinancing of $9 trillion in debt this a weaker Dollar Index could help emerging markets like India by attracting more foreign investments. In the Indian stock market, valuations have increased as earnings have not grown at the same Nifty-50's one-year forward valuation has risen above its long-term average, and mid and small-cap stocks continue to trade at a premium. This makes careful stock selection and active management more important for investors looking to generate higher returns, the report stated.
Hans India
an hour ago
- Hans India
HDB sets IPO price band at Rs 700-740
New Delhi: HDB Financial Services, a subsidiary of HDFC Bank, on Friday fixed a price band of Rs 700-740 per share for its Rs 12,500 crore company is expected to list on the BSE and NSE on July 2. At the upper end of the price band, the company is valued at nearly Rs 61,400 crore. HDB Financial Services' maiden public issue will open for subscription on June 25 and conclude on June 27, while the bidding for the anchor investor will open for a day on June 24, the company announced. The IPO is a combination of a fresh issue of equity shares worth Rs 2,500 crore and an Offer For Sale (OFS) of Rs 10,000 crore by promoter HDFC Bank. At present, HDFC Bank holds a 94.36 per cent stake in HDB Financial Services, a non-banking financial company (NBFC) arm of the bank. The company proposes to utilise the proceeds from the fresh issue to strengthen its Tier-I capital base. This will support future capital needs, including additional lending, to support business growth. The decision to list HDB Financial Services follows the Reserve Bank of India's mandate in October 2022, requiring NBFCs in the upper layer to list on the stock exchanges within three years. Last year, HDFC Bank's board approved a share sale worth Rs 12,500 crore, comprising Rs 10,000 crore OFS related to HDB Financial Services. After the proposed IPO, HDB Financial Services will continue to be a subsidiary of the bank, in compliance with the provisions of the applicable regulations. Half of the issue size has been reserved for qualified institutional buyers, 35 per cent for retail investors and the remaining 15 per cent for non-institutional investors.
Hans India
an hour ago
- Hans India
Middle East conflict no major worry: Crisil
The impact of the Middle East tensions on most Indian companies is expected to be limited in the near-term, with low capex intensity and balance sheet strength of firms offering a cushion from potential vulnerabilities, according to a Crisil report released on Friday. However, a prolonged escalation could aggravate the impact mainly due to a rise in oil prices and disruption in supply chains which could stoke inflation, the report added. 'So far, the ongoing uncertainties in the Middle East have not had any significant impact on India Inc's global trade. However, if the situation deteriorates, some sectors such as basmati rice could see a heightened impact and will require monitoring, while others like fertilisers and diamonds — both cut and polished — may also see some impact,' the report stated. Also, prolonged and increasing uncertainties can result in a rise in air/sea freight cost and insurance premiums for export/import-based sectors, the report states. India's direct trade with Israel and Iran is minuscule at less than 1 per cent of the total trade. While India's major export to Iran is basmati rice, trade with Israel is more diversified, and includes fertilisers, diamonds and electrical and Israel accounted for around 14 per cent of India's basmati rice exports in fiscal 2025. But because basmati rice is a staple, the impact on demand due to the ongoing tensions is likely to be limited, according to the Crisil report. Additionally, India's ability to export to other countries in the Middle East, the US and Europe reduces demand risk. But a prolonged crisis can lead to possible delays in payment from counterparties in these regions, elongating the working capital cycle, the report domestic diamond polishers, Israel is mainly a trading hub, accounting for about 4 per cent of the total diamond exports last fiscal. Additionally, around 2 per cent of all rough diamonds imported are from Israel. Polishers also have alternative trading hubs such as Belgium and the United Arab Emirates, with ultimate buyers based in the US and Europe, which will help them to manage any adverse impact on the sector, the report states. Repercussions of any further significant increase in the crude oil prices from the current levels would vary across oil prices will benefit upstream oil companies because it translates to more revenue, while their costs are downstream oil refiners, operating margins could get squeezed due to higher input cost as they may have limited ability to fully pass on the same through increase in retail fuel aviation companies, fuel accounts for about 35-40 per cent of operating cost. Further, the operators will also witness higher fuel cost due to increased travel time on account of airspace closures/diversions.
