That’s the finding of a new report from Monarch AIF, which describes the past year-and-a-half as a “strange phenomenon” in Indian markets: a phase of simultaneous timing and value correction where indices remain high on the back of a narrow band of large-cap stocks, while hundreds of small and midcap companies have been muted. This difference, the company says, is “extremely rare.”
And now, with the US-Israel strikes on Iran pushing geopolitics back to the fore, the Sensex fell over 1,000 points on Monday, the Nifty closed below 24,900. Investors now face a confluence of forces: A market that had already suffered from an 18-month sell-off is now grappling with a crude oil shock and an escalating Middle East conflict.
The question is whether this is the moment to run, or the moment to act.
The beer market is hiding in plain sight
“It feels less like a perceived crash and more like a sell-off, especially in the broader small- and mid-cap space,” said Aruna Gary N, founder, CEO and fund manager at TrustLine Holdings. “And historically, these kinds of milestones are painful, but they’re also when long-term opportunity is quietly emerging.”
He cited three recent examples of what he called “inappropriate price action on the downside.” He said UPL shares fell 18% or more after the group’s restructuring announcement, despite senior debt not having new data as the market is now in a mode of raising potential risks. IDFC Bank lost over Rs 14,000 crore worth Rs 590 crore in market capitalization due to alleged fraud. Dishmann’s Carbogen shares fell more than 10% after a mild downgrade by the agency. “One can go on,” said Aruna Geary. “The markets are in a less forgiving state.”
Yet inside the cage, something has changed. Monarch AIF analysis shows that around 36% of all stocks above Rs 1,000 crore currently trade at trailing 12-month P/E multiples below 25x, up from just 25% in September 2024. Many small but fast-growing companies are now available compared to one-year forward funds with a P/E of less than 20 fund points as well. Small companies that have hidden sales. Pre-tax profit for the bottom half of the listed universe by market cap grew at a CAGR of nearly 20% between 2019 and 2025, with PAT growth running at 25%. Net debt-to-equity for these companies has fallen to just 0.13x. Over the last three years the revenue CAGR for the bottom half was at 14%, for the top half at 11%.
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Price cuts add more fuel. Monarch AIF notes that after each rate cut period involving more than 100 basis points, the mid-cap and small-cap indices have seen a rapid recovery, with smaller companies willing to take greater advantage of operating profit, leading to better margin and earnings growth.
The company expects to see further revenue growth in Q4, with PAT growth in Q3 being partially pressured by labor code provisions. Trade deal announcements with the US and the EU are also expected to support export-oriented small caps, with revenue enhancements likely to follow in FY27.
The Iran war adds to the pain
In this complex picture, Iran’s violence has now erupted. However, history offers some perspective. Elara Securities notes that over the past 25 years of Middle East crises, the median Nifty return has been flat in one week and one month, and has risen 17% in a year. The sell-off only deepens meaningfully when geopolitics turns into a sustained energy shock, as in the 2011 Arab Spring, when Brent rose 20-25% in the first month and the equity shortfall widened rapidly. The Russia-Ukraine incident remains the closest tension pattern on record.
MK Global’s base case is that if the current antagonism ends in one to two weeks, markets will recover quickly as they did after the October 2023 and June 2025 events. Jeffries, while flagging India’s deep economic ties to the Middle East — 17% exports, 55% crude supply, 38% remittances — notes that recent regional conflicts have been short-lived, and that “a dip could be a buying opportunity.”
Also Read: Petronet LNG shares fall 8% after issuing force majeure warnings amid Middle East hostilities
Axis Mutual Fund is measured in equity. “Market price duration and economic impact, not sentiment,” the fund house said. “When it becomes clear that supply-side constraints are manageable, policy frameworks remain intact and growth is not structurally impaired, the risk premium declines. For India – where growth is driven by domestic consumption, capex restructuring, digitization and manufacturing restructuring – geopolitical shocks are typically buffers, not disruptions.”
The fund house pointed to a consistent pattern throughout the fifteen-year conflict selloff: “Investors who exited equities during the previous conflict selloff frequently missed out on the recovery that followed—sometimes in a relatively short period of time.”
What should investors do?
Back to the original market question. Aruna Giri’s version is unmistakable: “It’s time to invest to work, not to finish.” He acknowledges the challenge – “this approach will require a tough stomach to digest short-term and notional losses” – but argues that the number of opportunities that offer attractive free cash flow and payout products with high growth potential “is witnessing a rapid increase. Exciting times for bottom-up stock pickers.”
Monarch AIF agrees, saying that the risk reward for picking bearish stocks has changed “fairly” in a way that usually only happens after a bear market has run its course.
Indicators may not tell you that a bear market is here. But for 80% of Indian stocks, it is too much and some of the most experienced voices on the broker street are quietly starting to buy.
((rejection: The recommendations, suggestions, opinions and views given by the experts are their own. (It does not represent the views of The Economic Times.)
