A bull market is coming: This is how you should prepare for it

In the long run, India will always be in a bull market. (Image: Pixabay)
In the long run, India will always be in a bull market. (Image: Pixabay)

Summary

  • When will the next bull market start? Are you ready for it?

Ever since the Indian stock market made an all-time high back in September 2023, when the Nifty crossed 20,000, investors and traders alike have been hopeful of a new bull market.

Unfortunately, their hopes have not borne fruit yet. The Indian benchmark indices have been rangebound for quite some time now. No matter how bullish retail investors seem to be on the broader market of midcaps and small-caps, the Nifty is not in a mood to oblige.

What explains this?

The reason behind an indecisive market

Well, in the Indian stock market today, there are two competing narratives.

The first narrative is that we are already in the middle of a massive bull market that will last at least a few more years. Those who believe this narrative are looking at every correction as a buying opportunity.

The second narrative is that the bull market began after the covid crash in early 2020. It has been nearly 3.5 years since then. Thus, the bull market can't go on for much longer, especially when interest rates have gone up so much. This narrative calls for caution.

To be honest, there are many investors on both sides. This explains the indecisiveness in the market. While mid-caps and small-caps have gone up a lot, the benchmark indices have not. This signifies the caution of the second group.

At the same time, the first group have bought stocks on every dip. This is why we have not seen a major correction or a bear market. Retail investors have played a crucial role in this. As long as they are willing to buy stocks, a full-fledged bear market is unlikely.

When will the next bull market start?

This is not an easy question to answer.

One answer is that in the long term, India will always be in a bull market. This is because of steady GDP growth and strong corporate profit growth. At the end of the day, its earnings that drive markets. And India is well poised on that front, in the long term.

But what if we look that the short term situation?

Well here the second group mentioned above have a good point. With interest rates so high, there isn’t a huge appetite for going all in on stocks, especially among foreign investors.

After all, why invest in ‘risky’ emerging markets like India when the ‘risk free’ US government bond yield is at 5%?

In fact, if the US were to go into a recession next year, these so called risk-free assets will look even more attractive than today.

There’s another point to keep in mind. For more than two years now, the Nifty, and most large-caps, have not gone up too much. Many mid-caps and small-caps have but not many large-caps.

However, the earnings of large-caps have risen strongly over the same period. This means that the valuations of large-caps have been declining. This is known as a time correction and it’s good for the market. Indian stocks are getting more attractive as earnings catch up with high stock prices.

However, in the short term, this puts some pressure on prices as investors wait for better valuations before buying their favourite large-caps.

The situation is analogous to falling prices in a bear market. You see, in a bear market, investors think they can buy stocks at a lower price if they wait a little longer. This causes the stock prices to fall even more due to a lack of buyers.

In the same way investors avoid making big investments in large-caps during time corrections because they know the situation can last for a while as earnings catch up. Thus they are in no hurry to buy and instead prefer trading or investing in stocks across midcaps and small-caps.

This is the reason why we aren’t in a bull market right now. However the situation can change in two ways leading to the start of a new bull market.

Trigger for the next bull market

The first is the completion of the catch up process in earnings. We’re seeing this happen in some sectors and stocks. However, it may take another year or two for the entire Nifty to trade at a reasonable PE ratio, assuming earnings keep growing quickly.

The second way is for a small market correction to bring large-cap valuations to reasonable levels. This will excite those who believe the market is due for a correction. We will likely see significant buying by all segments of the market in this scenario.

Will this renewed buying result in the start of a new bull market? Only time will tell. But there would need to be a significant correction first.

Could that happen?

The answer is yes. Here’s Tanushree Banerjee, co-head of research at Equitymaster, on this possibility…

Although just a scenario, based on few assumptions, it is not impossible for the Sensex to end 2024 lower than where it is today.

Also, it is perfectly reasonable to expect equity investors to be prepared for a very volatile stock market.

The benchmark index tends to sway wildly in a year when several macros are shifting. And 2024 could be such a year for several reasons.

The problem is most investors today aren't even keen to think about it. They would rather see their stocks nosedive, especially the problematic ones, than prepare for Sensex 50,000.

And this not just about the Indian stock markets or Indian investors. The post pandemic euphoria in global stock markets could possibly take a back seat in 2024.

Indian investors may have to contend with some major macro changes in 2024 that could jolt their perception of the stock market risk.

Tanushree has highlighted some key reasons why we could see a correction before the start of the next bull market. Read her editorial for the details – Could the Sensex Fall to 50,000?

Such a correction, when combined with the ongoing catch up in earnings, could be just the trigger the market needs to start a new bull market. This bull market could see the Sensex at 100,000 before 2028.

Conclusion

No matter which narrative proves to be correct in the short term, long-term investors need not worry.

A new bull market is assured. If it happens due to a correction in the short term or when earnings growth finally makes the Nifty cheap enough to buy, or a combination of the two, we are most likely to see significantly higher Nifty levels a few years down the line.

So the big question on your mind should not be, ‘When should I buy stocks’?

Instead, ask yourself if you have made a watchlist of fundamentally strong stocks in India, across market-caps and sectors, and if you are setting aside sufficient funds for the time when the market presents you with the right opportunity to buy those stocks for the long term.

If you are already doing both…congratulations! You are in a good position to create wealth in the next bull market.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

MINT SPECIALS

Switch to the Mint app for fast and personalized news - Get App