Bulls vs Bears 2024 | Popular theories on why the rally should continue, and counterarguments

Night is still young for D-St buls.

The use of ‘bears’ in the headline may sound misleading, given there are so few of them left. Right now, all indications are that the party on Dalal Street has enough steam left and that things can only get better in 2024. Let us take a look at some of the wildly bullish theories in favour of the bull market, and also why you should not take anything for granted. Especially after the spectacular run-up over the last year.

Theory 1: There is massive money from global investors waiting to be deployed

Counterargument: Portfolio flows are fickle. ‘Money on sidelines’ was a refrain at the peak of the 1999-2000 and 2007-2008 bull markets too. Any sign of trouble and that money just seems to vanish, or take longer to be deployed.

Theory 2: The retail investor is now mature. Inflows through SIPs will continue no matter what

Counterargument: The majority of new entrants have not experienced a bear market. When the market briefly peaked in October 2021 and traded sideways for more than a year, many mutual fund investors had begun to lose patience.

Theory 3: An emphatic BJP victory in the general elections is a given

Counterargument: Election results can be a tricky affair, though in this case, it is more about the margin of victory. The 2004 and 2009 poll results were contrary to market expectations, the first one negative, and the second one positive.

Theory 4: Policy continuity will be a big sentiment booster

Counterargument: Agreed. But a lot of it already appears to have been priced in following the rally after the state election results. Risk of disappointment, in fact, has risen.

Theory 5: Fed to cut rates earlier than expected, will lead to higher flows into emerging market equities

Counterargument: Buy on rumours, sell on news. A rate cut in the US is now almost a given and has been priced in to a large extent. A section of smart money is betting that the market will top out once the Fed cuts rates.

Theory 6: RBI will cut rates shortly after the US Fed cuts rates, which should boost domestic investments, consumption

Counterargument: Surprise cuts work better for markets, like the one in March 2015 when RBI cut interest rates ahead of the scheduled monetary policy. Not when the market is in any way expecting it.

Theory 7: Corporate earnings growth is strong and expected to stay that way

Counterargument: In most cases, the market has rewarded these stocks in the form of rich valuations. The downside risk is huge in case earnings growth falls short of expectations.

Theory 8: Valuations will way high because India is one of the most attractive investment destinations globally

Counterargument: Possible. But that will also limit the potential upside for new entrants because valuations for even the best of businesses cannot expand beyond a certain level.

Theory 9: The market is not overleveraged

Counterargument: Just look at the size of the options market in comparison to the cash market turnover. It is among the highest globally. Many experts have warned that a black swan event in the options segment will have implications for the rest of the market, even if a temporary one.

Theory 10: Brokers are collecting margins on time. That should reduce the chance of panic-selling

Counterargument: If prices drop suddenly, many clients may choose not to pay additional margins and unwind their existing positions, which in turn could have a cascading effect.

Theory 11: Buy banks and NBFCs. Financials are the best proxy for a growing economy

Counterargument: Nine out of 10 market experts are equivocal that financials will outperform in 2024. The consensus prediction for the new year has a poor strike rate.

Theory 12: The defence story will continue to outperform because of strong order books

Counterargument: This is assuming that the defence companies will be able to execute all their orders on schedule. And that the government will not spring a nasty policy surprise. The market appears to have forgotten that public shareholders in PSU companies are not always the priority for the government.