The bull is raging, but is there a bear lurking in the shadows?

Without doubt, we are in a raging bull market. This was born during the despair of the Covid days. The totally unexpected once-in-a-century pandemic triggered a crash in the market which pulled the Nifty down to 7,511 on March 23, 2020. Then the market started steadily picking-up, ignoring the skepticism of experts that fundamentals do not warrant a recovery. But despite the global recession of 2021 and the consequent impact on income, the rally sustained on hopes of growth and earnings recovery.

It is important to understand that in this global rally, the mother market — the US — led from the front, and the humongous liquidity created by the leading central banks, particularly the Fed, played a major role in fuelling and sustaining the rally. The market’s anticipation of a quick economic and earnings recovery in India was proved right. The economy bounced back with an average GDP growth rate of above 7 percent during 2021-24 and, more importantly, earnings growth picked up swiftly with the NIFTY EPS spurting from 544 in FY21 to 989 in FY24.

Uniqueness of the Indian rally

It is important to appreciate a unique feature of the Indian bull run. This rally is primarily driven by domestic investors whose tribe has been growing every day. There has been an unprecedented and explosive growth in the number of demat accounts, from 4.09 crore in April 2020 to above 17 crore in August 2024, and it looks like this uptrend is going to sustain.

The AUM of the mutual fund industry grew impressively from Rs 9 lakh crore in 2014 to Rs 64 lakh crore in July 2024. The record-breaking growth in SIPs touched Rs 23,200 crore in July 2024. Domestic money has completely eclipsed foreign money in this bull run, and sustained selling by FIIs didn’t have any impact on the market.

Another distinguishing feature of the Indian bull run is that it is widespread, with participation across sectors and segments, unlike in the US where the Magnificent Seven stocks have been driving the rally. The mid and smallcaps have outperformed the largecaps, and many new-age digital companies have become darlings of investors.

We are in the maturity stage of the rally

Optimism is sustaining the rally and it may be argued that we are in the maturity stage of this bull run.  India looks set to achieve a GDP growth rate of around 7 percent in FY 2025, marking four years of above 7 percent growth. Thus, the growth momentum in the economy is strong, corporates are deleveraged, credit growth is good, the asset quality of the banking system is healthy, inflation is under control, the current account deficit is low, and the government has been consistently delivering on fiscal consolidation. In brief, we have a Goldilocks macro scenario supporting the bull run.

Time to be cautious

But bull  markets, like everything else, aren't permanent. Typically, markets display a boom-and-bust characteristic and nobody knows how long this bull phase will last. While it may last longer than most market participants think, perhaps it's time to be cautious. Valuations are elevated, especially of mid and smallcaps , supported only by the gush of domestic liquidity. Irrational exuberance in the SME segment is a cause for concern and safety lies in largecaps. However, it makes sense to remain invested as experience tells us that wealth is created by staying put through periods of outperformance and underperformance.

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