Hiren Ved, Director & CIO at Alchemy Capital Management
There are several ways to define a bull market, but the simplest time-tested definition could be “bull markets are born in the depths of a depression" and “are reared by lower interest rates and rising earnings” or expectations of lower interest rates and rising earnings!
There are a few defining characteristics of a bull market which never change over time. Those are:
1. Rising earnings and expectations of earnings
2. Peaking of inflation and interest rates
3. Reasonable macro stability
4. Markets making higher highs and higher bottoms
5. Unloved and under-invested sectors leading returns
6. Sector rotation
7. A strong narrative that is difficult to ignore
8. Implosion of mini bubbles along the way
It would suffice to say that the current bull market was born in the depths of the COVID correction in 2020. From there, we have seen a smart recovery. The breadth of wealth creation is dwarfed by and not completely appreciated when just looked at from the prism of how much the index has gone up. However, the recovery of the broader markets is better captured when we look at aggregate market caps.
What is essential to note is that the post-COVID bull market has been powered by the stupendous earnings growth in the last four years. It is also reasonable to expect that earnings will compound at mid-teens in the next few years. It is also a fair assumption that both inflation and interest rates have peaked from their highs in 2022.
Strong foundation
India's macroeconomic stability in terms of growth, current account and fiscal revenue buoyancy also seem to be in place. Markets have consistently made higher highs and all corrections have been higher than the previous ones.
PSUs and domestic cyclicals have led the current rally where investors are under-invested. The narrative of India's relatively superior growth among the leading developed and developing economies of the world cannot be disputed.
We saw our version of valuation bubbles in the "new age internet sector in 2021", which burst in 2022 on rising interest rates and now the one forming in the SME and IPO markets will also eventually burst.
But these weren't big enough to derail the bull market because the foundations of this bull market, in our view, are based on much more solid structural factors, like investment-led growth, superior earnings, deleveraged corporate sector and rising domestic liquidity coming to financial assets, among others.
Sure, there will be occasional breaks and corrections in this bull market, like in any. These challenges/corrections are what keep the bull market alive as investors and markets dial back due to the uncertainty caused by these events.
The correction we witnessed in late 2021 and in 2022 because of rising interest rates, rising commodity costs and supply-chain disruptions due to the Russia-Ukraine conflict in 2022 and the US regional bank failures in early 2023 are examples.
Be rest assured there will be more to come but this bull market is alive and kicking!
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