The raging bull market in Indian stock market over the last four years, has been baffling market analysts. The rally has remained indomitable despite multiple setbacks including the Russia-Ukraine war, raging inflation, global central banks going on a monetary tightening spree, conflict in the Middle East and slowdown in the Chinese economy. Even as other stock markets slipped and slid due to these factors, Indian stock market has been thundering higher.
This resilience is reflected in the performance of Indian stocks. The MSCI India index has delivered 260 per cent returns to investors since March 2020 while the MSCI emerging market index has been largely stagnant, gaining just 46 per cent in this period. The other market which has rewarded investors generously, the US market, has delivered a much lower 167 per cent.
The absence of deep corrections has been the hallmark of this up-move. The deepest correction witnessed since March 2020 was between October 2021 and June 2022 when the Fed began monetary tightening. But that correction led to a decline of just 18 per cent and the loss was retraced in no time, thanks to buying from domestic and foreign investors. Most other markets are still trading below their 2022 peaks. Other pull-backs since 2022 have barely corrected 10 per cent from the peak.
How long can this bull market last? What does the market valuation and psychology of the market participants indicate? We can look for some answers from the historical data of the Sensex.
Moderate bull markets
We analysed the long-term up and down trends in the Sensex based on the data available since 1979 (data prior to that date is not available). Uptrends that gave returns of over 90 per cent have been considered as bull markets. These have been terminated by deep corrections of over 30 per cent or shallow but long-drawn corrections.
We had 11 bull markets since 1979 (see table). In eight of these phases, the returns were normal, ranging between 90 and 160 per cent. These include the bull runs witnessed in the 1980s when the up moves were regularly interrupted by corrections, implying profit taking and lack of conviction in the uptrend.
Though the bull run from the global financial crisis low was also strong, it yielded normal gains since there was an extended sideways move between 2011 and 2013 due to the trade war, Chinese slowdown and turbulence in commodities market.
The super-normal
But there have been a few uptrends which have surprised everyone by going on and on and yielding super-normal returns. The first such raging bull market, which at least some of the current generation of investors have witnessed, was between 1991 and 1992, also called the Harshad Mehta period.
It was a crazy market in which stocks spiralled higher with no connect with fundamentals. Sensex price-earning multiple hit the dizzying height above 55 towards the end of March 1992, compared to PE multiple of 19.8 a year ago. This was largely a speculative market with money from banks being channelled into markets to manipulate stock prices. While this phase lasted only 13 months, the Sensex gained 380 per cent in this period.
The other super-normal bull market was witnessed between 2003 and 2008. This was a more sober phase, backed by fundamentals, though there were pockets of speculative excesses. It was a golden period for the economy with the privatisation and opening of the economy to foreign investments gaining momentum. Rapid increase in infrastructure development as well as private capital expenditure made the country clock a very healthy growth rate helping Indian corporates grow their profitability considerably.
Market valuation however become very pricey towards 2007, with the PE multiple way above its long-term average and price to book value at 5.47. The Sensex gained a whopping 622 per cent in this phase, which lasted 56 months.
The current bull run
The current bull-run from the Covid lows in 2020 has so far extended over 53 months. But this is only the third longest. The uptrend between August 2013 and January 2020 lasted 77 months. So, it may not be surprising if the rally continues for a year or more without a major pull-back.
In terms of magnitude, though the Sensex returns have surpassed 200 per cent, the gains are lower than the gains in the Harshad Mehta rally and the 2003 to 2008 rally.
The 1992 market was purely speculative driven by rampant price rigging, with no fundamental moorings. The rally from the Covid-lows is more comparable to the rally between 2003-08 because it is backed by sound fundamentals.
Listed companies have benefited from the distress among smaller companies during the pandemic to increase their market share. They could pare their debt and improve balance sheets thanks to the lull in the business during the pandemic. Availability of easy credit since the pandemic has helped bring down finance cost and banks have been making hay as demand for personal loans boomed.
The IT sector managed to hold its head above the water thanks to the digitisation drive across the globe. Construction, steel, cement etc have gained from the government capex spends. Consumption from the upper middle class has helped consumer durables and non-durable manufacturers.
It is due to the improving financial metrics that the benchmarks do not look too overvalued at this point. The current PE multiple of 23.9 is not too far from the 10-year average and the price to book value of 3.8 is not too extravagant either.
The fear factor
Another factor that is supportive of the current uptrend is the all-pervasive air of caution regarding the rally. Such long-term bull markets peak when the shoe-shine boy starts giving you tips. In other words, everyone turns into a bull. But most market pundits are advising caution and predicting a correction. While retail investors are trading heavily in the futures and options segment, their activity is restricted to handful of contracts and small- and mid-cap stocks.
The ongoing rally is already a super-normal bull market. It remains to be seen if it can reach close to the returns made in the 2003-08 phase.