How To Invest In An Ageing Bull Market

Bull rallies (periods when stock prices rise) and bear declines (periods when stock prices fall) are natural parts of stock market cycles, but they don’t follow a fixed timeline. Within a bull market, various phases occur at different times. One of these phases is known as the ageing bull phase. Vaishnavi Chauhan sheds light on what investors should do during such a period.

Investors have been watching with excitement as stocks soar to new heights and the markets hit all-time highs. The Indian markets have experienced a rally like never before, and with the upcoming Union Budget, there’s even more for investors to anticipate. However, just as the saying goes that ‘nothing is permanent’, there’s a rumour among investors that the market might be heading toward an ageing bull phase.

What is an Ageing Bull Phase?
First, let’s understand what an ageing bull phase means. Bull rallies (periods when stock prices rise) and bear declines (periods when stock prices fall) are natural parts of stock market cycles, but they don’t follow a fixed timeline. Within a bull market, various phases occur at different times. One of these phases is known as the ageing bull phase. An ageing bull market typically refers to a stage filled with excesses, where stocks continue to climb, even though there are warnings to be cautious. In this environment, there is a mix of excitement and nervousness among investors.

Some believe the rally will continue, while others fear that the market may soon reverse course. The sense of excitement comes from watching investments grow, but the nervousness stems from the uncertainty of how long the growth will last. Some investors are optimistic – predicting that the rally will go on while others are more cautious, believing the market might soon decline. The current stock market conditions are showing signs of an ageing or mature bull market. Now in its fourth consecutive year, the bull rally has seen the Sensex and Nifty continue to strengthen, surprising even seasoned investors.

Impact on Equity Markets
What does this mean for the future of the equity markets in India? Should investors continue to invest in equities? While the rise in main indices led by blue-chip stocks may not be surprising due to their past underperformance, it’s the significant increase in Mid-Cap and Small-Cap indices in 2024 that is out of the ordinary. Several investors locked in profits as early as late 2023 or early 2024, believing the smaller stocks were already too hot. They underestimated the market’s bullish momentum. Now, watching from the sidelines as equities climb higher, there’s growing anxiety about missed opportunities.

Many are asking investment advisors if they should invest lump sums to catch the momentum. In fact, several investors have jumped in after the election results, buying shares of the best-performing PSUs to ride the bullish wave. A fund manager called this “bear fatigue”, a subtle sign of an ageing bull market. Now, investors might be wondering which companies they should invest in next. Well, the answer remains the same: fundamentally strong stocks! Let’s quickly explore how to identify fundamentally strong stocks, mitigate the risk of losing funds, and allocate capital wisely

Navigating the Stock
Market Investors are always on the lookout for stocks that are wellpositioned in terms of valuation. It’s crucial to focus on stocks that aren’t overvalued. For instance, if a stock has already seen a significant price increase, the chances of it breaking its all-time high again are slim, as the potential gains have likely been factored in already. Looking back at the market performance from 2019 to 2020, the financial services sector experienced a notable boom. Following that, from 2020 to 2022, energy stocks took the spotlight. It’s unrealistic to expect these same sectors to outperform again soon as the market has already accounted for their past performance.

Anticipating New Sectoral Opportunities
With the upcoming budget and the current phase of the bull market, we can expect new sectors to come into focus. Sectors like railways, textiles and specialty chemicals might be the next big performers. Investors should pay attention to stocks within these sectors, especially those that have received government incentives. Additionally, stocks that have been stagnant for a long period could present new opportunities for profit if there’s a turnaround event.

Maintaining Liquidity and Portfolio Rebalancing
In this phase of the market, it’s wise for investors to maintain a reasonable amount of liquid cash. This liquidity will be useful if the market corrects, allowing investors to buy stocks at lower prices. Rebalancing your portfolio is essential. Consider shifting funds into new sectors that show potential for growth.

Risk Diversification
Diversification is a key strategy in managing a portfolio. With blue-chip stocks, the expectations for significant outperformance are lower. Instead, investors should allocate their funds across small-cap, mid-cap and Large-Cap stocks in proportion to their risk tolerance. This approach helps spread risk and increases the chances of capitalising on growth in different market segments.

Importance of Valuation
Valuation is a critical factor in stock selection. Investors should aim for stocks that are appropriately valued, avoiding those that are overpriced. A stock that has already risen significantly might not have much room to grow, as its potential gains have been discounted by the market. There are a few additional steps to consider balancing opportunities and managing risks effectively in an ageing bull market. First, keep an eye on financial news, company reports and economic indicators to understand what’s driving the market sentiment. However, avoid making impulsive decisions based on excitement or fear. Staying rational is crucial.

Secondly, avoid the herd mentality. It can be tempting to follow the crowd in a positive market, but blindly investing in trending stocks or sectors is risky. Conduct thorough research and focus on due diligence before making investment decisions. Pay attention to the long-term fundamentals of companies rather than chasing short-term gains. Furthermore, quality is the key. Look for companies with strong financials, a consistent growth track record, competitive advantages, solid management and a clear growth strategy.

Quality companies tend to perform well in various market conditions and are more likely to weather downturns. Consider dividend-paying stocks. These can be appealing in a positive market as they provide a source of income and tend to be more stable during market volatility. Adding dividend stocks to your portfolio can offer a steady income stream. Finally, stay disciplined. Emotions can run high in a positive market, leading to impulsive decisions. Stick to your investment plan, avoid overtrading, and focus on your long-term financial objectives.

The longer the bull market lasts, the more severely investors will be affected with amnesia; after five years or so, many people no longer believe that bear markets are possible. - Benjamin Graham

Conclusion
What does this backdrop mean for investors? An ageing bull market doesn’t mean the positive cycle is over. Market reversals are usually triggered by a recession or an unexpected global event, often called a Black Swan. Most global market participants don’t foresee a drastic worsening of economic conditions, especially in the U.S., despite record-high interest rates. Many expect the U.S. Federal Reserve to start cutting interest rates if job data weakens, which could boost emerging market equities, including those of India.

This doesn’t mean investors should avoid equities. Instead, it calls for fine-tuning portfolios and reducing risks, particularly in smaller shares, as the margin of safety shrinks with rising markets. Actively managed equity funds, especially large-caps, might struggle to outperform their benchmarks when fewer stocks drive the market. In such cases, index funds and ETFs could be better options for capturing the upside. Although a Black Swan event is unpredictable, managing risks in an ageing bull market, while challenging, will benefit investors.