ET Analysis: Investing in an ageing bull market

The current stock are exhibiting various characteristics of such an ageing or mature (as some on the Street prefer to describe it) bull market. Well into the fourth straight year of the bull rally, the Sensex and continue to move from strength to strength, with the momentum taking even the seasoned by surprise.

The Sensex hit the 80,000 mark last week for the first time, clocking nearly 11% returns from June 4 - the day of the election results. In 2024, the BSE index and Nifty have gained about 12%, while the Midcap 150 index has jumped 25% and the 250 index has risen 26%.

While the upmove in the main indices led by blue-chips may be less surprising because of their relative underperformance in the recent past, it's the extended run-up in the mid-cap and small-cap indices in 2024 that has caught many on the Street off guard. Several investors had locked in profits as early as late 2023 or early 2024 because many smaller stocks even then were already considered to be in the red-hot zone. Many of them underestimated the strength of the bullish momentum in the market. Now, as they watch the equities tick higher as bystanders, there is a growing sense of anxiety among them about the missed opportunities. Many of them are asking investment advisors whether they should consider pumping lump sum amounts into the market to ride the momentum. In fact, several investors have taken a plunge after the election results, lapping up shares of the best-performing PSUs to ride the bullish wave. A fund manager called this 'bear fatigue', considered one of the soft signs of an ageing bull market.

The drivers of the recent run-up in the market also point to this situation. So far in 2024, it's been a set of fewer stocks that have driven the Nifty, Midcap 150, and Smallcap 250 indices compared to last year. For instance, on the 50-share Nifty, 10 stocks led by and contributed to 73% of the nearly 2,600-point gain in the Index On the Midcap 150 index, 25 stocks drove almost 60% of the 4,178-point jump since January. Last year, a wider set of stocks drove these indices. Such conditions were last seen in 2018-19 when a handful of large-cap stocks led by Reliance Industries, , , and dominated the market gains.

What does this backdrop mean for investors? An ageing bull market does not mean that the current positive cycle is over. As the Wall Street adage goes, bull markets do not die of old age. Market reversals often are triggered by a recession or a big unexpected global event or shock, often referred to as a Black Swan. Most global market participants do not see economic conditions, mainly in the US, worsening drastically despite record-high interest rates there. Moreover, many of them are expecting the US Federal Reserve to start cutting interest rates if the jobs data show signs of weakening. That could come as the next push for emerging market equities, including India.

An ageing bull market does not mean investors must stay out of equities. It essentially requires investors to fine-tune their equity portfolios and cut risks, especially in smaller shares because the margin of safety keeps shrinking as the market extends gains. There is a likelihood that actively managed equity funds - mainly large-caps - could struggle to outperform their benchmarks when a narrower set of stocks is driving the market. Here, index funds and ETFs may be better options to capture any upside. A Black Swan event, by characterisation, is not something investors can anticipate but managing risks in an ageing bull market, however challenging, will bode well for them.