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De-jargoned: Bull market

LiveMint logoLiveMint 26-05-2014 Rajesh Kumar

The Indian stock market has gone up about 17% since the beginning of the calendar year 2014 and is expected to remain strong in the foreseeable future. According to a few experts, the Indian stock market is entering into a multi-year bull run. The enthusiasm in the marketplace is largely backed by the election outcome. It is for the first time since 1984 that a single party has managed to win a majority in the Lok Sabha.

What is a bull market?

In the stock market, when share prices are rising and are expected to rise in the foreseeable future as well, it is termed as a bull market. There could be several reasons for this sustained upward movement in stock prices. For example, such a situation may arise because of strong growth in the industry, backed by faster overall economic growth. Indian markets, along with global markets, witnessed this kind of a run during 2004-07.

There could be other reasons as well. Rising stock prices in some pockets of the market, which affects economic activity in general, can also take the entire market along with it. This was the case during the information technology boom in the 1990s, which came to an end in the beginning of 2000s.

The term ‘bull market’ is, however, not used only in the stock market; it’s used for other asset classes, such as bonds and gold, as well. Gold had a massive bull run in the international markets between 2003 and 2011, delivering a compounded return in excess of 18%. In a stock market, the expectation of rising prices also leads to higher valuations. For example, the price-earnings (P-E) ratio of CNX Nifty increased from the level of 11-12 in June 2004 to 28-plus in January 2008. However, as the markets crashed, the P-E also slipped to the level of 12 by November 2008.

Present condition

There is a lot of optimism in the marketplace as investors are expecting growth and earnings to pick up, which is reflecting on stock prices. But some analysts are cautious. “Usually, market participants start the year on a high note on earnings growth trajectory and gradually downgrade their expectations. If that trend does not happen this time, then only the long-term bull market can sustain; else, we will be back to muted growth with muted multiples. In a nutshell, we expect markets to remain in an uptrend for at least the next six months,” said a recent note from IndiaNivesh Securities Pvt. Ltd.

Markets have moved in anticipation of better days ahead; now, it’s for the fundamentals to deliver.

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