Understanding Bull Markets in India

Introduction

In this article, we are going to discuss the 5 Bull runs in India. What is a bull market, in which period and scenarios these bull runs happened in India etc.

What is a Bull Market?

• The term “bull market” refers to a time or a period when the stocks are on an upward trend. It is derived from the term “bullish”. In this case Bullish is a metaphor for charging or moving forward.
• It is important for us to understand what a bull run signifies and what are its micro and macro-economic implications.
  • In a bullish market, sentiments of investors are high. The small and mid-cap companies tend to take the maximum advantage of this optimism.
  • There is increased cash flow in the market and hence the companies expand and grow at an accelerated pace.
  • Apart from the growth of individual companies and the market itself, the economy of the nation also improves which is reflected by increased GDP growth.

Which are these 5 Bull Runs in India?

India, being a developing economy, has witnessed several bullish periods since independence. Indian bull runs, on an average, have lasted for 32 months with the longest and slowest one being the most recent one.       

To better understand a “Bull Run” we must now look at the history of few bull markets in India.

1985-86

• The first one being the one in 1985-86. The bull market of 1985 began with Rajiv Gandhi becoming the youngest Prime Minister of India after the unfortunate assassination of his mother and former Prime Minister Indira Gandhi. The death of Indira Gandhi shook the entire nation. Aftermath of the incident resulted into a triumphant victory for the Indian National Congress. Hence started the new age of Indian Politics.
• Market was, correspondingly, filled with optimism under the able and charismatic Finance Minister V.P. Singh. V.P Singh laid out a cognizant reform for long term fiscal policy and rationalization of excise duties.
• Further, Rajiv Gandhi gave subsidies to corporate companies in order to increase Industrial Production which triggered dramatic growth in economy and consequently the markets witnessed new highs. Rajiv Gandhi was also instrumental in bringing about the IT and Telecom Revolution. With prolific reforms from the new government, market surged from 230 to 670 levels, a growth of nearly 3 folds, in a time frame of less than 2 years.
• The bull run came to an end with the disclosure of Bofors scam in 1987 which shook the nation’s confidence and brought down the market in correction.

1991-92

• The country, however, did not wait for long to see another “bull market” which is infamously known as the Harshad Mehta Bull Market. This bull run started in the year 1991 which was again ignited by the formation of new government when INC (Indian National Congress) returned to power by overthrowing the then ruling coalition government of Janata Dal, BJP and other Left parties.
• Dr. Manmohan Singh became the Finance Minister under the Prime Ministership of PV Narsimha Rao. The historic budget of 1991 proved decisive and path-breaking for Indian economy and thus triggered the skyrocketing uptrend of Indian Stock Market. SENSEX shot up by around 300% in less than 18 months.
• The magnitude of this uptrend was such that it would result in negative equity return for a decade. Unfortunately, this rally was fuelled by the notorious mastermind Harshad Mehta a.k.a the “The Big Bull”.
• B. Com graduate, Harshad Mehta started his career as a salesperson in New Age India Assurance Company Ltd. During this time, he got attracted towards the Share Market and soon worked his way up to be named as the “Amitabh Bachchan of Stock Market”.
• In his scam, Harshad Mehta exploited the loopholes in Banking System by forging fake bank receipts in Ready Forward Deals. In short, Mehta used to illegally raise cash from Ready Forward deals and invest it in Share Market.  The reputation of Mehta was such that he manipulated the entire stock market according to his will and manged to hike the demand of certain shares like ACC, Sterlite and Videocon.
• This resulted in stocks like ACC (Associated Cement Company) to jump from Rs. 200 to Rs. 9000 within 3 months. The stock markets were overheated, and the ‘bulls’ were on a mad run.  
• In the end, Mehta sold off majority of his stocks in order to book profits which irrefutably crashed the market. By 1994, the market came down to almost 30% of the 1992 peak value.

1998-2000

• The dawn of Internet in 1998 marked the next bull cycle in India. While the US was amidst the dot com bubble, Asia was under the Y2K scare (a bug which was expected to afflict Computer Systems in the year 2000).
• However, India was not daunted by this and took this opportunity to foray into global software markets by providing debugging services. Thus, began the rally of IT stocks in share market.
• Within 2 years, BSE IT Index gained over 1000%. More than 30% of SENSEX was now made up of IT companies. All this resulted into overvaluation of IT stocks and thus the market started correcting in 2000. During this period (1998-2000), SENSEX rose from 2,700 to almost 6000.

2003-2008

• The next Bull Cycle began in the summer of 2003 which was brought by the Infrastructure and global Liquidity. After the dot-com bubble burst in US and Y2K incident in Asia, the global markets, including Indian, had corrected to considerable proportions.
• Sentiments of investors had now started to restore all across the globe. A significant characteristic of this Bull run, which made it distinct from the previous bull runs, was that it was not India-specific.
• Many other countries like China and Brazil also climbed to all time highs in this period. US on the hand was witnessing a boom in realty sector which resulted into it being submerged in subprime mortgages.
• Banking sector of US was eventually exposed in 2008 with the collapse of Lehman Brothers. Consequently, Wall Street crashed, and its impact rippled all across the world. As a result, the Indian Markets fell on several occasions in 2008.
• From peak levels of 20,000, SENSEX came down to 8,000. Thus, marked the end of another Bull Run.

2013-2018

• The bull run of 2013-18 is considered as the longest bull run in Indian history. Nonetheless, it was also the slowest. During this period, SENSEX was at 18,000 level, its lowest, in 2013 and managed to touch 38,000 in August of 2018, i.e. a growth of nearly 2 times in 6 years.
• The bull run started in 2013 with the rise of Modi in Indian politics. It was a period when anti-incumbency was at its peak and the nation was infuriated with revelation of scams and corruption. India desperately wanted a new Leader. In 2014, Modi led his party, BJP, to victory with NDA forming the government at the centre.
• Prior to the National Politics, Modi had been the Chief Minister of Gujarat for three consecutive tenures. Industries in Gujarat prospered under his realm and he was therefore expected to reproduce same results in Centre as well. With initiatives like Make in India and Digital India, BJP did not disappoint the Market.
• In 2017, Mid-Cap and Small-Cap companies surged to new highs. The rally was expected to continue in 2018, but the NBFC crisis of September 2018 shook the sentiments of the investors.
• Although the markets did not fall considerably, yet they were not able to grow at the same pace again. In 2019, the market was again shaken by global tensions (trade war between US and China) and volatility in crude price.
• With the highly criticized budget of 2019 coupled with the GDP rate falling below 5%, the bull run is now believed to be over.

Conclusion

• Bull runs, thus, might provide lucrative opportunities for making quick money for traders, but, on the contrary, are not so welcomed by value investors (who are in for the long run).
• It is therefore rightly said by Mr. Warren Buffet, “Be fearful when others are greedy and be greedy when others are fearful”.

Detailed Explanation of Nifty 50, Nifty Next 50 & 11 More Nifty Indices

Introduction

Nifty50 and Sensex are the most popular, also widely tracked and traded indices in the Indian stock markets. However, these are not the only two. There are many more Nifty Indices. In this article, we are exploring the Nifty equity indices in broad based index category in detail.

Exploring Nifty Equity Indices

NSE Indices Limited maintains equity indices comprising broad-based benchmark indices(13), sectoral indices(11), strategy indices(27) and thematic indices(20).

What are Nifty Broad Based Indices?

• Nifty Equity Indices in Broad Based category are the indices which consist of the large, liquid stocks listed on the Exchange.
• They serve as a benchmark for measuring the performance of the stocks or portfolios such as mutual fund investments.
• NSE is having total 13 broad based indices. These are:
  1. Nifty 50
  2. Nifty Next 50
  3. Nifty 100
  4. Nifty 200
  5. Nifty 500
  6. Nifty Midcap 50
  7. Nifty Midcap 100
  8. Nifty Midcap 150
  9. Nifty Smallcap 50
  10. Nifty Smallcap 100
  11. Nifty Smallcap 250
  12. Nifty LargeMidcap 250
  13. Nifty MidSmallcap 400

Above Nifty index structure efficiently represents large, mid and small market capitalization segments of the Indian capital market. Let us try to understand this structure in detail :

NIFTY 500

NIFTY 500 represents the top 500 companies based on full market capitalization from the eligible universe. In a way, you can say that it includes all the other 12 indices within itself.

1. NIFTY 100
   • NIFTY 100 represents top 100 companies based on full market capitalization from NIFTY 500. This index intends to measure the performance of large market capitalization companies.
2. NIFTY Midcap 150
   • NIFTY Midcap 150 represents the next 150 companies (companies ranked 101-250) based on full market capitalization from NIFTY 500. This index intends to measure the performance of mid market capitalization companies.
3. NIFTY Smallcap 250
   • NIFTY Smallcap 250 represents the balance 250 companies (companies ranked 251- 500) from NIFTY 500. This index intends to measure the performance of small market capitalization companies.

So as you see, the index Nifty 500 is basically made up of the following 3 heads :

• (1 to 100) – Nifty 100
• (101 to 250) – Nifty Midcap 150
• (251 to 500) – Nifty Smallcap 250

NIFTY 100

The Nifty 100 has 2 parts : NIFTY 50 and NIFTY Next 50

1. NIFTY 50
   • The index represents 50 companies selected from the universe of NIFTY 100 based on free-float market capitalization and liquid companies having average impact cost of 0.50% or less for 90% of the observations for a basket size of Rs. 10 Crores.
   • The constituents should have derivative contracts available on NSE.
2. NIFTY Next 50
   • It represents the balance 50 companies from NIFTY 100 after excluding the NIFTY 50 companies.

NIFTY Midcap 150

It has also 2 parts : NIFTY Midcap 50 and NIFTY Midcap 100.

1. NIFTY Midcap 50
   • It includes top 50 companies based on full market capitalization from NIFTY Midcap 150 index and on which derivative contracts are available on NSE.
   • In case 50 Midcap stocks do not have derivatives contract available on them then it could have less than 50 stocks in the index.
2. NIFTY Midcap 100
   • It was formerly known as ‘NIFTY Free float Midcap 100’.
   • It includes all companies from NIFTY Midcap 50. Remaining companies are selected based on average daily turnover from NIFTY Midcap 150 index.

NIFTY Smallcap 250

It has also 2 parts : NIFTY Smallcap 50 and NIFTY Smallcap 100.

1. NIFTY Smallcap 50
   • It represents top 50 companies selected based on average daily turnover from top 100 companies selected based on full market capitalization in NIFTY Smallcap 250 index.
2. NIFTY Smallcap 100
   • It was formerly known as ‘NIFTY Free float Smallcap 100’.
   • It includes all companies from NIFTY Smallcap 50.
   • Remaining companies are selected based on average daily turnover from top 150 companies selected based on full market capitalization from NIFTY Smallcap 250 index.

There are 3 more NIFTY Broad based indices.

NIFTY 200

In simple words, we can say NIFTY 200 includes all companies forming part of NIFTY 100 and NIFTY Midcap 100 index. ie. (NIFTY 50 + NIFTY Next 50 + NIFTY Midcap 100)

NIFTY LargeMidcap 250

It includes all companies from NIFTY 100 and NIFTY Midcap 150. It intends to measure performance of the large and mid-market capitalization companies.

NIFTY MidSmallcap 400

It includes all companies from NIFTY Midcap 150 and NIFTY Smallcap 250. It intends to measure performance of the mid and small market capitalization companies.

Base Date

The base date and base value for the NIFTY indices is as follows :

Calculation and dissemination

• The broad indices such as NIFTY 50, NIFTY Next 50, NIFTY 500, NIFTY 100, NIFTY Midcap 150, NIFTY Smallcap 250, NIFTY 200, NIFTY Midcap 50, NIFTY Midcap 100, NIFTY Smallcap 50, NIFTY Smallcap 100 and NIFTY MidSmallcap 400 are calculated online on all days that the National Stock Exchange of India is open for trading in equity shares and disseminated through trading terminals and website and
• NIFTY LargeMidcap 250 is computed at end of the day.

Limitations of The Buffett Indicator

Introduction

Market Cap to GDP Ratio, also popularly known as the Buffett Indicator is used to assess the valuations of the stock markets of a country. Let us discuss what does this valuation metric tell, how to interpret the ratio, what are the limitations of The Buffett Indicator in the Context of Indian Market Valuation etc.

Market Cap to GDP Ratio | The Buffett Indicator

Meaning

• Market Cap to GDP Ratio is a valuation metric which is used for assessing whether the country’s stock market is overvalued or undervalued, compared to its historical average.
• The ratio has become known as the Buffett Indicator in recent years, after the investor Warren Buffett popularized its use. Warren Buffett believes that Market Cap to GDP Ratio is one of the best measure of where valuations of the market stand at any given moment.
• As per Buffett’s comment, the ratio is a simple way of looking at the value of all the listed stocks on an aggregate level, and comparing that value to the country’s total output (which is its gross domestic product).  

Formula

• Market Cap to GDP Ratio = (Value of All Listed Stocks in a country / GDP of the country) * 100
• Thus, It is a measure of the total value of all publicly traded stock in a country, divided by the country’s Gross Domestic Product (GDP).

Interpreting Market Cap to GDP ratio

• If the Ratio is :
  1. 50% to 75%, the market is said to be modestly undervalued
  2. 75% to 90%, the market may be fair valued
  3. 90% to 115%, the market is said to be modestly overvalued
• The Buffett indicator is like a Price-to-Sales ratio for the entire country.  It relates very closely to a price-to-sales ratio, which is a very high-level form of valuation.
• In valuation, the Price/Sales or EV/Sales ie.(Enterprise Value/Sales) metric is used as a measure of valuation.
• A Price/Sales ratio of greater than 1.0x (or 100%) is generally considered a sign of being overvalued. On the otherhand, companies trading below 0.5x (or 50%) are considered to be undervalued.
• In order to properly assess a company’s valuation, other factors have to be taken into consideration, such as margins, growth etc.
• This is consistent with the interpretation of the Buffett Indicator, which makes sense, since it’s essentially the same ratio, for an entire country instead of for just one company.

Limitations of The Buffett Indicator

• The market only encompasses the value of all the listed companies in the country. But the GDP is the value of all incomes which includes unlisted private companies, small businesses, MSMEs, proprietorships, partnerships, government companies, government departments etc. To that extent the numerator and the denominator are not entirely comparable.
• The ratio is impacted by :
  1. Trnds in Initial Public Offerings (IPOs) and
  2. Percentage of companies that are publicly traded (compared to those that are private).  All else being equal, if there was a large increase in the percentage of companies that are public vs private the Market Cap to GDP ratio would go up, even though nothing has changed from a valuation perspective.
• The applicability of the buffett indicator is higher when the market cap reflects a much larger share of economic activity in the country. That is why the ratio is widely used in the advanced/developed countries like the US, UK, Singapore, Germany, Sweden where more of business comes under the formal sector.

Things To Remember While Investing in Stock Market

Introduction

In this article, we are going to discuss in detail the 5 golden rules for stock market investments which the investors should adhere to.

An assured formula has yet to be discovered for acheiving the success in stock market. Still here are some golden rules which, if followed prudently by the investors, may increase their chances of getting a good returns from the stock market.

5 Golden Rules of Stock Investments

Rule 1 : Invest in Business Which You Understand

• The approach for stock market investment should be a business oriented and not the specific stock oriented. In simple words, an investor should invest in business instead of merely focusing on the stocks.
• The investor should invest in those businesses which they understand. The understanding of the business of the company is very important before investing in that stock.
• In order to be successful investors, we must acknowledge that there are some types of companies we understand, and some we do not understand, and then we must only invest in what we understand.

Rule 2 : Never try to Time the Market

• An investor should never try to time the market. Nobody has ever done this successfully and consistently over multiple business or stock market cycles.
• Catching the tops and bottoms is just a myth. Timing the market, is a false notion or misconception till today and will remain the same in the future also. In fact, many people have lost far more money than people who have made money in the attempt of timing the market.
• However, a majority of investors, do just the same thing ie. they keep on trying to time the market. And thus they lose their hard-earned money in the process.
• So a prudent investor should never try to time the market. In the long-run, Time in the market is far more beneficial as well as significant than timing the market. An investment should spend more time in the volatile market to give the maximum returns for the investor.

Rule 3 : Avoid Herd Mentality

• The typical buyer’s decision is usually highly influenced by the actions of his associates, colleagues, or relatives. Thus, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same. But this strategy is bound to go wrong in the long run.
• Investor should strictly avoid having the herd mentality if he don’t want to lose his hard-earned money in stock markets.
• One should always remember the key lines of Warren Buffett – “Be fearful when others are greedy, and be greedy when others are fearful!”

Rule 4 : Keep Realistic Expectations

• Investors should keep realistic expectations from their stock investments. We should never enter into the stock market by keeping 30%-40% returns expectations. There is nothing wrong with hoping for the ‘best’ from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions.
• For Example, lots of stocks have generated more than 50% returns during the great bull run of recent years. However, it doesn’t mean that you should always expect the same kind of return from the stock markets.
• Expectations from the equity investments should very rational. What do we mean by rational expectations? Rational expectations towards equity investments should be equal to (current GDP % + 5%). We should plan our financial planning goals according to this realistic returns expectations.

Rule 5 : Follow A Disciplined Approach

• Volatility comes hand-in-hand with a great bull runs in the stock market, resulting into the cycles of panic moments also. The volatility witnessed in the markets has inevitably made investors lose money despite these great bull runs.
• However, the investors who put in money systematically, in the right shares and held on to their investments patiently have been seen generating outstanding returns.
• Discipline in investing is about forming good habits and then doing them consistently. Hence, it is prudent to have patience and follow a disciplined investment approach besides keeping a long-term broad picture in mind.

Difference Between Bonus Share & Stock Split

In this article, we are going to do a comparative analysis of Bonus Share Vs Stock Split. There is always a lot of confusion among investors regarding bonus shares and stock splits, as both results into an increase in no. of stocks and a decrease in share price.

We have discussed what is bonus share and what is stock split in detail in our earlier articles.

Bonus Share Vs Stock Split Comparison

Following are the main differences between bonus share and stock split :

1. Meaning

• Bonus share is a free additional share for the shareholder. Giving bonus shares is a way of distributing the corporate’s earning to the shareholders, not given out in the form of dividends but converted into free shares. The capital is simply being transferred from the retained earning account to paid up capital account, so the total shareholders equity remains same.
• Stock split is the same stock split into more shares. Stock split is just splitting of stock and do not involve any change in balance sheet, just the no of shares will increase.

2. Example

• Bonus Share : If a shareholder holds 100 shares of a company and a company declares 4:1 bonus, that is he gets 4 shares for free, for every one share he holds. That is total 400 shares for free and his total holding will increase to 500 shares.
• Stock Split : A stock split of 1:10 means that a shareholder will have 10 shares for every single share he holds. The same single share held by the shareholder is divided into 10 smaller shares.

3. Objective

• Bonus Share : To distribute the company’s accumulated earnings to the shareholders without paying dividends, but in the form of free shares. So, the company can use the cash for expansion projects. To improve the creditworthiness, thereby credit rating of the company. Thus, bonus share is issued to maintain and nurture the brand value of the company.
• Stock Split : To increse the affordability of stock for the small retail investors which can result into the increased investor base. To enhance the liquidity of the stock in the market.

4. Face Value

• In case of bonus issue, there is no change in the face value of the stock.
• In case of stock split, the face value changes. For example, for the stock split of 1:10, the face value of Rs.10 for a stock will become Rs.1 after the split.

5. Share Capital & Reserves

• In case of Bonus share issue, the share capital increases but the reserves gets reduced proportionately. So, the balance-sheet statement of the company changes accordingly.
• While in the case of stock split, the share capital and reserves remains the same. Instead, the number of shares is doubled and the par value of the stock is halved. Thus, there is no change in the balance-sheet statement of the company.

6. Who Are Benefited?

• Bonus Shares are available only to the existing shareholders.
• Both existing shareholders as well as potential investors can be benefited from the stock split.

7. Impacts

Lets compare the impact of these events from the market perspective.

• Bonus issue will make the shares more affordable, but bonus issue is more of a confidence statement by the company, indirectly indicating continued better prospects.
• On the otherhand, stock split will only make the shares more affordable for retail shareholders and there could be some marginal effect on the demand for shares going forward.

Impact on Future Dividends

• Generally, the company’s dividend outgo increases on account of bonus issue. Because the dividend is always declared on face value. As we have seen in the above points face value of share doesn’t change in case of bonus share issue. So the shareholders get the additional dividend on each bonus share received.
• While, in case of stock split, the face value of the share decreases according to the split ratio. As a result, whenever the company announces dividend in future post split, the dividend is going to be calculated as a decided % on the reduced face value of the share. The existing shareholders won’t get impacted due to it since even if face value of the share is decreased, the number of shares increases in the same ratio. so the total dividend received would be the same. But for the potential or new investors post split, the proportion of future dividends to be received would get affected adversely.

Tax Treatment on Gains on Bonus Share Vs Stock Split

• One major difference is in terms of the tax treatment of the gains in both the cases.
• In case of bonus issue, the new shares are received at price of zero, so when calculating the capital gains this will affect the tax treatment (whether each lot is treated as a short-term or long-term gain.
• While in case of stock splits, the stock price gets halved so the cost-basis of the gain/loss will also get halved.