There are three phases of a multi-year secular bull market.
- Early Stage: Early stage of a long term secular bull markets is characterized by high expectations and generally low economic growth. Equity returns are high because stocks bounce off the bottom. Usually large cap stocks do well in this period relative to midcap stocks. As the market transitions from early stage to mid stage, the economic outlook gradually improves. As the bull market matures, midcap starts outperforming in terms of returns. The Indian equity market, experts argue is in the early stage of a multi-year secular bull market, since it is characterized by the attributes described for this stage.
- Mid stage: The economic outlook keeps improving through the mid stage of the secular bull market. Corporate earnings show higher growth during this stage. While most developed equity markets grow at the pace of earnings growth, in a market like ours the growth is even higher as positive sentiments pushes up valuations (P/E ratios). The mid stage of the bull market is the longest stage and can last for many years. For our market, this can be especially a high growth stage if the Government implements its agenda of structural reforms. It is important for investors to remain invested in equities, because during this stage they can benefit from the power of compounding of returns.
- Late stage: This stage is characterized by high corporate earnings and GDP growth. High levels of exuberance sets in the market. Stock prices rise the fastest during this phase. Investors will recall how the equity market was in 2007. Market pundits, all of them turn bulls in this stage, start talking about new paradigms. Remember, how they talked about Indian market being decoupled from global markets, when there were early warning signals of a global recession. Unfortunately many retail investors enter the market at that stage attracted by high equity returns. When the market cycle turns, as it inevitably does, the late entrants lose out the most. The smart investors exit the market towards the end of the late stage. However, just like timing your entry in the market is extremely difficult, as discussed earlier, timing your exit is equally difficult. Having said that, even if you are not able to time your exit, if you have long time horizon for your equity investment, you can still make very good returns. For example, if you invested in ICICI Prudential Top 100 fund in 2003 and exited at the bottom of the bear market in 2008 (when the market fell almost 50% on a year on year basis), you would still made a compounded annual return of nearly 24%.