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GST blues may turn markets volatile


The Indian stock market could continue to remain volatile with a downward bias as corporates and investors assess the impact of the landmark goods and services tax (GST) on their businesses, investments, and the economy.

Market pundits are still trying to get a grip on how the new tax regime will impact inflation, gross domestic product, and profit margins of firms after July 1 roll-out. They, however, are unanimous in their belief that the markets could remain under pressure as the transition to the GST is likely to be fraught with hiccups, which could disrupt economic activities.

Ahead of the GST — which subsumes most of the preGST indirect taxes levied by the Centre and states — implementation, the benchmark Nifty declined in six of the previous eight trading sessions, with automobile and banking stocks, in particular, underperforming the market.

“The GST may disrupt the system for a few days, maybe weeks or months, as people are not yet fully ready for the execution. The Street will react to the initial disruption, as markets are trading at rich valuations with expectations of better corporate earnings,” says Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services, adding that the benchmark indices could correct up to 3 per cent from pre-GST levels.

The Nifty 50 index on Friday closed at 9,520, while the S&P BSE Sensex closed at 30,921.6. Despite the recent correction, both the indices are trading less than 2 per cent below their all-time highs touched last month. Also, they are trading at 19 times their estimated one-year forward earnings, compared to long-term average of 16 times.

“The impact of the GST on listed company volumes and earnings may extend beyond the June quarter. At rich valuations, any hiccup in numbers could be a risk,” says Sanjay Mookim, India equity strategist at Bank of America Merrill Lynch (BofAML), asking investors to stay cautious in the near term.

BofAML, which did a GST mood-check with retail channels, says there is anguish among traders over the complexity of the new system and hurried implementation. “On the ground, this lack of readiness at businesses will impose costs — money and time. These should be temporary and are unlikely to be fatal,” says Mookim. Most economists have sounded caution on GDP growth for the next two quarters due to the implications of the GST’s short-term impact.

“The short-term impact of the GST could be neutral to negative for the broader economy. Over the next few quarters as the dust settles on short-term glitches, the business will move to resolve the more structural issues of reforming business models and gaining efficiency,” says Suvodeep Rakshit, senior economist, Kotak Institutional Equities.

While the market seems vulnerable for correction, the downside could be protected as most fund managers are hitting high cash, which is waiting to be deployed.“There has been no country where the GST has been implemented without glitches. As fund managers, we look beyond the short-term. We will use the hiccups as buying opportunities,” says Sankaran Naren, chief investment officer at ICICI Prudential Asset Management.

At the end of May, equity mutual funds (MFs) were sitting on cash level of Rs 36,300 crore, nearly 6.5 per cent of their total assets under management. On several occasions in the past, MFs have emerged as strong buyers whenever markets have seen sharp correction, helping stock prices to rebound.

Beyond teething problems, many experts feel the GST has the potential to transform the economy and benefit large and organised businesses, which the market may not have priced in yet.

“It’s not just the GST, it’s a whole package of changes, package of reforms that the government has thrust upon the economy, which is going change the economy more fundamentally. The winners will be big and few, and the losers will be many and small. And that sort of rebalancing of the economy, I don’t think the market really understands that,” says Saurabh Mukherjea, chief executive officer, Ambit Capital.

Business Standard New Delhi, 03rd July 2017

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