You are here: Home » Markets » News
Business Standard

GST blues may make markets volatile, experts at sea over economic impact

Analysts fear markets could correct due to initial hiccups

Topics
Gst

Samie Modak  |  Mumbai 

GST
Imaging: Ajay Mohanty
  • ALSO READ

    Markets in expensive territory, says BofA-ML

    Cash levels at equity mutual funds continue to remain high

    GST can be positive for fiscal deficit; help lower rates: Neelkanth Mishra

    Investors beware: Stock markets are not prepared for GST disruption

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 could remain under pressure as the transition to the is likely to be fraught with hiccups, which could disrupt economic activities.

Ahead of the — which subsumes most of the pre-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 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.

graph


graph


graph

“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 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.


graph

Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Mon, July 03 2017. 08:40 IST
RECOMMENDED FOR YOU
.