GST And Its Potential Impact On The Indian Equity Market…   Jul 06, 2017


HHHStock markets reflect people’s opinion about an economy.

So when the BSE Sensex hits an all-time high in India, it suggests investors are optimistic about the future of the Indian economy. Needless to say, when the bellwether stock market index touches new lows it suggests that investors are inclined to be more pessimistic about the future.

But like the weather in the Andaman Islands, market opinion swings too quickly without fair warning. This confuses the majority of investors. Big money is made or lost when the market is in a confusing state.

You will find some eternal bulls on the one side of the spectrum who keep reiterating the good things about the stock markets, almost always. And there will be the perennial bears on the other hand who will be consistently engaged in fault-finding and painting a gloomy picture.

But if you want to be a successful investor, you can’t be friends with any of these camps forever. Do you remember how diverse the opinion of experts was about the demonetisation and its impact on the Indian economy?
 

Is GST going Demonetisation way?

 



(Source: BSE, PersonalFN Research)

 


Looking at the movement of equity indices, it seems markets are no more interested in perceiving demonetisation as a threat. But the general market opinion about the same event was negative around 6 months ago.

See how quickly it has changed!

After a couple of quarters, markets may completely forget about the much-discussed negatives of demonetisation. Why? Probably because they have done a careful assessment of an event and might have concluded that the demonetisation had a temporary effect on Indian economy.

You might be wondering why discuss all this now?

There’s a reason…

Like they did at the time of demonetisation, markets have now entered a similarly confused state; after the implementation of Goods and Services Tax (GST). Experts expect markets to be extremely volatile and some are even predicting a downfall, staring at high market valuations. Well, there’s no denying that an expensive market only needs an excuse to fall. But there’s always a possibility that, markets may prove all sceptics wrong or fundamentals may improve dramatically to support high valuations.

Everything is possible, so don’t rule out any possibility.

For the moment, the prudent approach is to assess the probable impact of GST on Indian economy. There’s hardly anyone who predicts GST to be disastrous for the Indian economy. And there’s no dearth of analysts who predict that GST will make the Indian corporate more compliant and transparent.

Now, sceptics aren’t sure of the implementation part of it. They think the implementation of GST is another great Indian Jugad. Well, it might be, but if India has handled so many jugads since it opened its economy in 1991 why would anyone believe it could fail this time? In fact, the implementation part of GST will be evolutionary since the Government has agreed to improve the processes continuously.

So far, tracking the market movement doesn’t give the impression that investors are worried about the impact GST will have on it. If markets do fall at all, after the quarterly results over the next two quarters, it’s likely that the impact is once again transient, like it was during demonetisation.

However, it’s noteworthy that market opinion doesn’t necessarily change very fast always. Please remember, Indian markets remained sideways with a negative bias for almost 5-6 years on the other side of the global financial crisis.

How to distinguish…

First, you should assess whether or not the economic activity is overheated.

Back in 2007-08, most of the listed companies were talking about capacity expansion and were borrowing huge sums to satisfy their growth plans. Investor expectations were at an all-time high, so were the market indices. There were very few sceptics and even fewer bears then. Many market participants carried massive leverage positions. Indian markets were primarily driven by Foreign Institutional Investors (FIIs).Unprecedented stock market fall was the culmination of all these complacencies.

Fast forward to July 2017

You would find enough investors, experts and even fund managers talking about expensive valuations. Forget about expansion, many industries fail to run at their installed capacities. Credit growth of banks is nearly a decade-low, and public sector banks are still plagued with the asset quality woes.

Net FII investments are drying slowly, but investments by the Domestic Institutional Investors (DIIs) have been consistently rising. The household savings are slowly getting channelised into the stock market through mutual funds. Interestingly, investors have been relying on the Systematic Investment Plans (SIPs) offered by mutual funds to take exposure to equity markets, rightly so. Indicating, they are mildly sceptical in a way.

All these factors hint that markets are expensive, but aren’t overheated. So any weakness in the Indian stock markets experienced on account of implementation of GST and its impact on the Indian economy is likely to be short-term in nature.

Speaking about the impact of GST rates on corporate, consumers, and investors, a few things will become mildly expensive while others will become moderately cheaper. In simple words, the net impact of GST on inflation is likely to be neutral—as that’s the core principle of GST.

If you’ve quickly scanned this article for the highlights, here they are. Written exclusively for you as follows:

 

 

 

 

  • While investing in stock markets, you must do your own assessment before taking any decision about your finances.
     
  • You should always consider your personal financial goals and risk appetite before investing in any asset class and selecting an investment avenue.
     
  • Unless you understand the nitty-gritty of investing directly in equities, it is preferable to take a mutual fund route.
     
  • Always invest for the long term.
     
  • SIPs are you best friends (not the eternal bulls or bears)
     
  • As far as the GST and its impact is concerned, it’s unknown to everyone. However, there’s no reason to be negative about it at least as of now, from the investment point of view.
     

Please keep in mind

What makes news in the short term often proves nothing more than noise in the long term. So avoid betting in favour of or against any news or an event.

If you want to shun the noise and create wealth in the long term, you may consider subscribing to PersonalFN’s latest report—Strategic Portfolio For 2025.

 

 

 

 

 

 

 



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