Why is GST-related frenzy missing in the market?

What irony! The stock market that anxiously awaited GST reforms for many years gave a muted response when the same was passed in the Rajya Sabha, and after a few days the Amendment Bill in the Lok Sabha. It gives the impression that the passing of the gst Bill seems to be a non-event for the market. gst is considered one of the biggest reforms of the Modi government. By far the largest tax reform since India gained independence in 1947.

On 3 August when the Rajya Sabha discussed the GST Bill the Sensex went down by 284 points. The next day, in response to the Rajya Sabha clearing the Bill (as this was done late in the evening and the market could only react the next morning) the Sensex barely managed to close above the previous day’s level. That trend continued when the Lok Sabha discussed the Amendment to gst Bill on 8 August. On 9 August the market moved down with the Sensex losing 97 points over the previous day’s level. This downward trend continues despite the many positives in the Indian stock market.

There have been better monsoons which will not only cool off inflation but also help revive rural demand. The VIIth Pay Commission is going to put more money in the hands of consumers, which will push demand for various products. And the Indian economy is growing at a healthy pace despite strong headwinds from global turmoil. Even crude oil, which surged in March and April, has now cooled off – releasing some pressure on Indian inflation. What should have soothed investors is that the Modi government was successful in terms of getting a consensus on GST among the political parties – both the Rajya Sabha as well as Lok Sabha passed the Bill unanimously. This augurs well for the reforms agenda as this sends a strong signal that the Modi government has learnt the art of pushing reforms through consensus rather than the pure numbers it poses in the Lok Sabha.

In March 2015 the Sensex was at 30000. Then, the monsoons were not that good and there was little clarity on GST.  But now the Sensex is almost 7 per cent down from its all time high touched about 16 months ago. In that sense the market gave time as well as price correction. On the other hand, the US Dow Index is at an all-time high. Thus the euphoria that has been built around gst is absolutely missing.

So why is the market giving a muted response to GST? “While I agree that we have not seen a rally in the broader index, side market stocks have gone berserk. One must also understand that in anticipation of GST the market had started inching up. Now it’s in a consolidation phase,” says Sunil Singhania, CIO – equity, Reliance AMC. “GST is a long-term reform and should not be measured in the short term. GST has taken the country to the next level in terms of reforms. The benefits would accrue in the years to come.” A similar view is echoed by Jyotivardhan Jaipuria, founder and MD, Veda Investment Managers, a new PMS player. Jaipuria is former head of research at Bank of America Merrill Lynch. “The market rallied in anticipation much before the GST Bill was considered this year in Parliament since for the past 12 months expectations have been high in every Parliament session that the Bill would get passed. Some of the gainers from GST have seen strong performance in their share prices over the past 12-18 months. At the same time, the market realises that the gains from GST are going to be a slow process and probably will be visible over the next 24-30 months rather than something immediate.”

While it’s true that the market has seen some rally in anticipation of the GST Bill getting passed, the rally has not been that significant. Also, most of the equity indices in the world are in the green as the easy money policy adopted by various central banks and the $13 trillion of treasury yielding negative yields are finding ways into emerging markets in search of positive gains. Higher allocations are being made to emerging markets and India has reaped the benefits of the same. As Cameron Brandt, director – research, EPFR Global, a company that tracks global funds flow, writes in his latest report: “Flows into EPFR Global-tracked Emerging Markets Equity Funds were positive for the fifth straight week going into August, thereby extending their longest inflow streak since 3Q14, as concerns about further US interest rate hikes this year continue to ebb. Once again the bulk of the fresh money went to the diversified Global Emerging Markets (gem) Equity Funds.”

The largest inflows from FIIs came to Indonesia and India. Since 1 April 2016 the Sensex has gained by 11 per cent. But at the same time some other emerging markets have risen: Brazil (15 per cent), Indonesia (12 per cent), Argentina (18 per cent) and Pakistan (19 per cent). Hence it’s very difficult to attribute GST gains made by the market.

The reason for the muted response could be due to the fact that many fear that GST may not be implemented by 1 April 2017 – a tough deadline to meet. Even Raghuram Rajan-RBI Guv- has expressed his concern saying: “The timely implementation of GST will be challenging.”

Despite the GST Bill being passed, there is lack of clarity in terms of what rates would be applied. If the GST standard rate is higher than 18 per cent, many feel it will spur inflation and in turn lower the demand for goods and services. Clarity on the rate is expected only by November and hence many investors have decided to stay put till then. These uncertainties are not allowing investors to go berserk on this mega reform undertaken by the Modi government.

So how does one play one’s cards since GST looks more certain than ever? While there could be doubts about 1 April 2017 implementation there are no doubts that it will happen – even if with a few months delay. We believe that government (state as well as Central) may not push for a higher GST rate. Government understands that the higher the tax, the lower the compliance. If so, then the whole purpose of GST would be defeated. In all probability the government may opt for a lower or reasonable rate and higher compliance, bringing about tax buoyancy and in turn a better Tax to GDP ratio. We are hopeful that good sense will prevail.

GST is a game changing reform. The benefits should be not viewed from one quarter or one year as explained by Singhania and Jaipuria. It is going to change the way the Indian economy and businesses operate. It’s going to put the country on a higher growth trajectory and improve ease of doing business manifold. All these benefits may not start accruing on day one; there could be some lag but once the benefits are seen, they will last for many decades. In other words, gst would have similar benefits for the Indian economy that the 1991 reforms did.

Now instead of looking at the short-term benefits, Indian investors must look at the long-term valuation game. In India we have many unorganised sectors that have a major or substantial market share due to lack of tax compliances that will now come under the tax net. Hence what they could afford to offer at lower rates through a kacha bill they now may not be able to do. They can now spend money on brand building and then compete on quality rather than on the price. This means a huge shift would take place to branded goods in the consumer facing business. Many good quality companies in the consumer durable space are available at attractive valuations despite many mid-caps (not necessarily consumer durables) having run up. They will surge in the coming months as the market would soon start seeing their potential. And that much of the demand comes from the rural economy as in the last couple of years rural demand was muted due to below par monsoons. With the VIIth Pay Commission kicking in this month, it seems the consumer durable industry is heading towards a brighter future.

The same way, some of the richly valued companies in NBFCs, private sector banks and pharma will see some headwinds as investors’ appetite for these companies have declined. They would either underperform or market perform the broader market. Please note that the Indian market is definitely heading towards a big bull run. Hence avoid looking at the market in terms of one month or quarter. Invest in good companies that have reasonable valuations. The probability is high that you would double your money in 36 months.

GST is definitely a game changer – not only for the Indian economy but also for the Indian stock market. History suggests that good reforms always attract bulls.

Be a bull in this market rather than a bear.