GST delay may not impact markets

Dated 12th December, 2016

Even as the government hurries to get the States on-board to meet the deadline for its ambitious goods and services tax (GST) bill rollout by April 01, 2017, recent developments indicate a possible delay.

The deadlock between the government and States comes amid the government's clamp down on black money by demonetising the Rs 500 and Rs 1000 notes in November. While the Parliament's winter session concludes on December 16, the GST Council will meet again on December 22 - 23 to build consensus on these issues.

But how are the markets likely to react to a possible delay in the rollout ?

Analysts say the markets have already factored in a possible delay in the GST roll out, as it April 01, 2017 was an ambitious target to begin with given the complexities involved in the bill. Though the markets could see a knee-jerk reaction, they rule out a sharp fall.

"GST rollout is a complex process, and at least I did not expect it will be on time. The delay will not impact the market going ahead. The immediate concern for the market is the demonetisationimpact on corporate earnings. In my opinion, events like delay in GST rollout, rate hike by the US Federal Reserve (US Fed) or even a rise in crude oil prices will not create any fear or panic-like situation. I don't expect the oil prices to breach $62 - 63 / barrel going ahead. Even the possible hike in rates by the US Fed has been discounted," said G Chokkalingam, CEO, Equinomics Research & Advisory.

"Going ahead, I expect the corporate earnings to be bad in January, given the impact of demonetisation. Though I don't expect a crash even then, a 2% - 3% correction is not ruled out from the current levels. Stability of currency and aggregate demand improvement should only happen in the March 2017 quarter, which will also help arkets stabilise," he adds.

BULLISH ON INDIA

Despite headwinds, foreign brokerages remain bullish on India from a medium-to-long term view. Analysts at Morgan Stanley, for instance, believe the low return environment that India seems to be trapped in may get a breather in 2017 thanks to better equity valuations, the bottoming of the growth cycle (disrupted temporarily by the recent demonetisation) and higher correlation with world equities on which they are more constructive.

"Equities are likely to deliver 15% return in 2017 compared to negative 3% in 2015 and 2016. India is one of our top emerging market (EM) picks. We are overweight consumer discretionary, financials, technology and underweight staples, energy, industrials, telecoms and utilities," says Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a co-authored report with Sheela Rathi.

On the other hand, Nomura maintained it's bullish on India, which is also their biggest overweight in the Asian region.

"We expect the MSCI Asia ex-Japan to end 2017 slightly below current levels, at 520. This assumes forward earnings growth of 6% (versus consensus of 10.5%) and a forward P/E of 11.8x versus 12.5x currently," says Mixo Das of Nomura in a recent report titled "Asia 2017 outlook: Sailing into the storm"

"We are downgrading Korea to 'Neutral' and Malaysia to 'Underweight', and upgrading Thailand to 'Neutral'. Our top 'Overweight' is now India," Das adds.

(This article is published in Business Standard on 12 December, 2016)