Market preparedness for GST is a bit lax; tactical correction in near-term likely: BofA-ML

Based on the twin impact of Goods and Services Tax (GST) rollout and higher valuations, Bank of America Merrill Lynch (BofA-ML) signals caution on the market.

The global financial services firm highlighted how the industry was not prepared well enough for the rollout of the tax reform. IT infrastructure could be in place from top vendors for large corporates, but smaller and medium-sized firms do not have it yet, it added.

“People are acting out of caution…pre-GST discounts are being offered and de-stocking is also taking place. This is going to lead to a lean period of sales,” Sanjay Mookim, Director, India Equity Strategy at BofA ML told CNBC-TV18 in an interview. The aggregate numbers may look weaker, he added.

Meanwhile, the other big risk for the market, Mookim said, was the valuation rally. “Such rallies cannot continue day after day, which is what the nervousness is all about,” he told the channel. The upside to the market today, he explained, is due to the falling cost of equity. The average cost of equities are at all-time lows, he added.

Mookim expects a fall on the Street going forward and advises investors to be ‘very careful’ in this market. “I don’t know what might be the trigger…which domino will effectively lead to the fall,” he added.

Having said that, he is positive about the business as well. “The business cycle will improve in the next couple of years,” he said, adding that the pace of it will be slow and the market currently was moving ahead of it.

BofA-ML’s year end Sensex target stood at 30000, below the current levels and thus implying a downside. Mookim says that average PE and earnings growth are taken into account to arrive at this target and hence undershoots based on those numbers could be possible.

On metals and telecom sectors, he feels that the former has run its cyclical course and suggests getting out of cyclicals for now. Meanwhile, on telecom, he sees a huge amount of capacity being created by the new player, which will lead to pricing pressure. Investors need to think whether this pricing pressure has hit its peak, and whether other stocks are seen at attractive valuations.