(Bloomberg) -- Money managers including Ashmore Group Plc and Prudential International Investments Advisers LLC have a new rationale for an old favorite trade: Prime Minister Narendra Modi's biggest legislative victory since taking office in 2014.
Lawmakers on Wednesday unanimously approved the creation of the goods-and-services tax, or GST, that would create one of the world's biggest single markets. The tax, which has been a decade in the making, is seen benefiting industries such as cement, logistics and automobiles by easing the movement of products across state borders. Finance Minister Arun Jaitley has said it will add as much as 2 percentage points to economic growth.
The bill's passage will burnish the appeal of Indian assets for global funds, that bought a combined $2.7 billion of stocks and bonds last month, according to Ashmore and Aquarius Investment Advisors Pte. It would also strengthen the Modi government's credentials of being able to push through difficult legislation in a nation that's been criticized for its slow pace of reforms.
“We will increase exposure,” if GST is cleared, said Jan Dehn, London-based head of research at Ashmore, which oversees about $51 billion in emerging markets. The tax “should lead to economies of scale in production, lower costs and ultimately higher growth.”
Stock futures trading in Singapore gained 0.4 percent, halting a two-day decline. The rupee's one-month non-deliverable forwards were little changed at 67.11 per dollar. The currency has slid 1.3 percent this year in the spot market, Asia's worst performance after the Chinese yuan.
The benchmark S&P BSE Sensex last week capped the longest run of monthly gains since 2014, while sovereign bonds surged the most since 2013.
Industries where indirect duties are high, such as appliances, autos, consumer staples and home-building products, are likely to benefit from the tax, said John Praveen, managing director of Prudential International. Apparel, retail and textiles may be hurt, he said.
For all the optimism about the new levy, expensive valuations are seen curbing further upside in share values. The Sensex dropped the most since June 24 on Wednesday.
The S&P BSE MidCap Index reached a record earlier this week. The rally has lifted the gauge's price-to-earnings multiple to 32, a level seen in January 2008, a year that saw Indian stocks suffer their worst-ever annual loss.
“We would not get incrementally bullish even if the GST is passed as valuations are still not comfortable,” Mihir Vora, chief investment officer at Max Life Insurance Co. in Mumbai, said in an interview. The insurer, which has $5.4 billion in assets, already owns shares of cement companies, automakers and logistics firms, businesses that are expected to gain from the tax, he said.
Read: Franklin Templeton Fund Embraces Debt as India Stocks Get Pricey
Besides, the benefit from the GST will reflect in company profits over the next 18 to 24 months, Sanjiv Bhasin, executive vice president of markets at the IIFL Holdings Ltd., said by phone from New Delhi.
The constitutional amendment approved late last night now has to be endorsed by the Modi-controlled lower house and then ratified by at least half of all states, a process projected to be concluded before the year ends.
For offshore investors the bill's passage is as much about the trajectory of the nation's economic reforms as it is about the benefits to industry. Since taking office in May 2014, Modi has expanded foreign direct investment in sectors such as airlines and railways and overhauled a century-old bankruptcy law.
“GST's clearance sends a strong message to the global investment community,” said A.S.T. Rajan, a senior managing director at Aquarius Investment in Singapore. “It increases the attractiveness of India as an investment destination.”
--With assistance from Santanu Chakraborty and Candice Zachariahs To contact the reporters on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net, Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Jeff Sutherland at jsutherlan13@bloomberg.net, Shikhar Balwani, Ravil Shirodkar
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