Vote-on-account to be non-event for mkt: Citi's Narain

Q: If you read Aditya Narain's 2014 outlook – a report that he put out in December, at the end of it all it sounds like 2014 would be a very dull year. I will quote one line from there, "lower volatility, greater predictability and trading in a narrow band." Ofcourse the year is not really going to be like that on a tick by tick basis. So, I have Aditya right here with me the India strategist at Citi and I also have with him Brent Robinson the head of pan Asia Research at Citi Group.

Menaka: Did you change your Sensex target or were you inclined to change your Sensex target of 21800 for 2014 after what we saw happen in the month of January to emerging markets. India bore a little less of the brunt but nonetheless?

Narain: Not at all. In some senses we did believe and kind of factored in the likelihood that you are going to have external volatility. My sense is you are going to have external volatility and you will have internal volatility through the course of the year. At the end of the day our basic call is that the market will reflect the state of the economy and the trajectory of the economy and that is going to be flattish and possibly just a little up which is what our market call is.

Q: We have one report card on the state of the economy coming up on Monday in the vote on account that the finance minister will go through. In that we is more likely to say or this is our expectation that we are now in a comfortable position on the current account deficit even though some of that has been brought about by artificial compression of gold demand or that one of FCNR(B) scheme all of that but anyways current account deficit (CAD) is looking better and he might even say that we have come in below 4.8 percent on the fiscal deficit. If he does say all of this on Monday, how convinced will you be about the strength of the Indian economy and what 2014 portents or will you be worried about the quality of the fisc?

Narain: I will be pretty convinced about the stability of the Indian economy not necessarily the strength, there is difference. Stability is holding it within a band, strength is actually pushing it up. The challenge will be in pushing it up and I think that will tend to take a bit of time. In terms of stability I think those numbers are both driver of the stability and a reflection of it.

Menaka: What else are you expecting him to say on Monday?

Narain: He won't be very aggressive. At the end of the day he has met its targets. He will talk about having done that and its been quite a challenging task in achieving those and he will actually lay it out for the next government to push forward.

Menaka: You don’t think he is going to push in some indirect tax changes? One of our stock analyst is expecting may be an excise cut for autos which might board well for a beleaguered industry. Are you expecting any cuts?

Narain: If there is a sector analyst looking for it, it is just a bit of wishful thinking and hopeful thinking. If there are some tinkering they will really reflect some adjustments that need to be made where there is either a distortion or there is a huge negative impact. Slowdown in auto is not because excise is too high.

Menaka: So, you are expecting this to be a non-event from the markets point of view on Monday?

Narain: Yes very much so. CAD numbers are in any case out in the domain. The fiscal deficit expectation is very much there in the market place. So, even if he does beat the fiscal deficit number it is coming a little bit at the expense of expenditure per say and that is not necessarily something that the markets will like so much. Bottom line I don’t think it is that eventful.

Menaka: You are going to look for the math on the subsidies front? How much he has pushed out for the next year for the math on all the cross holding front because not everybody is comfortable with it. So, I am surprised you are a little sanguine?

Narain: In some senses the Budget as an event is both a bit of tallying up the maths for the year gone by and the expectation both in terms of maths and direction of the economy going forward. I think the later is what is critical rather than the maths.

In some senses the quality of the fiscal is what people will tend to look at but the fact that tax collections have been there, there have been divestments. In many senses I don’t think that is what the quibble is going to be about or the change in sentiment is going to be about. I think it is what lies ahead which is going to come out three months up ahead.

Menaka: Aditya spoke of internal triggers that India is going to deal with. They have to do with elections – who comes to power, what their policies will be. Let us talk about external triggers, where India stacks up against the other Asian economies or even emerging markets, what you expect will be the Fed policy through the course if this year, How is that going to change fund flows etc?

Robinson: In the last six months or so it has been mostly developed market story versus emerging markets and emerging markets are trading at a pretty heavy discount right now relative to the domestic market peers. If you look at within the emerging market world we prefer Asia over Latin America and also over Eastern Europe. Within the developed markets we like Europe and Japan over the US.

US has just had a great run. Potentially there is a mid-term correction in the US. We think money will begin to flow into other parts of the world as it has to Europe and Japan. Next stage would be for it to continue to spread to emerging markets.