Week ahead: Vote on Account, fiscal deficit, FII flows key

A listless week ahead, starting with Indian Finance Minister P Chidambaram presenting the non-event Vote on Account on Monday. The incumbent government generally opts for a Vote on Account instead of a full budget in an election year, like the present one. Vote on Account deals only with the expenditure side of the government's budget unlike the full budget which deals with both expenditure and revenue. It cannot tweak the prevailing direct tax rates and also cannot announce any new schemes. Indirect taxes can be changed but the policy announcements generally are not taken seriously by the market as they are subject to change depending upon the new government formation after the parliamentary elections. However, the government’s progress on fiscal consolidation will be keenly watched and scrutinised.

Politics will increasingly come to the fore as we approach the parliamentary elections in May 2014. If we go by the various opinion polls, which often go wrong, being carried out by various media agencies, the most optimistic scenario for the current opposition party BJP led NDA with its present structure, is some 220 seats in the parliament which can have the maximum strength of 552 members with the present number being 545. In this regard the likelihood of fractured mandate is very high and may lead to instability which would induce more of populism rather than a pursuit of economic reforms, by the new government. This political uncertainty, also expressed earlier through this platform, will continue to bog the markets and the bias would continue towards downside.

With Janet Yellen subscribing to the continuance of tapering in the last week’s Senate hearing, FII flows will continue to be on the radar. As of 13th February trade date, the month has seen an outflow of USD 321.59 million and the calendar year has seen an outflow of USD 197 million, in Equities. The FII flows are expected to remain tepid at least till the new government formation in May 2014.

With key earnings season over, the focus of investors will continue towards bottom up stock picking investment ideas. It will be very difficult to highlight which sector will perform because in the recent past the advance-decline ratio in almost all the sectors has been around 1, indicating preference to bottom up stock picking rather than indicating a sectoral trend.

In US, we have release of minutes of last FOMC meeting on Wednesday, while in Eurozone, we have release of the ZEW economic sentiment figures for both Germany and the Eurozone on Tuesday, followed by Thursday’s raft of PMI figures. On Thursday, we also have the all-important Chinese HSBC Manufacturing PMI, a key data as the sell-off in the emerging markets over the past few weeks was initiated in large part by the struggling Chinese HSBC manufacturing PMI figure seen last month.