‘Inflationary headwinds key risk to bond investors’

Equities, on the other hand, remain cheap compared to long-term averages, even following a modest rally in 2012. Equities have yet to fully respond to the recent improvement in economic news, suggesting that investors are more focused on near-term risks than long-term prospects.

In case of a shift in investor interest from bonds to equities what kind of inflows can be expected in equity markets, including of emerging markets?

Over the last three years approximately $1.3 trillion has flowed into bond mutual funds and $350 billion has been withdrawn from equity mutual funds. We expect some reversal of this trend in the coming year. Most likely that around $300 billion will flow into equities this year of which potentially $50 billion could be earmarked for emerging market funds.

While the Chinese market underperformed that of India in 2012, with an economic revival in sight for Asia’s biggest economy, can India lose out to China in attracting substantial FII inflows in 2013?

We believe that China will attract a significant part of the flows given the very low valuations and the good news flow. China has the more immediate good news given the recent upgrades to GDP forecasts, given the stronger than expected end to last year. India has a building long term story with the recent spate of economic reforms. International investors will however be somewhat wary of India at the end of the year given the likely general elections in 2014. International investors will be hoping that whoever the

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