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 government is that they will follow the current path of significant reform.
How would India fare compared to other EM members like Brazil and Russia in drawing capital flows this year?
India is relatively more attractive than Russia or Brazil. Although the Russian equity market is cheap, investor concerns over corporate governance and government interference could still hold the market. In Brazil domestic growth is weakening however higher than expected inflation is holding the central bank from easing.
As the US economy strengthens its recovery, can similar developed markets that are likely to see a revival in economic growth eat into investor interests in EMs?
Even if the US delivers greater than expected economic growth we still expect investors to favour emerging markets over developed. The only exception might be the Japanese equity market where the depreciation of the yen and active economic policies to drive growth should be very supportive of the corporate sector.
Which factors can pause or reverse the prevailing ‘risk on’ sentiment amongst investors, in the order of their importance?
The key risk to the markets is a resurgence of inflation or further problems with budget policy discussions in the United States. Inflation should not be a problem for much of