‘Inflationary headwinds key risk to bond investors’

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SummaryEven as India is likely to gain its fair share of capital flows coming to emerging markets in 2013, international investors will be somewhat wary of India at the end of the year, says Gary Dugan, MD & CIO—Asia and Middle East, RBS Wealth Division.

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 the year however if growth remains strong as we end the year, a likely spike in inflation could bring interest rate increases in Asia.

If the US does not resolve its political differences between the Republicans and Democrats then there is the prospect of government policy sending the US economy into a recession.

What is your outlook for the global crude oil prices?

Geopolitical risks bias oil prices higher. In the very term the inability of Mr Netanyahu to gain a strong mandate to form a government probably means that some of the risks of Israel attacking Iran have fallen back.

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