‘Inflationary headwinds key risk to bond investors’

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

... contd.