Fears of fund outflow from emerging markets since early 2011 may have been overstated and Asian equity market could still demonstrate 15-30% returns in the next 12-18 months, says Royal Bank of Scotland.
According to Emil Wolter, head of regional strategy of RBS,the Indian equity market, however, may underperform other emerging markets as it may not be easy to finance the country?s dual deficits, especially given the higher trajectory of crude oil prices.
The bank is ?cautious? of the headline targets, both, on the budget deficit and government revenues, given in the latest union budget, he said.
The bank believes that the next leg of rise in emerging markets equities will be driven by north Asian markets and was overweight on markets like Malaysia and China.
Further, a relative preference was given to sectors such as telecom, IT, utility and energy, which are likely to be the driver of this expected rally.
Small-cap companies as well as companies that are highly leveraged may show a relative underperformance to the market, the bank report mentioned.
The rationale for this broader outlook on Asia, according to the bank, is likelihood of a shift in fund flows from bond market to equity market, since it believes the bond yields may have made a low in 2010 and could now start revving up on the back of higher inflation in some countries and better growth in others.
Many emerging markets, including India, have experienced a bout of fund outflow in favour of developed markets like US, which offer relatively lower valuation and are at a nascent stage of economic recovery as against higher domestic inflation in asian economies. However, the outlook for emerging markets as a whole remain positive for medium to long term given stronger fundamentals and better demographic of the region, says RBS.
