Indian equities will flourish in the second half of 2012 thanks to expected policy change and more co-ordination in Europe, according to RBS Private Banking India, part of Royal Bank of Scotland.

The private bank says recent financial activity data points to steadily building growth momentum led by an improved outlook and new orders in India. “Although PMI (Purchasing Managers' Index) data appears to contradict the weakness in GDP, we read it as early signs of a recovery," said Rajesh Cheruvu, head of investment strategy at RBS Private Banking. "A moderate outlook suggests that growth is likely to skim below the 7 per cent mark for the remainder of the year while inflation also falls.”

Prateek Pant, director of products and services of RBS Private Banking, said he believes the eurozone holds the key to the performance of financial markets for the rest of the year.

"We believe that flare-ups in the eurozone will continue, but will be met by policy response," Pant said. "Although financial markets are expected to remain volatile, coordinated policy action in the eurozone, combined with domestic policy progress should see Indian equities continue to outperform in the second-half.”

As a bulwark against the volatility, RBS Private Banking research suggests that at current high yields, bonds will be important as a hedge against equity exposure as well as the global deflationary environment. "Corporate bonds will be better placed than government bonds, with short-term maturity bonds delivering better returns with an improvement in liquidity in the short-term," the firm says.

The firm also sees gold as an important ballast in portfolios as a hedge against currency devaluation in the current environment of low or negative real interest rates. "Gold is the favoured hedge against the loss of faith in the face of default risk," the firm says. "While it is vulnerable to a squeeze on dollar liquidity, as seen in the latter part of 2011, it is likely to continue to benefit from weakness in major currencies amid near-zero interest rates and further quantitative easing."