Emerging Markets: what India’s Covid surge means for investors
Spotlight on Emerging Markets: A monthly update from James Syme and Paul Wimborne (pictured), managers of Pendal’s Global Emerging Markets Opportunities Fund
- Indian equities outperformed the broader MSCI Emerging Markets Index for the third quarter in a row in Q1 2021, as Indian economic data and company results remained broadly supportive
- But Covid-19 data in India has worsened sharply since mid-March, amid distressing stories of human tragedy
- We remain positive on India for our two-year investment horizon, but we are alert to key near-term risks
- Find out about Pendal Global Emerging Markets Opportunities Fund.
BEYOND the human tragedy, the emergence of a new wave of Covid-19 in India is a clear concern for investors.
Indian equities outperformed the broader MSCI EM Index for the third quarter in a row in Q1 2021, as Indian economic data and company results remained broadly supportive.
We have remained overweight India and this was a positive contributor to performance in March and in the first quarter.
Since then Covid data in India has worsened sharply — and we have all witnessed the distressing results in global media coverage.
Here we provide our view on some of the concerns for India and Indian equities.
In terms of Covid data, our preferred metric is the seven-day moving average of cases (and deaths) per million people, which normalises for reporting practices and country size.
Smoothed cases per million people bottomed at 8 in mid-February, before climbing to 17 in mid-March, 45 at the end of March and close to 100 in the first few days of April.
For context, several other emerging markets have seen a serious deterioration in Covid-19 case data in the last few weeks — often at a much higher level than in India. For example, Turkish smoothed cases per million started March at 100 and rose to about 600 in early April.
The key question is whether India will need to reimpose a strict national lockdown to control infections — as they did mid-2020.
For now, the increase in cases is localised (the state of Maharashtra is about one-third of new cases) and local lockdowns and travel restrictions should slow the rate of growth. Even so, near-term risks are elevated and case numbers in less-affected areas will need to be tightly monitored.
Ultimately, vaccinations need to be the solution.
India is one of the world’s biggest producers of vaccines, and has strong experience rolling out national medical (and other) programs. The vaccination rate picked up strongly in recent weeks to a rate of more than 3.5 million doses/day — although on a per capita basis, this is still well below most developed nations.
Experience in the UK and Israel suggests case numbers can be kept under control once half the population has been vaccinated.
More than 90 million people in India have now been vaccinated. At 100 million people per month, India may be five to six months from that threshold. If the vaccination rate can pick up yet further, that timeline would be shortened.
While there are reasons to be worried about Covid-19, the economy continues to deliver promising data.
All forms of PMI data have been strong in the year-to-date (March Manufacturing PMI, for example, was 55.4). Vehicle sales have continued a strong trend that started in October 2020.
With the central bank remaining on hold and fiscal policy remaining stimulative, the policy drivers of growth remain supportive.
Drivers that have historically limited growth remain benign.
Credit growth has been restrained for several years, while excess liquidity in the banking system has risen to INR 7 trillion.
The trade deficit for February was US$94.4 billion, remaining at around its lowest level in a decade. This suggests plenty of potential for domestic demand to increase without balance of payments stress emerging.
Inflation has picked up on a weaker currency and higher commodity prices, but consensus estimates for the 12 months ahead is for CPI to reach only 4.7%. This should not threaten the economic recovery.
The Covid-19 situation is the most pressing concern.
We remain positive on India for our two-year investment horizon. But we also remain alert to key near-term risks.
About Pendal Global Emerging Markets Opportunities Fund
James Syme and Paul Wimborne are senior portfolio managers and co-managers of Pendal’s Global Emerging Markets Opportunities Fund.
The fund aims to add value through a combination of country allocation and individual stock selection.
The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
The stock selection process focuses on buying quality growth stocks at attractive valuations.
Find out more about Pendal Global Emerging Markets Opportunities Fund here.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
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