Unfortunately, the mortality rate in India has also increased significantly. On the surface, the situation does not look as bad as the worst of the what the US experienced in early to mid-2020. Yet, the scale of the outbreak in India and the country’s relatively low number of hospital beds have driven the recent surge of deaths. Furthermore, due to limited testing and the uncertainty of mortality attribution, officially reported COVID-related deaths have been significantly undercounted based on a standard methodology measuring excess deaths. India’s status as a vaccine production hub also meant that more than 70 million doses were exported before the worst of the outbreak, and it will now need to import vaccines.
The implications for global investors
India’s $3 trillion GDP makes it the world’s fifth-largest economy and gives it a market weighting of 8.6 per cent in our global GDP projections. Therefore, any prolonged slowdown in economic activity could negatively affect global growth and certain commodity markets, such as the crude oil market. The recent downturn in economic activity fell to the level when the nationwide lockdown ended in June 2020, which was about half of the pre-lockdown levels from early 2020. In general, many GDP forecasts for 2021 have declined from the 12-13 per cent range to 10 per cent. We also see growth of 10 per cent in 2021, and we project a moderation to 6.8 per cent in 2022.
We don’t believe India’s Baa3/BBB sovereign rating is at risk in the near-term, but the longer-term outlook depends on the ability to restore its growth trajectory. The sovereign debt has underperformed amid the uncertainty with a year-to-date loss of 2.53 per cent through April. However, the situation has broadened the opportunity set for credit selection among Indian corporates, which have outperformed with a YTD return of 0.89 per cent. That said, we are mindful of the slower pace of recovery in virus-sensitive sectors, such as airports, but expect defaults to remain relatively contained and below the 2.4 per cent default rate recorded by Indian corporates in 2020. In terms of foreign exchange, the Indian rupee experienced a mid-single-digit per cent correction as the second wave accelerated, but the currency subsequently stabilised.
Emerging market implications
Like many things COVID-related, the virus introduced a new set of variables to consider when investing in the emerging markets, particularly as it pertains to countries with dense populations and relatively low levels of healthcare spending. It emphasises the need to understand the extent of a country’s public-health policies and healthcare infrastructure, including hospital capacity, oxygen supplies, and drug availability. Public events that could entail personal contact, such as elections with in-person voting, also require monitoring, and India’s next round of significant elections begins in January 2022.
Finally, vaccination campaigns will be critical to achieving herd immunity among the adult populations of emerging market countries. Estimates indicate 35-40 per cent of India’s adults will be vaccinated by the end of 2021 and 50-60 per cent may be vaccinated by April 2022. A delay in that time frame or public hesitancy to be vaccinated leaves the window open for additional mutations, which could be more transmissible and/or more fatal. As we await greater vaccine introductions, we anticipate that India’s infections may peak in May given the improvement in areas that were the first to lock down, such as Mumbai where the positivity rate declined from 30 per cent to 7 per cent.
From a personal perspective, that inflection point is something I eagerly anticipate for the wellbeing of my family and compatriots. On a professional level, investors should continue to monitor and adjust exposure to India based on the opportunities and risks, whilst applying a broadened perspective from the crisis across the emerging markets as the economies within the sector gradually begin to recover.
Aayush Sonthalia, portfolio manager, PGIM Fixed Income