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Personal Perspective on the Implications of India’s Outbreak
- By Aayush Sonthalia, CFA, Portfolio Manager, Emerging Markets Debt
- May 18, 2021
The past few weeks have been the most harrowing of my life. My immediate family in India remains healthy, yet the suffering of my friends and the country’s citizens leaves me heartbroken. When I think about India’s COVID outbreak from a professional perspective, I segment it into three categories: how it happened, the investment implications, and the lessons we can apply to the emerging market debt sector.
How It Happened
India’s early experience with COVID-19 was relatively mild. Based on the information available, the country’s virus-related deaths in early to mid-2020 were low on a per capita basis compared to those in the U.S. In early 2021, when COVID cases were still relatively low in India, a sense of complacency grew among the general population and the government regarding the transmissibility of the virus. That complacency—coupled with five regional elections, a relatively slow pace of vaccinations, and the virus’ triple mutation variant—fueled the recent spike in the positivity rate to more than 20% by early May (Figure 1).1
Figure 1: India’s Surge in COVID-19 Cases
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 U.S. experience 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 (Figure 2). 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.2 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.
Figure 2: Daily New Confirmed COVID-19 Deaths Per Million People (Rolling 7-Day Average)
The Implications for Global Investors
India’s $3 trillion GDP makes it the word’s fifth largest economy and gives it a market weighting of 8.6% 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 (Figure 3). In general, many GDP forecasts for 2021 have declined from the 12-13% range to 10%. We also see growth of 10% in 2021, and we project a moderation to 6.8% in 2022.
Figure 3: Deutsche Bank’s India Economic and Mobility Recovery Index
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% through April.3 However, the situation has broadened the opportunity set for credit selection among Indian corporates, which have outperformed with a YTD return of 0.89%.4 For example, we see value in the quasi-sovereign space with spreads around 180-210 bps for 10-year maturities relative to spreads of about 96 bps on the 7- to 10-year segment of the U.S. investment grade index.5 We also favor select, BB rated high yield renewable and industrial issuers, which yield around 4% vs. 3.35% for the similarly-rated portion of the U.S. high yield benchmark index. 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% default rate recorded by Indian corporates in 2020.6 In terms of foreign exchange, the Indian rupee experienced a mid-single digit percent correction as the second wave accelerated, but the currency subsequently stabilized.
EM 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 emphasizes 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% of India’s adults will be vaccinated by the end of 2021 and 50-60% may be vaccinated by April 2022.7 A delay in that timeframe 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 lockdown, such as Mumbai where the positivity rate declined from 30% to 7%.
From a personal perspective, that inflection point is something I eagerly anticipate for the wellbeing of my family and compatriots. On a professional level, we’ll continue to monitor and adjust our exposure to India based on the opportunities and risks, while we apply our broadened perspective from the crisis across the emerging markets as the economies within the sector gradually begin to recover.
This material reflects the views of the author(s) as of May 18, 2021 and is provided for informational or educational purposes only. Source(s) of data (unless otherwise noted): PGIM Fixed Income.
1While the positivity rate is not a perfect measure—it is influenced by the number of tests performed—it provides a sense of the sharp and sudden deterioration in the situation in India.
2Based on methodology from the Institute of Health Metrics and Evaluation (IHME).
3Based on the J.P. Morgan EMBI Global Diversified.
4Based on the J.P. Morgan CEMBI Broad.
5Based on the Bloomberg Barclays U.S. Aggregate Corporate Index.
6Default data according to J.P. Morgan.
7Vaccination estimates according to Deutsche Bank.
Aayush Sonthalia, CFA
Aayush V. Sonthalia, CFA, is a Principal and portfolio manager for PGIM Fixed Income's Emerging Markets Debt Team. Previously, he was an Asian corporate bond credit analyst for the Credit Research Group. Prior to joining the Firm in 2012, he was a Portfolio Manager at BlackRock, Inc. Previously, Mr. Sonthalia held positions as trader, research analyst and portfolio manager with R3 Capital and Lehman Brothers. Mr. Sonthalia began his career with Morgan Stanley as an equity research analyst. He received a Bachelor of Engineering from the University of Mumbai and an MBA from the Indian Institute of Management, Ahmedabad. He holds the Chartered Financial Analyst (CFA) designation.
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