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Liontrust Insights: India – between a rock and a hard place

Shashank Savla, fund manager at Liontrust, shares his views in a short article below.


On 8 June, India began the first phase of re-opening its economy after more than two months of Covid-19 lockdown with hotels, malls and restaurants allowed to re-open in areas not designated as containment zones. While many countries around the world are relaxing lockdown measures, the key difference for India is its number of new cases is still rising at a rate of around 10,000 a day.

The lockdown has already had a high economic cost, which has been compounded by weak social security structures and low levels of fiscal stimulus. But relaxing lockdown restrictions poses a substantial risk of an increase in infections, which will delay economic recovery and leaves Indian equities looking expensive.

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Swift lockdown has not led to containment of the virus

India was relatively early in imposing a lockdown on 24 March, just a day after the UK. Whilst the number of cumulative cases in the UK at that time was more than 5000, India’s total had only crossed 500, with daily cases still below 100.

However, India’s healthcare facilities are scarce compared to the enormous size of its population. Furthermore, most of the intensive care facilities are concentrated in metropolitan areas and larger cities whereas rural areas tend to provide only basic care. The early lockdown was not sufficient to prevent a significant outbreak of the virus and India’s total number of cases has now surpassed UK to be the fourth highest in the world.

Lockdown has had a significant economic cost

India’s growth was already slowing even before the impact of Covid-19 containment measures. Real GDP growth had halved to 4.1% in the fourth quarter of 2019 compared to 8.2% in the first quarter of 2018. Growth for the first quarter of 2020 slowed further to 3.1% and economists forecast second quarter GDP to fall more than 10% year-on-year, with some forecasting close to a 20% decline.

The problem is exacerbated by a migrant crisis. India’s urban centres rely on millions of migrant workers and when the lockdown started without any notice, many were left without any means to support themselves. With public transport also shut down, many walked hundreds of kilometres to reach their homes in the rural areas. According to independent research and survey company CMIE, India’s unemployment rate increased to 23.5% in May from 7.5% before the lockdown after 122 million jobs were lost.

A lack of stimulus makes a V-shaped recovery very unlikely

Unlike countries such as UK and Australia, which put together generous income support schemes for unemployed people, India’s social security net is much weaker. More than 80% of workers in India are employed in the informal/unorganised sector, making it difficult to provide legal and social protection.

Overall, India’s fiscal response has been weak. While it announced a headline stimulus package equivalent to 10% of GDP, most of this was accounted for by credit and liquidity support; actual fiscal stimulus amounted to less than 1% of GDP.

The main reason for the muted fiscal response is that India cannot afford to spend more without risking a credit downgrade. Fitch yesterday downgraded India’s outlook to ‘Negative’ citing weak economic growth prospects and rising government debt. India’s fiscal deficit for the year ended March 2020 rose to 4.6%, much higher than its budget forecast of 3.8%.

There are other factors that will hamper economic recovery: the migrant workforce is unlikely to be willing to return rapidly; the virus may spread rapidly in rural areas now that many workers have returned home from urban areas; and the financial sector remains under pressure.

The shadow banking sector has still not recovered from the credit squeeze induced by the collapse of Infrastructure Leasing and Financial Services in 2018. Although significant liquidity has now been made available to the finance sector, it is still struggling. The public sector banks have problems of high non-performing loans and a lack of capital. Private sector banks, though relatively strong, are unwilling to lend and take on more risk in this environment.

Given the risks to economic recovery, analysts’ earnings forecasts look too optimistic

Earnings estimates for the MSCI India Index (for the year to March 2021) have only been downgraded by 25% since the start of 2020, and generally analyst estimates have proved too optimistic for the past several years. In our view, valuations still look expensive; the 12-month forward price/earnings ratio for the market is almost back to its peak of around 19x. Even on the price/book measure, India is trading at 2.3x – just 10% below the last five-year average.

These valuation measures put India at a premium of between 25% to 50% to the wider region. India has underperformed the Asia Pacific ex-Japan index significantly by over 20% in US dollar terms over the past year. Given the economic risks associated with a premature relaxation of lockdown measures and the optimistic consensus earnings forecasts, we do not expect this performance to reverse any time soon.


Liontrust Key risks and Disclaimers

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. 

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business. This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.  

MeDirect Disclaimers:

This information has been accurately reproduced, as received from Liontrust Fund Partners LLP. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

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