A contrarian view on India’s Covid shock

Within Asia, India has been the worst hit country in terms of health by Covid-19. The initial lockdown harmed its large informal economy and did little to stop the spread of the virus. The Indian government realised that a swift U-turn was required and abandoned its effort to eradicate the virus and, instead, focussed its attention on supporting the economy. This seems to be working and, in our view, places India in the interesting position of being both open for business  and largely domestically driven, unlike many other countries with a Covid ‘clean sheet’ to protect. The market appears to be taking notice given India’s outperformance within the Asian region during 3Q20.

We have been adding to our Indian exposure within the Asian equity strategy as we remain optimistic that the business prospects for our Indian holdings have the scope to improve further for a number of reasons:

1. The economy is close to pre-Covid levels of activity, according to recovery trackers we follow, which chimes with anecdotal evidence from company management. Also, infection rates are past the worst, according to government surveys, and death rates remain relatively low partly thanks to India’s young population.

2. The country also benefits from structural growth drivers. Firstly it is one of the only large economies to have kept credit to GDP levels almost unchanged since the GFC which provides scope for credit growth and business expansion. The banks are in better shape after cleaning up their balance sheets for several years while the reform momentum of the past few years, although painful in the short term, should begin to bear fruit within our investment horizon. More recently, the government introduced the long awaited new labour code which is expected to consolidate 29 different codes into four which should help incentivise business creation and greater investment. Complex labour laws have been a disincentive for small firms to invest and scale up their business in the past.

3. Some solid and well-managed companies have suffered from the lack of economic activity this year which has allowed us to take positions at historically attractive valuations. We have been taking profits in tech companies and have been buying domestically-driven companies such as a leading construction and infrastructure business with a strong balance sheet which has been a beneficiary of a return to normality. Other beneficiaries include an auto company which has released recent promising quarterly results. We also hold well-run Indian private banks which have been taking market share from the dominant less well run state-owned banks. In all these cases, we believe that the outlook for these businesses are attractive particularly given their strong balance sheets.