Investment Adventures in Emerging Markets


Update on India’s Second COVID Wave

While the COVID-19 situation in India is serious with case numbers spiking across the nation, reaction to the recent second wave has been swift, with the population being much more vigilant and following COVID protocols. Our Emerging Markets Equity team’s Murali Yerram weighs in on why the economy should be able to bounce back.

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There is no doubt this current second COVID-19 wave will leave a dent in India’s economic recovery, which could last for 1-2 quarters, but we expect the economy to bounce back with the vaccination drive and the market impact to be transient.

India is one of the largest and most dynamic national economies in the world. The country enjoys a number of structural growth drivers, which could keep the economy on a reasonably strong upward trajectory in the long run. Such drivers include a domestically oriented economy driven by internal demand and investment, a low export share, favorable demographics, large-scale urbanization, rising consumption and a high savings rate in the population.

While the COVID-19 situation in India is serious with case numbers spiking across the nation and hospitals under stress (although mostly in hospitals with weak infrastructure particularly outside of major cities), reaction to this second wave has been swift, with the population being much more vigilant and following COVID protocols. Restrictions such as lockdowns have been implemented at a localized, state level (rather than nationwide) when necessary to contain the outbreak. Actions are bearing fruit with cases reaching a peak across most states. Based on reported data, confirmed cases have come down from a high of approximately 400,000 to 255,000 per the seven-day moving average, and the last reported case numbers were approximately 220,000.1 Additionally, the test positivity rate has come down from 25% to almost 11%, which is a welcome indicator.2

Unfortunately, the number of deaths has gone up, crossing 1% on a cumulative basis, which is a sign of the danger of this COVID variant.

The vaccination program remains top priority. The population was initially apprehensive about taking the vaccine, but the second wave has reminded all of the severity of COVID-19, and we are now seeing full utilization of vaccines being produced.

  • Covishield and Covaxin produced in India will be ramped up from July.
  • The government is also stepping up to accelerate vaccine roll outs: 1) Sputnik V has been approved and was rolled out on May 1; 2) vaccine approvals for the Pfizer, Johnson & Johnson and Moderna vaccines, which have been authorized by Western countries, are being fast tracked; and 3) vaccine administration by private participants, such as private hospitals or companies, is being allowed to ease the burden on the state-level health care.

Timeline-wise, the expectation is for India to complete vaccinations for individuals over the age of 18 by the end of this year.

The sharp increase in new COVID cases, shortage of medical supplies, new lockdowns in most affected states (but not nationwide) and weak macroeconomic data dented investor sentiment in April. However, Indian equities, as measured by the MSCI India Index, are seeing a recovery in May, up 5% year-to-date through May 21,3 which is likely a reflection of the market belief that the second wave had peaked.


We think concerns related to COVID-19 and the impact of potential further local/national lockdowns on economic activity are already largely priced in (and have been for 3-4 weeks). We expect the loss of economic output to be much lower compared to last year, because the measures introduced to contain the wave were not as harsh as the first-time round, and the government permitted most manufacturing and construction sectors to function normally while other essential services such as banking and e-commerce as well as the rural economy were allowed to operate. Hence, our belief is that the impact to gross domestic product growth for fiscal year (FY) 2021 owing to the second COVID wave is likely to be in the range of 1-2% (Indian fiscal years end in March, so FY21 ended on March 31, 2021).

And, we expect to see robust growth when compared to FY19. In part, this is because of the turnaround seen in some of the larger companies in India, which have a substantial impact on the overall figures for the market. Additionally, the reduction in costs across the board during 2020 is having a helpful impact as sales recover. While we anticipate a 5% impact to the FY22 earnings forecast on account of the second wave, we still expect robust earnings growth for FY22 and FY23 (ending in March-2022 and March-2023 respectively). In our view, another positive aspect of the recovery is that some sectors, such as cement, infrastructure and information technology services, are nearing the stage where they should see order books and run rates at better than pre-COVID-19 levels.

It should also be noted that stock markets can recover ahead of economic growth and earnings growth, if corporate feedback remains positive and markets have confidence in the trajectory of business activity in India. Our numerous on-the-ground checks continue to suggest that companies remain positive on earnings recovery in 2021-22. While we cannot rule out some cuts to current FY22 earnings estimates, an earnings recovery appears likely to be strong in the next couple of years.

The pandemic has emphasized the importance of investing in companies with good management who know how to act in a time of crisis, taking appropriate cost-cutting and process adjustments. In addition, it has highlighted that strong balance sheets—either due to net-cash balances or low debt levels—should remain another important focus. Generally, while not all Indian companies will come out of the crisis unscathed, we believe many companies across sectors can come out of the crisis strong, with a stronger competitive advantage in the medium to long term, with potential for further market share gains from weaker players due to industry consolidation which in turn should be supportive for share price returns.

The government has taken supportive measures for the economy, notably with a higher focus on infrastructure projects and manufacturing incentives compared to pre-pandemic plans.

Overall, we expect India’s economic recovery to continue over the course of 2021 as economic activity gradually settles toward pre-pandemic levels. We see corporate earnings on an uptrend toward earnings normalization, following the pandemic-related downturn. The main risk for the market we see is the second wave of the COVID-19 pandemic.

Additionally, like most markets, the overarching drivers underpinning the Indian market are low interest rates, high liquidity and fiscal incentives, all of which currently stand intact. However, we remain mindful of the risks, including the ongoing virus pandemic, regional and global geopolitical relations and the path of the recovery and infection rates in other regions globally.

What Are the Risks?

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1. Source:, as of May 24, 2021.

2. Source: Ministry of Health and Family Welfare, Government of India, as of May 24,2021.

3. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

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