India's coronavirus epicentre Maharashtra went into a state-wide weekend lockdown on April 10 as the country battled exploding infection numbers and reported shortages of vaccines, drugs and hospital beds. (Image: AFP)
As India topped the charts in the number of daily infections, attention this week was grimly focused on the deadly second wave and the plight of people scrambling to find hospital beds, oxygen and medicines for their loved ones. Clearly, we have learnt few lessons from last year’s ordeal. The resurgence of the virus has led to massive demand for vaccines, exposing gaping holes in our planning. We discussed what needs to be done to ensure there are adequate stocks available.
In the markets, the question uppermost on investors’ minds is the impact the second wave would have. We looked at what the resurgence of the virus meant for pharma stocks, its effect on the FMCG sector, how the auto industry would be affected and which bank stocks are the most resilient.
As the results of the Q4 earnings season started trickling in, we told you what to watch out for. We had a couple of analyses on the valuation differences between Infosys and TCS, after their results. We looked at Tata Metaliks’ quarterly results. We considered stocks that could withstand the ravages of the second wave, such as Cadila Healthcare and Gillette India. And we continued our search for little nuggets that could add value to your portfolio, such as Grauer & Weil, SastaSundar Ventures and DFM Foods.
But given the speed of the second wave and the restrictions that have been once again imposed on businesses, the March quarter results are largely yesterday’s story, apart from gleaning what company managements have to say about future prospects. What matters now is the impact the mini-lockdowns are likely to have on the economy. That in turn will determine what happens to earnings growth.
So far, our weekly recovery tracker has held up well. But the restrictions on business are already having an impact. A note from Credit Suisse says there has been a drop in supply of food and vegetables to APMCs, with a 10-15 per cent fall in demand from restaurants and hotels; despatches from factory gates are down 10-15 per cent; truck rentals and fleet utilisation have both come down and footfalls in auto showrooms have slowed. Nomura Research points out that railway freight and passenger revenues have been lower this month, although the latter may be offset by migrant workers returning to their villages.
Going by recent trends, it’s very likely that case numbers will rise sharply across many states in the next few days, leading to more restrictions and partial lockdowns. As a report from Kotak Institutional Equities says, "The trajectory of confirmed cases in the state of Maharashtra… may be a leading indicator of the likely trajectory for other states as the underlying factors are more or less similar."
While economists have made minor downward revisions to GDP growth forecasts this fiscal year as a result of the second wave, it is anybody’s guess how long the surge will last. But all the forecasts agree that while there will be a short-term impact of the second wave, depending on how long it lasts and how severe it becomes, there will be little impact on the Indian economy’s medium-term prospects.
That is because of several reasons. The most important is the vaccination drive. A note from Barclays estimates that India should be on track to vaccinate around 300 million people by the end of August this year. A Nomura estimate predicts that 40-45 per cent of India’s population will be vaccinated by the end of the year. As the number of vaccinated people increases, the spread of the infection will be reduced and business restrictions can be relaxed.
Apart from vaccinations, there are other factors that are expected to make the economic impact of the second wave far less deadly than the first. One is that governments are far less enthusiastic about lockdowns, having realised the havoc they cause. The second reason is that firms have learnt how to operate with restrictions. A Goldman Sachs note pointed this out: "Evidence from other markets like Europe and Brazil which have seen multiple COVID waves and restrictions put in place shows two key insights. Firstly, market sensitivity to levels of containment policy has reduced in subsequent COVID waves; and second, valuations saw modest pressure but earnings continued to improve. This is likely because households and corporates have increasingly adapted to the post-COVID environment (with a shift towards e-commerce, working from home, etc) and consequently subsequent restrictions haven’t derailed recovery."
A third reason is that the recovery is in full swing in the developed economies, thanks to the stimulus their governments are providing. Growth in China too has been strong. Strong global growth, aided by a weak rupee, could support exports—in fact they did very well in March.
But there are also a few headwinds. One question is whether the economic recovery was running out of steam even before the second wave hit. That is what the February industrial production data seem to show and this is buttressed by the data on bank credit growth. Inflation too has been rising, as seen by the March wholesale price inflation number, at 7.4 per cent, the highest in the current series. Of course, the partial lockdowns may lower inflation insofar as they affect demand. But the current bout of inflation is very likely the effect of supply disruptions, which could be exacerbated by the fresh business restrictions.
There are also signs that despite unveiling a new bazooka in the shape of the G-SAPs, the RBI has failed to rein in bond yields.
And then there’s the valid question whether the most affected businesses, such as those in the hospitality and travel sectors, can survive these repeated shocks.
For the equity markets, as the developed economies recover faster, thanks to their stimulus and vaccination programmes, the risk is that funds will desert emerging markets for more promising shores.
If you are interested in looking beyond the current turmoil to take a 20-year view, you could read what the US National Intelligence Council thinks of India’s prospects.