Even before the COVID-19 crisis spread across the world and dragged economic activity down to new lows, India was already seeing a deceleration in growth due to the effects of a liquidity squeeze. After averaging around 7% growth during the last 10 years, 2H 2019 saw this figure slow to below 5%.

The current situation only appears to amplify the issues facing India. Effects stemming from the dense population and large amount of workers subsisting on day-to-day earnings have been reflected in the high number of infections and the hit to activity. High-frequency indicators are currently still mixed and do not point to a strong “V-shaped” recovery. Overall risks to growth are still to the downside.

Fiscal policy has stepped in to provide much-needed economic support, but the Indian government’s response faces a dilemma. The available firepower for its policies will be limited due to high debt levels and the need to control the already large fiscal deficit.

Valuation wise, India’s story is also mixed. India’s equity markets performed relatively well during 2Q 2020, but price-to-earnings valuations appear stretched, with the MSCI India forward P/E at over 22x, almost at its highest in the last 15 years. Price-to-book ratios appear far more reasonable at 2.7x, slightly below the long-term average, but an uncertain economic outlook does not bode well for earnings expectations.

Exhibit 1: India’s slowdown started before the virus, but now only points to more uncertainty

Source: J.P. Morgan Asset Management; (Top and bottom left) CEIC; (Top left and right) Ministry of Statistics and Program Implementation; (Top and bottom right) FactSet; (Bottom left and right) Reserve Bank of India; (Bottom right) World Bank – World Development indicators.
*Reserve Bank of India (RBI) repo rate is % per annum.
Guide to the Markets - Asia – On the Bench. Data reflect most recently available as of 17/08/20.

Investment implication

Similar to many other countries, India’s market performance has risen on recovery optimism and policy support. There are still opportunities in areas that we expect to be resilient during this virus outbreak such as health care and IT. India’s long-term growth potential of a rising middle class still remains. However, we believe that an uncertain growth picture, limited fiscal space and a questionable earnings outlook call for more caution in the short term.