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March 27, 2020

MRP Adds Short India as a Theme

Summary: India’s high population density, patchwork healthcare infrastructure and air pollution problem heighten the probability that India could become the next global hotspot for coronavirus. If a health crisis does erupt, it may destabilize the country’s already weakened financial system, triggering even bigger capital outflows from Indian assets than we've seen year-to-date.

Related ETF: iShares MSCI India ETF (INDA)

There’s been chatter in the medical community that India could become the next global hotspot for coronavirus. As of March 26, India has a little over 700 confirmed cases of COVID-19, up from 160 a week earlier. That is still a surprisingly low case count in a nation of 1.3 billion people. The actual number of cases is likely much higher if one accounts for the government’s stringent testing criteria.

In order to be eligible for testing in India, you must have traveled to a country with a COVID-19 outbreak, or come in contact with a confirmed case, or be a healthcare worker that has come in contact with a suspected case. For the most part, no one else is getting tested, even if they display symptoms.

This policy obviously fails to account for community transmission cases which, no doubt, have to be taking place already. Once testing is expanded to the general populace, the number of reported cases will surely skyrocket.

Three factors make India particularly vulnerable to a bad COVID-19 outbreak:

  • Its high population density
  • Its “rickety” healthcare infrastructure
  • Its terrible air pollution problem

With that combination, the containment measures that have proven successful in other parts of Asia won’t easily work in India.

Consider, for starters, that India has 420 people living per square kilometer (about 0.4 of a square mile) compared to 148 people per square kilometer in China. Then consider that, in some Indian cities, tens of millions of people are crammed up in slums or low-income housing under close quarters with poor sanitation. In those communities, the social distancing measures being advocated elsewhere in the world cannot be realistically implemented.

The nation’s weak public health infrastructure poses another challenge to containing the virus. India’s health-care spending is among the lowest in the world — just 3.7% of GDP. For hundreds of millions of Indians, the option is either an overcrowded public hospital that cannot accommodate them or a private hospital they cannot afford.

Then, there’s the pollution issue. Evidence from previous coronavirus outbreaks show that those exposed to dirty air are more at risk of dying. Scientists who analyzed the SARS coronavirus outbreak in China in 2003 found that infected people who lived in areas with greater air pollution were twice as likely to die than those in less polluted places. Toxic air has risen to extreme levels in India. Air quality in Delhi is sometimes so hazardous that breathing that air for one day is considered to have the same health impact as smoking at least 25 cigarettes.

On top of all this, India has other systemic risks to worry about. For some time now, the country has been grappling with a shadow banking crisis that is now spreading to conventional banks at the risk of destabilizing the broader financial system.

Over the past six months, the Reserve Bank of India (RBI) has had to bail out no fewer than three institutions deemed too-big-to-fail. The most recent was this month’s dramatic rescue of Yes Bank Ltd (YESB.NS), India’s fourth-largest private lender. Yes Bank’s revelation that 20% of its loan book has turned bad and that its deposits have shrunk by 34% in 5.5 months indicates how bad things are. The RBI’s latest interference was driven by fears that the deposit flight, if not halted, could spark a contagion that would spread to other banks, putting India’s already fragile financial stability at risk.

Yes Bank’s vulnerability is certainly no outlier. India has one of the worst bad-loan ratios among the world’s top ten economies — even worse than Italy’s — and there are many other weak banks with deteriorating balance sheets. At least two credit rating agencies have warned that Indian banks’ non-performing loans and provisions will spike in coming months. The timing is quite bad, what with India’s economy expanding at the slowest pace in 11 years and coronavirus kicking at the door.

To curb the virus’s spread, Prime Minister Narendra Modi decided to imposed a 21-day shutdown of the country that started on March 25. During that time, only essential services will remain open and the country’s 1.3 billion residents are expected to stay home. The government is also setting aside $2 billion to bolster India’s medical infrastructure and care for those infected with the coronavirus.

Whether these measures will be adequate to prevent the country’s fragile health system from buckling under a surge of critically ill patients remains to be seen. Given the size of India’s informal cash-driven economy, three weeks of forced-containment at home may be difficult for people to adhere to if they have to worry about making money to feed their families.

The Reserve Bank of India expected GDP growth to rise to 6% in this fiscal year (which ends for them in April 2021). A shutdown of activity in the second quarter will certainly change that, and could inflict a heavy economic blow to the country that’s barely started to recover from its banking crisis.


New MRP Theme: Short India

Our takeaway is that Indian assets are risky right now and will likely underpeform their emerging market peers this year and the S&P 500. With this view in mind, MRP is adding Short India to our list of themes. We will monitor the theme with the iShares MSCI India ETF (INDA).

The sensex closed at 29,947 on March 26, marking a 29% decline from its all-time peak of 42,274 reached on January 20. On a one-month basis, the iShares MSCI India ETF (INDA) has returned -31% vs -18% for the Emerging Market ETF (EEM), and -16% for the SYP 500 ETF (SPY).

On March 19, in our initial report titled Indian Stocks Have Farther to Fall Once Coronavirus Testing Really Begins, we foretold that the performance gap between INDA and the other two ETFs will widen once India's coronavirus cases start to rise. We already seeing that performance lag play out.

India vs BRIC vs Emerging Markets vs S&P 500