Nowhere in Asia are markets currently more disconnected from the reality on the ground than in India. Mumbai stocks are cresting near their all-time highs, and are some of the top performers in Asia over the course of the last month and last year, whichever way you look at it. All this, while the world's worst outbreak of COVID-19 rages.
Global investors are clearly betting that the pandemic's fierce and fatal second wave has peaked. That does appear to be true, although there's a long way to go in a nation still reporting well north of 100,000 new infections every day.
The Nifty 50 index touched a new record intraday high on Tuesday at 15,660. The Sensex index this week crested above the 52,000 mark, almost retesting its February all-time high.
Although both indexes, representing large caps on the National Stock Exchange and Bombay Stock Exchange respectively, are down around 0.5% on Wednesday at the time of writing, the Sensex has still gained 5.8% in the last month, and an eye-popping 52.6% in the last year. The Nifty 50 is up even more, 55.2% in a year. Indian equities have doubled from their COVID lows.
The next phase of tighter margin restrictions that securities regulators launched last year kicked in on Tuesday. That may result in short-term weakness, although the change was telegraphed well ahead of the event.
It is a thankless task to keep track of all the various pandemic outbreaks and control measures in place across Asia. Malaysia entered "total lockdown" yesterday for two weeks, right as neighboring Singapore said it was considering easing its pandemic measures, which bar dine-in eating and restrict gatherings to two. But you certainly cannot get any feedback from the markets.
The Vietnam stock market is up 8.0% in the last month, in the form of the Ho Chi Minh Stock Index. That's even as the government of Ho Chi Minh City said it would test all 13 million of the residents in the country's business hub to combat a wave of infection that began in April. The city also suspended non-essential businesses and on Monday started 15 days of lockdown measures, while Hanoi is halting international plane arrivals. Markets up, country closing down.
The disconnect between the markets and main street is a gaping chasm in India. That's led the central Reserve Bank of India to warn of a potential bubble in Indian equities, which it attributes to rising money supply and increased participation by international investors.
Small investors contribute around 50% of the trading volumes in India. It is emerging-market allocations by global investors that are likely to prove fickle, however, if there's any retreat away from the current appetite for risk. If anything, Indian equities have tracked the U.S. and European rates of infection and vaccination, and are more exposed to central-bank tightening abroad than at home.
The Indian jobless rate rose in May to a shocking 11.9%, up from 8.0% the previous month. The urban unemployment rate is even higher, at 14.76%, a sharp increase matched only by the total lockdown that the country went through in April and May last year. Other than that two-month spike, these are the worst figures in half a decade.
Consumer confidence cannot possibly return quickly if jobs are uncertain. Economists are slashing growth forecasts even as equities rise. The second wave of infection caused the State Bank of India to radically revise its estates for the year ahead. GDP will grow 7.9% for the fiscal year through March 2022, the state-owned bank predicts, having previously set next year's economic rebound at 10.4%.
How much and when consumption and output recover, in other words, is very much a moving target. COVID cases do appear to be coming under control, with numbers down 45% from two weeks ago. But that still amounts to an average of 169,542 new cases EVERY DAY in the last week. Deaths, down 18%, have yet to chart the same downward trajectory, but likely will.
And those are only the official figures: 28.2 million infected, 331,895 dead. It was the middle of last month when India was setting the largest daily death toll for any nation since the pandemic began. Epidemiologists and other experts tell The New York Times that a likely scenario is five times that death count, or 1.6 million, since testing in India has been scant, cremations quick, and 4 out of 5 deaths went uninvestigated even before the pandemic began.
Indian equities saw a period of choppy trading when infection rates started to rise in February. Each dip was short-lived, though, and both the Nifty 50 and the Sensex have marched steadily higher since April 20. At that time, the parabola curve of infection was still rising, and just how high the disease outbreak could go remained unknown.
That equity strength has fed into other assets. The Indian rupee advanced 4.1% against the U.S. dollar between April 21 and the end of May. The currency, too, has weakened slightly in June.
It is likely that India will be one of the strongest major economies rebounding out of COVID-19. This second wave has been so devastating, though, and I feel forecasts of future profits could be overly optimistic. The impact has yet to be reflected in earnings, and more importantly will have shaken the population more profoundly than the first wave - the disease has touched virtually every family this time around.
Big businesses are likely riding the wave of economic disruption better than their smaller counterparts. Large-cap earnings should then fare well when the economic recovery is confirmed. That stage is not yet here, though - Indian equities have got ahead of earnings, and ahead of the disease curve, and ahead of themselves.