India is likely to suffer the most if there is a further deterioration in global economic conditions as a result of the coronavirus, according to Matthews Asia’s Robert Horrocks. 
The global response to the Covid-19 coronavirus has been robust, with stringent measures to tackle the spread balanced with substantial levels of support to prevent economies from collapsing.
Nevertheless, Matthews Asia chief investment officer Robert Horrocks (pictured) – who is co-manager of the $189.4m Matthews Asia Dividend and the $71.1m five FE fundinfo Crown-rated Matthews Asia ex Japan Dividend funds – said there are still several key risks that could emerge to further challenge markets.
And the country that could be affected the most is India.
The first big risk facing markets is that the dollar panic – witnessed as the coronavirus started to spread beyond China – makes a comeback and investors start to worry about the supply of the currency.
The ‘dash to cash’ occurred around the first weekend of March and saw bond yields spike, equity markets sell off and the US dollar strengthen.
“Everything was being sold to hold US dollars,” Horrocks explained. “This was the dollar panic stage and it was the most scary stage of the crisis.”
Countries with large current account deficits and those with much reliance on external financing are most likely to be affected by a shortage of dollars, he said.
The Australian and Indonesian banking systems are both reliant on external financing, which could rise should the US dollar strengthen, although both should be resilient enough to withstand the move in the short-term.
“The most exposed [to this risk] is India, it’s banking system is under greater stress than most other places,” Horrocks said. “It does have a current account deficit and it’s hard for it to deal with in that situation.”
Current account balance (Balance of Payments, current US$) – India
Source: World Bank
Yet Horrocks said a shortage of US dollars is not something that he is overly worried about.
“This is the one I’m least concerned about because it is the easiest to fix,” he explained. “The Federal Reserve has shown a willingness to do whatever it takes to fix it. If it does come back it will be short-lived and dealt with.”
The second risk to markets that could emerge, said the Matthews Asia manager, is the economic effect of the lockdown.
“You have to look at who went into lockdown later and less aggressively,” he explained. “If you were first in there as soon as you got cases of the virus, you locked it down and you did so aggressively, [then] you'll have less need for draconian nationwide lockdowns and the economic impact will be less.
“Within Asia, it's not really about north Asia, they’ve dealt with it so far. China, Korea, Japan, Hong Kong, Singapore all seem to have emerged from this and for all the talk of a second wave, it hasn't really happened.
“India went into lockdown late and did it aggressively, so it didn’t have the impact and probably went into lockdown too late to control the spread of the virus and the aggressiveness of the lockdown is going to have a fairly significant impact on domestic demand.
“In addition, they were going into this having had weaker and nominal GDP growth, so they were just in a more vulnerable position.”
The final risk, said Horrocks, will be the impact of coronavirus on aggregate demand and the ability of governments to provide a fiscal boost to help stimulate their economies because of weaker demand.
“The best response has probably been the US. We had the usual political horse-trading before any stimulus package gets through, but we’ve now had big fiscal stimulus packages put in place,” he added.
“The one country that’s going to struggle is India because the government is not in a strong position. It’s already had a big stimulus with the corporate tax cuts, it kind of fired its bullets before this happened.
Performance of Indian rupee rebased in US dollar YTD
Source: FE Analytics
“One of the stress points here is the financial system, ultimately they need a round of capitalisation and probably the currency comes under pressure. Asian currencies look OK to me, but the [Indian] rupee is the one where you have vulnerability.”
One country that Horrocks is least concerned about with any of the risks is China, which was the first to be affected as the coronavirus emerged in Hubei province’s city of Wuhan.
“China really looks pretty good through the lens of these risk factors,” he said. “Monetary risk? Well, we never had the dash-for-dollars panic as a closed capital account. So, it seemed relatively insulated from that.
“Lockdown risk? It locked down early and hard and seems to have emerged from that and the impact on domestic demand will be much less severe than you see in Europe and the US, is my guess. You’ll have secondary effects from global weakening, but China should post positive GDP growth for the year, which is unlikely to happen in Europe and the US.
“And the fiscal response to emerge from this? The amount of stimulus required from China is much less because of the lesser domestic impact. But does anybody doubt that they are in a position to stimulate through fiscal or monetary means or do they have a lack of willingness to do so?”
Yet Chinese companies are trading at lower valuations than their counterparts in the US, said Horrocks. And this is despite a much worse situation for the US in terms of rising numbers of coronavirus cases and deaths and better prospects for the Chinese economy.
Performance of funds YTD
Source: FE Analytics
Year-to-date (to 7 April), Matthews Asia Dividend is down 10.10 per cent, outperforming the average IA Asia Pacific Including Japan peer, which is down by 10.28 per cent, and the MSCI AC Asia Pacific benchmark, which has lost 11.4 per cent.
Meanwhile, the Matthews Asia ex Japan Dividend fund is down by 3.44 per cent compared with a 9.26 per cent fall for the MSCI AC Asia ex Japan benchmark and a 12.66 per cent loss for the average IA Asia Pacific Excluding Japan peer.