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In Japan and India, investors are becoming more concerned about the prospects for a strong post-pandemic recovery. (Source photos by Kyodo and Getty Images) 
Market Spotlight

Japan and India stock markets feel pain from COVID surge

Asian equities underperform as rising caseloads slow region's economic rebound

JADA NAGUMO and NARAYANAN SOMASUNDARAM, Nikkei staff writers | Japan

TOKYO/HONG KONG -- Investors in Asia, led by Japan and India, are reacting with concern to a surge in coronavirus cases in many parts of the region as new lockdown measures threaten corporate earnings and economic recovery.

Asia looked likely to escape the worst consequences of the pandemic, with strict lockdowns helping to stem COVID transmission. Investors had identified the region as a good bet for recovery, helping stock markets to climb.

But now many parts of the region are struggling to contain a resurgence of the virus, with India setting records for daily COVID cases and Japan having on Sunday entered a renewed state of emergency covering its biggest urban areas.

Japan has been one of the worst performers among major global equity markets in recent weeks. The Tokyo Stock Exchange's blue-chip Nikkei Stock Average index has fallen over 2% in the last week and remains flat compared to a month ago. The broader Topix index has weakened nearly 3% in the past month.

In comparison, the Dow Jones Industrial Average, as well as benchmarks in mainland China and Taiwan, have posted gains during the same period.

Japan is facing a fourth wave of the pandemic, with new cases surging in big cities including Tokyo and Osaka. The rapid rise in deadlier COVID-19 variant cases has also become a point of concern for investors -- as has the slow pace of Japan's rollout of vaccines. Little over 1% of the population has received a first dose.

Ryota Sakagami, chief equity strategist at J.P. Morgan Securities Japan, said in a recent report: "While the number of infections has been increasing again, the spread of the vaccines has been slower compared to Europe and the U.S." This has led to growing uncertainty over Japan's ability to get its economy functioning normally again.

As investors' risk appetite wanes, sectors like air transportation, railways, real estate, and restaurants have been hard hit. The latest COVID-19 emergency declaration will be in place during Japan's Golden Week holidays through early May -- usually a travel and shopping bonanza. The government has asked restaurants and other nonessential establishments such as department stores to close.

Tokyo's stock market has begun to factor in the hit to domestic consumption.

Takahide Kiuchi, executive economist at the Nomura Research Institute and a former member of the Bank of Japan's policy board, estimates that the 17-day state of emergency in the four prefectures will impose a 699 billion yen ($6.4 billion) economic hit. 

Shares in Osaka-based Keihan Holdings, which provides local bus services and manages Keihan Electric Railway as well as Keihan Department Stores, have fallen 20% in the last month. Big market losers also include Japan Airlines, department store operator J. Front Retailing, and apparel company Tokyo Base, as well as Tokyo Disney Resort operator Oriental Land.

"Investors have turned cautious as Japan enters its corporate earnings season," notes Hiroshi Matsumoto, head of Japan investment at Pictet Asset Management. "There is a possibility that companies depending on domestic demand, like retailers and the overall service industry, will announce conservative forecasts."

Prior to the recent surge in COVID-19 cases, expectations for a swift economic recovery had risen, with investors anticipating upbeat profit outlooks. "Because the level of expectation is so high, if a company's forward guidance doesn't reach analysts' consensus, it could lead to big disappointment in the market," Matsumoto said.

India is another country that had been expected to achieve a strong post-pandemic recovery. However, Asia's third-largest economy is now responsible for the bulk of new infections in the region as it continues to set daily records.

In recent days the country of more than 1.3 billion people has set repeated record highs for one-day tallys, with more than 300,000 new daily infections -- triple the number it had confirmed during the peak of its first wave in September. As hospitals struggle with shortages of beds and oxygen, the capital region, Delhi, has been forced to order a lockdown.

This, in turn, has prompted banks and securities companies, including UBS Securities and Nomura Securities, to cut their economic growth forecast for India. UBS now estimates growth of 10% to 11.5% in 2021 while Nomura downgraded its forecast from 13% to 12.6%.

India's benchmark BSE Sensex has declined more than 4% during April. The index had risen nearly 10% since the start of the year to an all-time high on Feb. 16. Those gains have been wiped out.

"The second wave of COVID infections in pockets of Asia seems more ferocious than the first. India and Thailand seem particularly at risk," said Manishi Raychaudhuri, head of equity research for Asia-Pacific at BNP Paribas in Hong Kong. "The resurgence in some Asian pockets is leading to growth hopes getting postponed. Consensus earnings growth estimates -- especially in [India's] domestic economy-linked sectors of consumer discretionary, financials and telecommunication -- appear overstated to us despite the low base of 2020," he added.

Asia's uptick in coronavirus cases has put all the region's equity markets under pressure. Global stocks, as measured by the MSCI All Country World Index, have outperformed their Asia-Pacific peers by 8.4 percentage points since Feb. 1.

The resurgence in infections poses "additional challenges to what is already a challenging backdrop," said BlackRock portfolio manager Nicholas Chui. "It does call for the need to be selective in investing, as not all markets are experiencing the resurgence in the same way."

In Malaysia, the infection rate increased to a record-high this month as people traveled for Ramadan. The government has warned that the country is on the brink of a fourth wave.

Its main share index, the FTSE Bursa Malaysia KLCI Index, has ceded all gains racked up at the start of the year.

Meanwhile, Thailand is witnessing a third wave of the pandemic -- its most challenging so far, with infections reaching all 77 of its provinces. More than a third of the nation's total cases have been recorded in April alone, driving the government to tighten COVID-19 restrictions.

However, its stock index, which fell 10% last year, has stood its ground amid the latest surge, with investors buying into beaten-down sectors.

In Indonesia, which has announced an internal travel ban during its Eid al-Fitr celebration in May, the benchmark stock index has dropped almost 4% in the past month.

South Korea, which also witnessed the highest number of daily infections since January, has fared better, with the number of new cases still contained and vaccinations underway. The Kospi index has climbed 6% in the past month, taking gains for the year to 11%.

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