Soap and Toothpaste Help Biggest Fund Bypass India’s Growth Math

  • ICICI Prudential CIO sees 50 bps interest rate cut by December
  • Naren says bullish on utilities, drugmakers and financials

S. Naren.

Photographer: Dhiraj Singh/Bloomberg

For India’s biggest fund manager, S. Naren, there are better ways to gauge economic growth than the nation’s much-reviled official estimate of gross domestic product.

Naren says he relies on data for spending on soap and toothpaste, travel and electricity usage when deciding where to invest ICICI Prudential Asset Management Co.’s $29 billion assets. Double-digit demand growth for everything from fuel and air travel to air conditioners means he doesn’t worry about whether GDP data overstates the economy’s strength. Only rising oil prices or a sub-par monsoon would derail his bullish bets on power utilities and finance companies, he said.

“I’m not an economist, so I don’t understand the GDP numbers,” Naren, executive director and chief investment officer at ICICI Prudential, said in an interview in Mumbai. “I would use things like coal and power demand, two-wheeler sales and volume growth in areas like toothpaste, soaps and detergents. These areas can see huge growth, leave aside the GDP numbers.”

The question mark on India’s growth data means other indicators of economic activity are becoming more important for investors trying to gauge how successfully the country can decouple from a slowdown in China and Europe. Morgan Stanley Investment Management’s Head of Emerging Markets Ruchir Sharma said Friday India probably grew 5 percent to 6 percent, far short of the 7.6 percent published by the government.

ICICI Prudential Value Discovery Fund has climbed 20 percent annually in the five years through June, surpassing 95 percent of its peers. That’s more than the 14 percent yearly gain in the Nifty Midcap Index during the period. The fund had invested about 30 percent of its 132.1 billion rupees ($2 billion) assets in banks, engineering firms and drugmakers as on June 30, data compiled by Bloomberg show.

India’s fuel demand rose 11 percent in the year ended March, the fastest pace since at least fiscal 2001, while air travel grew 23 percent in the first five months of this year, official data show.

New Math

India’s headline numbers have puzzled investors ever since the government’s statistics department changed its method for calculating GDP in January 2015. The new calculation uses market prices rather than factor costs, and a data set that includes reporting from hundreds of thousands of smaller companies and government bodies. The formula change prompted the annual growth to rise to about 7 percent virtually overnight from a near-decade low of 5 percent.

“More than a year has passed and a growing number of people have come around to the view that there’s something wrong with the method,” said Morgan Stanley Investment’s Sharma, author of The Rise and Fall of Nations. The new method “has made things worse in terms of credibility.”

Even so, India has “good, solid growth,” Sharma said, forecasting a “path of steady acceleration” for the economy.

Fund Inflows

Overseas investors, including Mark Mobius, have bought $1.7 billion of domestic shares since April 1, the highest in Asia excluding Japan, as global risk appetite revived and Prime Minister Narendra Modi’s government took steps to bolster growth.

The S&P BSE Sensex, the nation’s benchmark stocks gauge, increased 6.5 percent in the June quarter, the most among markets valued at more than $1 trillion. Only a spike in oil prices and a below-normal monsoon can upend markets, said Naren. The gauge dropped 0.5 percent at 2:09 p.m. in Mumbai on Tuesday, halting a six-day advance.

Naren says he huddles with senior members of his team each time crude climbs by $5 a barrel or rainfall remains below average for a week. For an oil-importing country, lower crude prices keeps a lid on inflation and bountiful rain is crucial to sustaining the nation’s economic growth after back-to-back droughts.

‘Trigger Meetings’

Reserve Bank of India Governor Raghuram Rajan left interest rates unchanged in June at a five-year low and said good rainfall and astute food management were needed to offset higher inflation. Naren said he expects the central bank to cut its benchmark rate to 6 percent from 6.5 percent by year-end.

“If our calls go wrong, then we have trigger meetings," Naren, 50, said. “If oil spikes or the monsoon turns bad, we would be pro-exporters. We will go underweight on highly leveraged companies and turn cautious on financials.”

Total rainfall has been 2 percent below average since June 1, with the deficit narrowing from as high as 25 percent early last month. Oil has posted its best quarter in seven years as falling U.S. supply added to speculation the global surplus is easing.

Naren’s approach helps him beat the market as his fund invests mainly in publicly-traded companies, according to Pankaj Sharma, head of equities at Ahmedabad-based Equirus Securities Pvt.

“If you take a bird eye’s view from 20,000 feet and start worrying too much about macro drivers of economy, the chances of getting it wrong are more," Sharma said. “Looking at granular data is more sensible than tracking the country as GDP comprises data from the unlisted space as well.”

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