Market slowdown driven by tepid Q2 earnings and election-linked spending cuts: Hiren Ved

"So, spending is down 35% year-on-year or compared to what was budgeted and I think that is causing a little bit of a slowdown in the economy, apart from other reasons," says Hiren Ved, CEO, Director & CIO, Alchemy Capital.

Ayesha Faridi: I remember the last time you were in the studios, you were talking about Sholay. Of course, it was in the context of the defence stocks, ki jab tak hai ja hain nachungi, the Basanti song. Are you finally seeing Gabbar in the market? I mean, what is the market telling you right now?
Hiren Ved: So, we are kind of seeing a pause in the momentum and I think that is also to do with the fact that earnings growth has also paused. We have seen a very tepid Q2 and markets are responding to that. The first half has been very slow, both from a GDP growth perspective, from an earnings perspective. But I am very hopeful that second half we should see an acceleration. What this loss of momentum to me is largely because generally Q1, Q2 are slower quarters, but also because of elections the government has not been able to really spend on capex as much that they had budgeted. So, we budgeted 11,11,000 crores, that is roughly about 93,000 crores a month. But if you look at the data for the first five months, we have only spent at the rate of 58,000 to 60,000 crores. So, spending is down 35% year-on-year or compared to what was budgeted and I think that is causing a little bit of a slowdown in the economy, apart from other reasons.

Ayesha Faridi: So, that is the domestic angle. The FIIs, they were in any case not India's friend, they were not putting money in India for the last one year. But in just the last one month, they have sold about one lakh crore rupees. It pinches now because it is a weak, shaky market. What explains that?
Hiren Ved: Well, partly it is the fact that China stimulated the economy massively. If you look at the total stimulus from April 24, it is roughly about $800 billion, which is 4.5% of GDP for China, that is a very big stimulus that they have given. But I guess the recent data also shows that it is not just money to China, it is also money to Japan that has gone. So, the foreigners are still looking for better entry levels to come into India and last few years was never a FII driven market. It was always a domestic flow driven market. It is just that the intensity of selling in the last one month has been very-very significant and that is kind of showing up in the numbers as well. When will it turn? It is anybody’s choice. At some point in time, they cannot ignore a market as big as India because there is no structural growth left in any other part of the world. I mean, if you want growth, you have to take more debt or you have to stimulate the economies and that is where you get growth. If you want broad-based growth, India is where you will get it. So, eventually they will come.

Ayesha Faridi: But how punctured is the HNI, ultra-HNI fraternity after the recent market fall?
Hiren Ved: Look, nobody likes loss of momentum. I mean, everybody got carried away with the fact that in the last four years, we did not even have a 5% correction on the Nifty. Now, we have a 7% correction and this is what people were looking for to deploy capital and the market has given you a Diwali sale offer to come and buy...

Ayesha Faridi: No one has the courage to.
Hiren Ved: It always happens. It always happens when it is going up, it is too expensive; when it is correcting, you do not know, you think it will correct a little bit more and so people just keep waiting. But to be fair, generally speaking people are committed and invested in the market. It is not that people are not invested in the market. So, there is always a question when you want to deploy incremental capital, but they will come. Once the market starts to accelerate again, again money will come in.

Ayesha Faridi: But the earning season and taking a cue from what you were earlier mentioning has been kind of an eye-opener as well. Yes, the valuations and therefore those extrapolated rises and falls in the stock price, that aside, but banks, for instance, you always knew the deposit growth is going to be an issue and it is playing out and very starkly so. And it is also becoming more like an auto kind of story because every segment within banks and financials is playing out amidst a different theme altogether. How is it that you are looking at opportunities and risks now within the financials cluster?
Hiren Ved: So, we have broadly been anti-consensus when it comes to the private banks and financials. We have very little exposure there. Everybody likes the private banks. We think that we are better off buying capital market plays than bank stocks. And what kind of got us thinking was that the financial year 22-23 was a perfect year for banks. You had the best NII, you had the best credit growth, and you had the least credit costs.

And despite that, bank stocks did not deliver and that got us thinking that how come that you have the best of the three variables and still bank stocks refuse to move and that told you that the problem is that, as you rightly mentioned, that on the liability side, it is becoming difficult to raise deposits and on the asset side, your most profitable segment is credit cards and unsecured lending, that is where the RBI is very uncomfortable if there is significant growth.

So, your most profitable segment, the RBI is putting the brakes and on the liability side, you are finding it difficult to raise deposits unless you substantially raise deposit rates, in which case your NIMs will get impacted. So, my sense is that, and I believe that in this cycle is more for the capital market plays because you have to follow where the money is.

So, if the retail household guy is not putting money in deposits and putting money in SIPs or mutual funds, then you are better off buying capital market plays and those have done far better than betting on banks.

Ayesha Faridi: Exactly why, but do not you think a large part of that story is also played out already?
Hiren Ved: Don't we think that capital markets can compound at 12%, 13%, 14%, 15%? So, my argument is that when you are playing the big private banks, what growth are we playing? Essentially, mid-teens growth and that also not everybody is able to get that kind of growth. ICICI probably is an exception.

Maybe Axis did well. But neither Kotak nor HDFC has been able to deliver that kind of growth. I think that you can get the same kind of growth in capital market plays, though they may be more volatile, but there are no balance sheet issues because it is a pure operating leverage business.

Your AUMs keep compounding at 12%, 15%, 18% and your incremental fixed costs do not grow at the same rate, so that is a better compounding story than banks today.