The National Stock Exchange’s (NSE’s) IT index has outperformed the broad markets by around 5% since the US election results were announced. A Trump presidency has a number of negative implications for Indian IT, which makes the outperformance surprising, to some extent.
One of the factors propping up IT stocks is the 3.5% depreciation in the rupee since 8 November. But there’s another interesting reason investors haven’t sold IT stocks en masse. The IT index had underperformed the Nifty by around 20% in the six months before the Trump election. As such, valuations are low, and a number of investors see limited downside, especially in the backdrop of the evolving situation in the domestic economy due to demonetisation.
Analysts at Jefferies India Pvt. Ltd said in a note to clients earlier this month, “The negative impact of the recent black money clampdown by the Indian government on domestic consumption stocks should be a relative positive for Indian IT names. Risks for Indian IT have been priced in to a large extent, given the moderation of valuations.” In other words, IT stocks are finding takers largely because of a lack of alternatives.
In addition, financial results of banking and financial services firms in the US were better than expected for the September quarter, raising hopes of an increase in outsourcing from those quarters. The US BFSI (banking, financial services and insurance) sector is the largest benefactor of the Indian IT industry.
Yet, while it’s true that valuation multiples are at historic lows, it may not be safe to assume that the downside is limited. The IT services industry has already been struggling for growth, and Trump’s policies could make things more difficult on the growth front, besides impacting margins as well.