Shares of IT companies skyrocketed for the second day in a row, fuelled by growing optimism for a soft landing of the US economy. The Nifty IT index surged 4.6 per cent on Friday, marking an 8.2 per cent increase over two days — the most significant rise since July 2020.
Bellwether stocks Tata Consultancy Services, Infosys, and HCL Technologies each witnessed a 5 per cent jump on Friday, accounting for over half of the market gains. Analysts said that the sudden shift in the American economic outlook has bolstered prospects for software exporters, because most domestic IT firms draw the majority of their revenue from the US.
Previously, it was believed that the world’s largest economy could not reduce its inflation without slipping into a recession. However, inflation has now cooled off to 3 per cent, down from a peak of 9 per cent in 2022. At the same time, growth in consumer spending and hiring remains encouraging.
“Initial concerns about a US recession have been alleviated, thanks to encouraging economic data. The shift in expectations regarding the rate cycle, coupled with an improved outlook for the US economy, is driving a pronounced rally in IT stocks. Largecap IT names, boasting comfortable valuations, are particularly benefiting from this positive sentiment, attracting substantial interest from institutional investors,” said Sunil Nyati, managing director, Swastika Investmart.
Until recently, the performance of IT stocks lagged the benchmark Nifty50 for 2023. However, after two days of gains, the year-to-date gain for the Nifty IT index stands at 25 per cent, compared to 18 per cent for the Nifty50.
According to experts, most investors maintained an underweight position on IT stocks due to uncertainties over their growth prospects. However, following a turnaround in sentiment around US rates and economic growth, investors are increasing their exposure to technology stocks.
“The rally has been tilted towards largecaps in the past few days. Within largecaps, the value of the IT stocks is attractive. Most other largecap stocks are at the peak of their valuation, but not the IT pack. And the rupee is near an all-time low. The benchmark indices could see another 3-5 per cent gain, and IT stocks would drive it,” said G Chokkalingam, Founder of Equinomics.
Shares of TCS rose 5.3 per cent to Rs 3,860, reaching their highest level in nearly two years. The company’s market cap crossed Rs 14 trillion once again on Friday. Meanwhile, shares of HCL Technologies hit fresh highs, with the company’s market cap crossing Rs 4 trillion. After a 9 per cent increase in two days, the year-to-date returns for Infosys turned positive, too.
“IT stocks have not performed well in the past 18 months. And compared to the rest of the markets, they are trading cheaply. Especially when the markets go up sharply, investors tend to look for pockets with value. The catalyst was the Federal Reserve’s hint regarding rate cuts next year, which indicates that the economy is improving. As a result, discretionary spending of US companies will increase and IT will benefit,” said Ambareesh Baliga, independent equity analyst.
First Published: Dec 15 2023 | 8:52 PM IST
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