On December 31, Indian information technology (IT) stocks faced significant losses, with major players such as Tata Consultancy Services (TCS), Infosys, and Tech Mahindra dropping 2-3%. The broader IT index was the worst-performing sector on the day, sliding over 2%. This drop in stock prices can be attributed to multiple factors, with the primary reason being the pressure from rising US Treasury yields, which have remained above 4.5%.
Impact of US Treasury Yields on IT index
US Treasury yields have been a key factor affecting global markets, especially growth-sensitive sectors like technology. The yields above 4.5% have led to concerns among investors, causing a ripple effect on IT stocks. When these yields rise, it often signals a shift toward safer investments, putting pressure on high-growth stocks such as those in the technology sector. Indian IT companies, which have a significant portion of their revenue coming from the US, have been feeling the impact of this global economic environment.
This external pressure has caused investors to pull back from IT index, leading to the significant declines observed on the stock market.
Weak Growth Expectations for IT Majors in Q3
Adding to the pressure, the outlook for Indian IT companies in the third quarter (Q3) remains muted due to weak seasonality. Typically, the Q3 period is slower for the IT sector, as demand tends to dip during the holiday season. This weak seasonal trend is expected to continue in 2024, dampening investor expectations. Analysts predict that growth will be subdued, contributing to the cautious sentiment surrounding IndianIT index.
The combination of rising treasury yields and weak seasonal performance has led to a decline in growth expectations, further affecting investor confidence in the sector.
Sector-Wide Losses Across IT Companies
The decline in IT index was not limited to the large-cap majors. While TCS, Infosys, and Tech Mahindra faced a 2-3% drop, mid-cap IT companies also saw a sharp fall. Companies like Coforge, L&T Tech, Mphasis, and Persistent Systems lost between 1-4% during the trading session. This widespread decline across both large-cap and mid-cap IT stocks contributed to the Nifty IT index falling over 2%, making it the worst-performing sector on the day.
The broad-based losses reflected the growing concerns among investors regarding the future growth prospects of the IT index. While the large-cap companies are expected to weather the storm better than their smaller counterparts, the entire sector has been facing headwinds.
Analyst’s View on Indian IT Firms
In an interaction with CNBC-TV18, Manik Taneja from Axis Capital shared his perspective on the current state of the Indian IT sector. Taneja pointed out that Indian IT companies might be better positioned in a “Trump 2.0” scenario compared to the previous phase of Trump’s presidency. Despite the weaker performance expected in Q3, Taneja believes that optimism in the US market will likely drive stronger demand for Indian IT firms.
However, Taneja also highlighted the issue of high valuations for Indian IT companies, which could limit their potential for growth in the short term. As a result, he prefers investing in global tech companies over Indian IT firms, as he believes they offer more attractive opportunities given the current market conditions.
Conclusion
The IT index in India has been under pressure due to external factors like rising US Treasury yields and weak seasonal performance expectations. The market response has been largely negative, with major IT stocks such as TCS, Infosys, and Tech Mahindra posting significant losses. Despite these challenges, analysts remain cautiously optimistic about the long-term potential of Indian IT companies, particularly in a “Trump 2.0” scenario, but the high valuations pose a challenge for short-term growth.
Investors will likely continue to monitor the sector closely in the coming weeks to assess whether the current downtrend is temporary or indicative of longer-term issues.