Tech stocks get hammered in manic Monday sell-off; Nifty IT falls 3.5%

The tech-heavy Nasdaq index is down 22 per cent this year

Information technology (IT) stocks took a hammering in Monday’s sell-off. The Nifty IT Index dropped over 3.5 per cent, underperforming the benchmark Nifty50 Index which finished 1.4 per cent lower.

The performance of IT stocks also mirrors a trend in the US. On Friday, the technology (tech)-heavy Nasdaq dropped nearly 4 per cent, while the Dow Jones fell 3 per cent after the US Federal Reserve (Fed) Chair Jerome Powell delivered a stern message at the Jackson Hole symposium on the need to curb inflation, even at the cost of growth.

“The sentiment against tech stocks in the US has soured because of higher rates. The correlation between domestic IT stocks and US tech stocks is pronounced. Any sentiment against US tech stocks will affect tech companies in the short term,” said Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies.

So far this year, tech stocks in India and in the US have fallen more than the overall market. The Nasdaq is down 22 per cent this year. By comparison, the Dow Jones is down just 11 per cent. On the other hand, the Nifty IT Index is down 28.5 per cent so far this year, while the Nifty50 Index is down a marginal 0.2 per cent.

“After Powell’s statement, markets are baking in higher-than-expected Fed rates for longer than expected. These would result in a slowdown in the US economy, adversely impacting US IT spending. Any cutback in US IT spending would lead to a slowdown in growth rates for Indian IT services companies already facing significant margin pressures due to supply-side issues. Notwithstanding significant corrections in stock prices so far, most IT stocks are still trading at a premium to their pre-pandemic price-to-earnings multiple. The increasing probability of slowdown in global IT spends in the second half of 2022-23 due to a Fed-prompted slowdown, coupled with margin pressures and relatively expensive valuations, is leading to a sell-off in IT stocks,” said Manish Jeloka, co-head, products and solutions, Sanctum Wealth.

A weak sentiment towards IT stocks was clearly visible in Monday’s trade. Among 19 sectoral indices of the BSE, the gauges for the performance of IT stocks fell the most at over 3 per cent, even as most other sectoral gauges fell less than 1 per cent. The latest fall in IT stocks extends their run of underperformance seen this calendar year.

In the run-up to the Jackson Hole symposium, the IT Index had tumbled close to 5 per cent last week. Also, a downgrade by JPMorgan had weighed on the tech pack.

The brokerage has downgraded all its ‘overweight’ stocks in the IT sector to ‘neutral’ and maintained its ‘underweight’ position on the sector.

The brokerage expects the margins of tech companies to come under severe pressure.

“Sharp margin misses across scale IT services vendors in the June quarter were deeper than feared, with incremental growth coming at lower margins. We expect margin erosion to persist in the medium term and stay meaningfully below long-term trends due to reversal in employee-employer bargaining power, underwhelming graduate uptake, limited price increases, return in travel/facility costs, and high onsite inflation,” JPMorgan said in a note last week. 

In spite of the sharp correction this year, IT stocks have failed to provide valuation comfort.