Usually seen as a safe haven, information technology (IT) stocks are trading under pressure with sector gauge Nifty IT down 2% so far this week. During the same period, the broad Nifty50 fell just over one percent.
The sale of IT stocks came even as most market participants maintain a positive stance in the sector, while a few others advised against aggressive buying amid high market volatility.
Here are the main reasons for the recent sell-off in IT stocks:
Market participants believe valuations are a bit tight in the IT sector and some have even pointed to attrition as a concern for the sector which has put IT stocks under pressure lately.
The overall trend for IT stocks is positive given the appreciation of the US dollar. To clarify, IT companies charge their clients in dollars, so an appreciation of the dollar would bode well for them, said Bhavin Mehta, vice president – derivatives strategist, Dolat Capital Market.
“The recent sales of IT stocks were in part due to a long unwinding,” Mehta added.
“Investors unwound their long positions in IT stocks to protect the mark-to-market of the portfolio’s overall values after the massive selloff we saw this week,” he added.
Some analysts also said that the SEBI margin requirement rule that was due to be implemented in December also triggered a sell off in the market. However, the implementation delayed until February gave the market some breathing space.
The market regulator has postponed the implementation of the 50% cash margin rule for futures and options traders and the credit default swap segment until February 28, 2022, for compared to the previous deadline of December 1, 2021.
If the Nifty IT index falls below 34,700 points, a further drop is expected, said Sneha Seth, derivatives analyst at Angel Broking.
Seth says now is the time to close long positions and suggests to be cautious given the high volatility in the market right now.
One could buy the downside, but “aggressively buying” computer stocks, even at this point, is not a prudent decision.
What you could do with IT stocks:
Ajit Mishra, vice president of research at Religare Broking, said mid-cap IT stocks looked slightly expensive.
However, he added that the overall view of the sector remains positive. He says one might consider buying large cap stocks that provide a safety net in this very volatile market environment.
Meanwhile, Atanuu Agarrwal, co-founder of Upside AI said, “By historical standards, just like the broader market, IT stocks trade at relatively high multiples of PEs. However, I think in the long run there are strong tailwinds in favor of the industry. Of course, there are challenges like a high churn rate, but it can turn out to be cyclical. “
Currently, Upside AI has relatively high IT exposure in its large and mid cap portfolio.
“Large-cap IT companies are expected to continue to benefit from a secular trend of digitization, while having the means to withstand short- to medium-term issues like high churn,” Agarrwal added.
(Edited by : Ajay Vaishnav)