There was a decline of more than 1 percent in the stock market on Tuesday. In which the largest share has been seen from the IT sector. A decline of 6 percent was seen in the Nifty IT index on Tuesday. The special thing is that in the month of February, Nifty IT index has fallen by 21 percent. Which is considered to be the biggest fall after the global financial crisis of 2008. This time the reason is not just macro weakness. Let us also tell you why the IT index of the stock market has seen the biggest decline in 18 years?
Why did the IT index decline?
Recently, AI startup Anthropic has said that its cloud tool can help in simplifying COBOL code, which increased the fear of interruption in the long-standing revenue source of technology companies. This announcement created a stir in global tech stocks. To sum things up, IBM shares fell 13 percent overnight, which was the company’s worst one-day selloff in nearly 25 years. In today’s session, IT stocks fell by 8 percent. Coforge, Persistent Systems and HCLTech were the biggest losers with a fall of around 7-8 per cent. Shares of Infosys, Tech Mahindra, Mphasis and Tata Consultancy Services fell by about 4-6 percent. There was a huge fall of 6 percent in Nifty IT index. After the historical correction, Nifty IT index is now trading at its lowest level in eight years compared to Nifty 500.
Decreased valuations, is this enough?
Experts are cautioning against investing hastily. S Naren, ED and CIO of ICICI Prudential AMC, earlier said in an ET report that along with the fluctuations in the sector, fear is also increasing. If growth risks are not met, there is scope for good returns. However, before being completely positive, clarity on long term growth is necessary. In a sector which is facing problems, cheap valuation alone will not be enough. Alok Aggarwal, head quant and fund manager of Alchemy Capital Management, also expressed the same concern in the media report. He said that this weakness predates the current AI anxiety. Over the last 3, 5 and 10 years, the IT sector’s earnings growth has mostly been in single digits or barely reached double digits.
According to him, this reflects continued poor performance due to commoditization of services, pricing pressure and slow demand, especially from the Western market. On top of this, the disruption of AI may further weaken the path to earning. High dividend yield and attractive free cash flow yield may seem comforting, but these are backward-looking metrics. If growth slows down further, cash generation could be impacted, making these yields less sustainable. He said that unless companies show concrete strategies to move towards AI enablement, move up the value chain or achieve true cost transformation, the risk-reward may remain poor even in 4 to 5 years’ time.
technical picture is bad
Anand James, chief market strategist at Geojit Investments, said in an ET report that oscillators had become oversold and had shown early signs of positive divergence in recent days. However, the latest breakdown has taken the index below its February 13 reaction low of 31,422, with momentum indicators pointing towards further decline. Standard deviation studies show that the nearest support is at 29,961, followed by further downside at 28,800 and 27,200. On the upside, 30,300 on intraday and 31,300 on closing basis are immediate reversal levels, while 36,200 remains a major resistance.
Ajit Mishra, SVP, Religare Broking, said in a media report that the index has formed a pattern of low highs and low lows, which shows weak momentum. Immediate support is seen around 29,600, with a big support zone near 26,300. On the upside, any bounce towards 33,000 to 34,000 could bring fresh selling pressure. He advised traders to avoid new long positions and instead look for shorting opportunities on the rebound.
What is the investment opportunity?
The valuation discount is real, but so are the fears. If the disruption caused by AI proves to be incremental rather than existential, a sharp correction could provide a nice upside over time. But if it significantly reduces demand for traditional IT services, the pain may persist. But for now, experts are advising to adopt a wait-and-watch strategy.