Nifty IT gains over 8% in a month as Donald Trump’s victory fuels spending expectations

The Nifty IT index continued its winning streak for the third consecutive trading session on Tuesday, December 3, rising by 0.5 per cent to close at 43,754. The index recovered 0.75 per cent from its intraday low, with a strong rally in Persistent Systems and HCL Tech helping keep the index in positive territory.

IT stocks have been buzzing recently, fuelled by optimism surrounding Donald Trump’s victory, which has raised hopes that his corporate tax cut proposal could boost discretionary spending in the US, potentially benefiting Indian IT companies.

Additionally, Trump’s proposed policies, such as tariff hikes on trading partners, have contributed to a surge in the US dollar, further supporting the rally in IT stocks, as the sector earns a significant portion of its revenue in USD. BFSI clients experienced a modest recovery in discretionary spending in Q1, which has also contributed to the positive sentiment.

Against this backdrop, the Nifty IT index has surged by 8.2 per cent over the past month. Leading the gainers, Coforge topped the list with a 15.4 per cent increase, followed by Persistent Systems and Tech Mahindra, which rose by 12.1 per cent and 9.1 per cent, respectively.

During Donald Trump’s first term in office, from January 2017 to January 2021, Indian IT stocks experienced a substantial rally. The Nifty IT index delivered a remarkable return of 150 per cent, significantly outpacing the broader Nifty 50, which gained 60 per cent over the same period.

IT companies stand to gain from Trump’s pro-oil stance

Global brokerage firm Phillip Capital analysed 15 years of data on crude oil prices, US crude oil production levels, and the performance of the E&U verticals of IT/ERD companies. The brokerage found that while spending depends on multiple factors, IT/ER&D (Information Technology/Engineering Research and Development) discretionary spending tends to perform well during periods of stable-to-positive crude oil prices and rising oil production levels in the US.

The brokerage noted that during FY12-15, when crude oil prices remained stable and production levels increased, the E&U verticals of IT services companies saw high-teens USD growth. Similarly, in FY18-20 and FY22-24, as crude oil prices rose and US oil production significantly expanded, the E&U verticals experienced robust double-digit growth. 

The brokerage highlights that Trump has been vocal about his pro-oil and anti-electric vehicle (EV) stance during pre-election rallies. He advocates for tax incentives for oil and gas drilling, increased oil production and exports, expanded carbon credit captures, and the elimination of the US$ 7,500 EV tax credit.

It stated that during Trump’s first term, US crude production levels increased from 8.9 mbpd in 2016 to 12.3 mbpd in 2019. This trend continued under Biden, with US oil production reaching historic highs, and Trump is expected to push production levels even higher in his second term.

The brokerage believes companies with significant E&U exposure, like Cyient (17 per cent), Infosys (13 per cent), Wipro (12 per cent), and LTIMindtree (6 per cent)—with L&T Technology Services having the lowest at 5 per cent—are likely to benefit under Trump 2.0. These companies performed well during Trump’s first term, aided by increased discretionary spending across both upstream and downstream segments.

In his second term, the brokerage expects similar benefits, with increased spending in areas such as plant efficiency improvements, greenfield/brownfield plant expansions, 3D plant design, IoT, digital oil fields, ERP upgrades, IT modernization, InfraOps, and cloud migration.

Notably, the brokerage said that Cyient’s E&U exposure is largely from Citec, an acquired company with a stronger presence in Europe.

Companies are less exposed to immigration risks now

Over the last eight years, Indian IT companies have reduced immigration-related risks by hiring more locals in onsite markets, increasing reliance on subcontractors, and opening more near-shore delivery centres.

Tier-1 companies’ dependence on H-1B visas has fallen drastically since 2016, on average by 30 per cent for total approvals and 40 per cent for initial approvals. Based on this, the brokerage believes immigration will not be a major risk factor if the next US administration tightens legal immigration.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.