Nasdaq divergence shows pain for IT cos

The Nasdaq composite index (representing the technology stocks in the US) hit a record high of 5,346 last week and gained about 6% yoy. 

However, for the first time, the BSE IT index diverged to a large extent from the US technology index and slid 18% in the last one year from 11,290 in November 2015 to around 9,224 now. 

The Nasdaq index moved up 113% from its 1999 bottom of 2,208 to 4,697 in February 2000, primarily led by the dot com boom world over. 

However, in the same period back home, the BSE IT index surged almost near 7-folds from 981 in February to 6,637 in February 2000. In fact, both BSE IT and Nasdaq Composite indices had quite high correlation (0.81) till 2015 when the BSE IT index peaked out nearly to 11,500 in November 2015. Since then, there has been significant divergence between the BSE IT and Nasdaq indices.

After a gap of about 15 years, the Indian IT industry is going through difficult times in terms of slowdown in its export growth and uncertainty emanating from the leadership changes in the US. 

Recently, Nasscom revised India’s IT industry growth forecast downwards to 8% to 10% for the current fiscal FY17. This is the first time in the recent period that the industry association has given the growth projection in a single digit and the third time that the industry body has revised downward the growth prospects of the sector for the year. 

In April 2016, it revised it downward growth forecast to 10% to 12% from the previous estimate of 12% to 14%.

Today, the base of exports of IT and IT-enabled services is over $100-billion per annum – such a large base itself would have limit to grow in double digits. 

Further, slowdown in the euro economy would act as a dampener for the turnaround in growth while the new leadership in the US could result in some margins pressure on account of possible compulsion to hire costly local employees. 

Hence, the divergence between the Nasdaq and BSE IT indices might continue to grow with bias against the large Indian IT companies. 

Hence, the wealth creation opportunities from the large IT stocks in India are most unlikely in the next 1 to 2 years at least. 

However, this divergence of performance would force the large Indian IT companies to opt for acquisition of some of the mid-sized IT companies, which are also quite insulated from the adverse impact of current demonetization drive by the government.