How did Nifty IT manage to reach a record high in such a recent volatile market?

The Nifty IT index hit a record high of 44,085 on November 26, reflecting the strength of India's major information technology companies. Over the past year, the Nifty IT Total Return Index (TRI) surged 40%, outperforming the Nifty 50 TRI's 24% gain. This robust performance has been mirrored by sectoral mutual funds, which have delivered average returns of 40% over the same period.

Recent Performance

After a challenging 2022, where the IT sector faced negative returns due to rising inflation, interest rates, and global recession fears sparked by the Russia-Ukraine conflict, IT stocks have rebounded significantly over the last 15-18 months. Meeta Shetty, Fund Manager at Tata Mutual Fund, highlights that these adverse conditions had dampened global market sentiment and slowed demand for IT services.

Impact of US Election

The recent election victory of Donald Trump is expected to increase discretionary spending by US businesses, benefitting Indian IT firms. Nirav Karkera, Head of Research at Fisdom, notes that the IT sector's recent performance has been bolstered by strong order books and better-than-expected earnings, with industry leaders like Infosys and TCS securing major deals.

Ongoing Challenges

Despite these gains, the sector faces near-term pressures such as wage hikes and geopolitical risks, which could impact profit margins. However, the long-term outlook remains positive due to rising global IT spending and India's leading position in technology services.

Shetty cautions that current stock valuations are approaching pandemic-era highs, leaving limited room for further price appreciation. Nonetheless, she expects IT companies' earnings growth to drive sectoral performance over the next two to three years, even if stock prices stabilize.

Mutual Funds and Smallcap Stocks

There are currently 25 mutual funds focused on the IT sector and related areas. Among these, 12 theme-based funds also invest in related sectors like telecom, retail, fintech, and entertainment. As of October 31, 2024, here are the top smallcap IT stocks held by these mutual funds:

While the IT sector's journey has been marked by significant challenges and recent victories, the long-term prospects remain strong. Investors should consider the sector's robust fundamentals and potential for earnings growth, even as near-term pressures persist.

Disclaimer: Readers are advised to consult certified financial experts before making any investment decisions.