IT companies' shares rise amid fall in global AI stocks; Nifty IT up 17% in one month

So far this month, the index has gained 17%. Growing concerns about unchecked spending have led to losses in global AI stocks over the past couple of weeks. On Friday, the South Korean KOSPI and Japan's Nikkei 225 were down around 1% each following losses in stocks of major AI and adjacent stocks such as Samsung Electronics and Tokyo Electron. This came after overnight losses in the stocks of major technology companies in the US such as Nvidia and Alphabet, which dragged down the Nasdaq Composite index to end nearly 3% lower.

Meta shares lost nearly 8%, overnight on Wall Street, after the Facebook parent posted its first cash outflow in more than a decade due to its AI-related expenditure. The Kospi Index in South Korea pared losses of as much as 4.1% to trade little changed as chipmakers such as SK Hynix Inc. erased earlier losses and jumped 4%. The broader MSCI Asia Pacific equities Index was down just 0.2%, having earlier fallen as much as 1.1%.

Following a rout in chip stocks Thursday on Wall Street, tech shares in Asia Pacific had retreated, pushing MSCI Inc.’s regional equities toward its lowest close since late July. Equities later recovered some ground, with Nasdaq 100 futures erasing earlier declines to edge up 0.1%. European shares were also set for a modest gain at the open. Technology stocks that powered a four-year bull run in US equities bore the brunt of the selling Thursday as earnings from megacap companies added to concerns their rebound since late March had gone too far, too quickly.

Some analysts view Indian IT stocks as a relative hedge against the global AI trade because they can benefit from companies' growing need for AI consulting, integration and managed-services work, while requiring far less upfront spending on data centres and chips than global hyperscalers. However, some believe that it is too premature to make a direct correlation in this regard. "This is not a rally which is driven by FIIs (foreign institutional investors)," Sumit Pokharna, vice president – IT at Kotak Securities, told Informist.

"It is only the DIIs (domestic institutional investor) who are buying it (IT stocks). At most, if we have to be optimistic, then we can say that FIIs might not be selling Indian IT stocks," according to Pokharna. Extremely cheap valuations and in-line earnings releases by major players in the sector are the key factors driving the rally in the sector, according to analysts. Further, large domestic investors are reducing their exposure to other sectors which they believe will be worse hit in the second half of the ongoing fiscal year due to high raw material costs.

Thus, Indian IT is emerging as a preferred pick among the investor class, Pokharna highlighted. The September quarter earnings of TCS, HCL Technologies, and Tech Mahindra broadly met the Street's expectations. Investors now await the results of Infosys, due later in the day.