Technology shares make a comeback

Information technology (IT) stocks have emerged as top bets in 2018 amid a rise in market volatility. The S&P BSE IT index, a gauge for technology stocks, has gained 10.3 per cent during the year even as the benchmark Sensex remained flat. Technology shares also dominated the list of best-performing stocks in 2018. Half of the top 15 performing stocks in the S&P BSE 500 index are from the IT space.

The sector has emerged as a defensive play, as IT stocks remain relatively stable when markets go through a turbulent phase. They also act as a natural hedge as the fall in the equity market is typically accompanied by a weakening of the rupee, a positive for the exportoriented tech sector.

Among IT companies, L&T Technology Services is the best performing stock with a year-to-date gain of 37 per cent. Mindtree and L&T Infotech also saw their shares go up by more than 30 per cent each during the year. Big-ticket IT firms also have put up a positive performance, with TCS and Infosys up 12 per cent each.

At the start of 2018, most IT stocks were trading at valuations below their long-term averages following years of underperformance due to concerns like slower growth and regulatory headwinds such as tightening of the US visa rules. However, in the last few months, the sector has shown signs of revival.

The order books of Indian IT firms are showing signs of improvement in global growth. Analysts also say the better-thanexpected growth in the US and the developed world has led to a re-rating in the Indian IT stocks. Also, the medium-term outlook for many IT companies looks positive on the back of good growth in dollar revenues and efficient use of surplus cash on the balance sheet.

Good performance of IT stocks is a positive for the overall market. The sector has an 11.7 per cent weight in the Sensex, second-most after the banking sector’s weight of over 30 per cent.