Information technology stocks traded higher on Thursday amid fears of a looming recession. The rupiah’s sharp fall also couldn’t dampen the sharp correction in tech stocks on Thursday, as investors took cover. A recession could lead to lower IT spending and it is for this reason that investors have started to dump these defensive stocks. What added fuel to the fire was a report from JP Morgan, which downgraded the entire sector citing a deteriorating earnings outlook.

Software stocks, which drove the market rally last year, have lagged this year, with the sector underperforming the benchmark Nifty50 index by 17.8% year-to-date. Infosys, the biggest contributor to Nifty50 with 566 points last year, has corrected more than 26% from its January highs. Separately, the gauge for IT stocks — the Nifty IT Index — has corrected nearly 28% since Jan. 4, compared with a 14.4% drop recorded by the benchmark Nifty50 index since its October peak. The fall in computer stocks has faded 8.96 trillion worth of market capitalisation with TCS and Infosys witnessing erosions to the tune of2.4 trillion and Rs 1.9 trillion, respectively. The two IT giants along with HCL Technologies, Wipro and Tech Mahindra had boosted around a third of the Nifty50, which gained 24.1% in 2021.

JP Morgan, which downgraded the IT sector and cut multiple targets from 10% to 20%, believes peak revenue growth is behind the sector and EBIT margins would start to fall due to inflation, a return to the average. The IT sector, which was accelerating through Q3FY22, began to slow from Q4FY22, which is expected to worsen in FY23 due to competition, supply issues and possibly a macro deterioration. “We expect margin headwinds to drive downgrades in Q1/Q2 earnings seasons, and macro earnings downgrades in Q3/Q4, which make even current multiples unsustainable for some,” observed JP Morgan.

IT stocks lagged the benchmark Nifty on Thursday, with Wipro sinking as much as 6.3%. Others like HCL Technologies, Infosys, Tech Mahindra and Tata Consultancy Services (TCS) also followed suit, each at between 5% and 6%.

According to Kotak Institutional Equites, the correction in IT stocks was driven by rising interest rates, recession concerns and margin risk. While margin concerns are correctly priced into stock prices, the economic downturn – which has a direct impact on demand and multiples – is not factored in. “We expect IT spending intensity to increase, but spending growth is a function of customer health and the economic environment,” KIE wrote in a note to investors. The rupee fell another 14 paise on Thursday to hit a new low of 77.73 against the US dollar, following equity market weakness and continued outflows of foreign funds.