Nifty IT soared 150% during Trump’s first term. Is a repeat show likely under his second stint?

Former President and Republican nominee Donald Trump secured a significant victory in the 2024 US presidential election, marking a historic comeback after his defeat in 2020. Trump reclaimed the White House by winning more than the required 270 Electoral College votes, setting the stage for another term.

Trump's victory was met with enthusiasm from investors worldwide, as reflected in a strong rally across global equities on Wednesday. The S&P 500 surged over 2.5%, marking its largest intraday gain in two years. This optimistic momentum also lifted Indian markets, with the Nifty 50 and Sensex rising over 1% each.

In addition to equities, Bitcoin soared to an all-time high, fueled by Trump’s campaign promise to support cryptocurrencies. The U.S. dollar also posted its biggest gain in eight years, highlighting the market's positive response to his election.

Trump's policies under his "Make America Great Again" agenda focus on strengthening American industries and jobs. During his first term, he implemented various measures, such as raising tariffs on imported goods, particularly those from China to protect American goods, tightening H-1B visa regulations, and reducing the federal corporate tax rate from 35% to 21%.

During the 2024 presidential campaign, Trump proposed an additional reduction in the corporate tax rate for U.S.-based manufacturing, aiming to lower it from 21% to 15%. He also advocated for new tariffs, including a 10% tariff on all imports and a significant 60% tariff on goods from China.

With Trump now back in power, expectations have surged that the proposed corporate tax cuts could boost discretionary spending by enterprises—a key factor behind the global stock rally observed on Wednesday.

The Tax Foundation, a non-partisan think tank specialising in U.S. tax policy, estimates that Trump’s proposed tax measures could have a favourable impact on the country’s long-term GDP.

Meanwhile, Indian IT companies, which generate 60-70% of their revenue from the U.S., saw a sharp rise in their shares during the previous trading session. The Nifty IT index ended the session with a gain of over 4%, fueled by hopes that Trump’s policies would drive higher IT spending by U.S. companies.

Analysts noted that sectors such as banking and healthcare in the U.S. are currently under-penetrated and have significant growth potential. Additionally, the manufacturing sector faces challenges, fueling expectations that spending on IT projects could increase—potentially benefiting Indian IT companies.

Indian IT stocks shine under Trump 1.0: Repeat performance likely?

During Donald Trump's first term in office, from January 2017 to January 2021, Indian IT stocks experienced a substantial rally. The Nifty IT index delivered a remarkable return of 150%, significantly outpacing the broader Nifty 50, which gained 60% over the same period.

Analysts now believe that Indian IT firms are well-positioned to benefit from a potential rebound in U.S. IT spending. Recent Q2 results have indicated a positive trend in BFSI (Banking, Financial Services, and Insurance) spending in the U.S., which could be a strong growth driver for Indian IT companies.

This sectoral uptick, alongside anticipated investments in cloud, AI, and digital infrastructure, is expected to boost revenues for Indian IT players, making them attractive in the current market environment.

On the other hand, there are concerns about the possibility of tighter H-1B visa norms. During his first term, Trump implemented Executive Order 13788, titled 'Buy American and Hire American,' which increased restrictions on H-1B visas and led to a marked rise in H-1B and L-1 visa denial rates.

However, global brokerage firm JM Financial noted that major Indian IT services firms have reduced their reliance on these visas, offering them a significant degree of insulation from potential policy shifts. According to JM Financials' estimates, in FY17, approximately 65% of Infosys’s U.S. employees relied on H-1B and L-1 visas. This dependence declined to below 50% by FY20 and is expected to have further decreased, thanks in part to Infosys's 'expand localization' strategy.

Wipro, likewise, reported that 69% of its global workforce was localized in FY20. Additionally, JM Financial highlighted a 50-80% reduction in H-1B visa approvals for Infosys, TCS, and Wipro over the past decade, underscoring the industry-wide shift towards a lower dependence on foreign worker visas.

Meanwhile, experts also suggest that a potential increase in tariffs could dampen discretionary spending in the U.S., which may, in turn, impact IT spending. 

Nitin Aggarwal Director of Investment Research and Advisory at Client Associates said, “One of the key focal points of Trump's presidency was reducing the US trade deficit, a policy that heavily relied on increasing tariffs on imports. While these measures could help shrink the trade deficit, they risk pushing up inflation by making imported goods more expensive. This, in turn, could delay interest rate cuts by the US Federal Reserve, which is already grappling with persistent inflationary pressures.”

“For India, the consequences of such a policy shift could be twofold. First, certain sectors like Pharmaceuticals and IT may experience challenges. Indian generic drug manufacturers could face increased tariffs on their exports to the US, affecting the pharmaceutical industry. Meanwhile, India's IT sector might also see a slowdown in demand, as a trade war and economic slowdown could reduce discretionary spending in the US,” he added.

Trump trade may not benefit India’s overvalued market

Dr V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services said, "Trump's pro-business initiative of ‘America First’ can strengthen the American economy. But if he walks his talk and imposes a 60% tariff on Chinese imports and a 10% to 20% tariff on imports from other countries, that would trigger inflation and jeopardise the Fed’s policy of containing inflation, necessitating a rethink of the Fed’s present policy of rate cut. This has the potential to negatively impact global stock markets."

It is important to understand that even though Trump’s anti-China policy has positive implications for India, Trump has been critical of ‘India’s high tariffs’ and won’t hesitate to impose tariffs on India’s exports to the US.

He also highlighted that the ‘Trump trade,’ which has sharply lifted the US markets, is unlikely to have a similar positive impact in India since Indian market valuations are high and there are headwinds from an earnings slowdown. Investors should stick to quality and value during this period of euphoria and uncertainty, he said.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.