US Presidential Election 2024: In the context of any event occurring in the United States (US), Indian investors are typically quick to assess the future of the information technology (IT) sector since there is a strong connection between the Indian IT industry and the US.
As the US Presidential Election 2024 approaches, investors are assessing the potential effects on the IT sector. Market analysts are also considering the ramifications for the sector and India in the event of a Kamala Harris victory, as well as the consequences if Donald Trump is re-elected. Other sectors that could be influenced include automobiles, energy, defence, commodities and metals, and pharmaceuticals.
Indian IT companies are significantly affected by the US economy because they heavily depend on American clients. Major Indian IT players such as TCS, Infosys, Wipro, HCL Technologies, and Tech Mahindra generate more than half of their income from the US. Changes in the US economy can have a direct effect on the revenues and growth opportunities of these firms. According to the India Brand Equity Foundation, India's IT and business services market is predicted to reach US$ 19.93 billion by 2025.
As per Arun Kejriwal, the founder of Kejriwal Research and Investment Services, the overall market will be influenced, but the IT sector will be particularly affected due to the way business operates in the US, which involves currency fluctuations; these factors will have a greater impact on IT compared to other sectors.
PhillipCapital, in its latest report, noted that the initial effects appear more severe if Trump is elected, due to his anti-immigration policies. Nevertheless, Indian IT firms have sought to mitigate this risk by employing more local staff in on-site markets, using subcontractors, and establishing additional near-shore delivery centers.
On the other side, Saurabh Patwa, Head of Research and Portfolio Manager, Quest Investment Advisors pointed out that the historically, US elections have had little to no impact on the IT spending patterns of US corporates, so the election cycle is not expected to significantly alter the sector's trajectory.
Overall, the outlook remains cautiously optimistic for Indian IT, driven by sectoral recovery and steady demand.
Arun Kejriwal said that the US elections will influence more than just the IT sector; what other factors are people considering? Currently, the Democrats are in power, and the election results are too close to call. It's uncertain whether the Democrats or Republicans will come out on top. A few key geopolitical issues are emerging, as both candidates are expressing anti-China sentiments at the moment. Such positions against China can benefit India by enhancing export opportunities and fostering improved relations. However, there is also some anti-India rhetoric, particularly from Canada, which adds a layer of negativity. The political landscape is quite complicated, and clarity is likely to emerge only after the new President is in office.
China's initiative to engage with India at the BRICS meeting underscores the struggles of its economy, which is in poor condition. They require a significant market to purchase their products. Currently, the only nation capable of consuming China's output is India. It's uncertain whether India will fully reopen its market to China as it did five to eight years ago. If it does choose to reopen, it will likely do so with many restrictions to rebuild trust between the two nations. This won’t be based on blind trust. If we continue to manage our relationship with China, the US will inevitably seek to strengthen ties with India. At the same point, it has to sell defence equipment to India.
What does it indicate in the market? The market isn't likely to see any overwhelming triumph from either side, and it doesn't greatly matter who takes charge—let it be whoever it may be. However, depending on who steps in and how they respond moving forward in India, future circumstances will depend on that.
The results from the IT sector have largely met expectations so far. In the US, the BFSI sector is experiencing a recovery, marked by an increase in volumes and a slow rise in discretionary spending. Conversely, in Europe, especially within the automotive and manufacturing sectors, challenges remain that are impacting the performance of various companies. On the whole, organisations are navigating the tough macroeconomic landscape, with demand stabilizing across essential verticals, according to Saurabh Patwa.
Positive indicators point towards a more robust recovery in the IT sector in the upcoming quarters. The resurgence in financial services, along with anticipated widespread growth in 2QFY25, is expected to enhance performance in the latter half of FY25 and further. The impressive outcomes from major US banks are promising, suggesting a potential trickle-down effect that may advantage Indian IT services as we progress.
“While the sector could face margin pressures due to seasonal factors like furlough and wage hikes, falling interest rate cycle, is likely to drive an increase in discretionary spending, boosting IT demand,” added Patwa.
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.
