Global brokerage firm JPMorgan has upgraded its stance on the information technology sector to 'neutral' from the earlier bearish view, buoyed by expectations of a pivot on rate cuts by the US Federal Reserve and a favourable base.
Factoring in those expectations, the brokerage has also upgraded its ratings for IT majors like Infosys and L&T Technology Services to 'overweight' while others, including TCS, HCLTech, Mphasis and Persistent Systems are lifted to 'neutral' calls from 'underweight' earlier.
Aided by the upgrades, shares of most IT companies inched higher on January 4, lifting the Nifty IT index around 1 percent higher.
The firm banks on expectations of a pivot in rate cuts to cost-saving measures, pro-cyclicality, near-term generative artificial intelligence (Gen AI) prep work and a very low base of 2023 as major drivers behind the slew of upgrades.
The IT sector has been an underperformer in the bull run seen in the market in 2023, largely dragged by a weak macro environment due to prolonged deal conversions as business ramped down on IT spending.
However, with hopes of the US central bank achieving a soft-landing running high along with hints of an earlier-than-expected start of the rate-cut cycle, the macro environment for the sector is likely to ease.
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Many analysts expect the positive triggers to reflect in the earnings of IT majors only from the fag-end of FY24 or the beginning of FY25.
With expectations of a recovery making its way, analysts also recommend investors looking to enter the market with a long-term perspective to shift focus towards IT names as their valuations seem more reasonable as compared to other counters that have witnessed a sharp rally in 2023.
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