The surprising aspect of Tuesday's selloff was the selling pressure seen in tech stocks. The BSE IT index fell as much as 2.5 per cent in afternoon trade as compared to 0.85 per cent drop in the broader Sensex. HCL Tech was the top Nifty loser, down nearly 5 per cent.
Reasons why investors may be getting out of IT stocks.
1) Profit taking: The sharp selloff over the last few days has unnerved investors. Both external and domestic cues point to further weakness in markets. IT stocks, as measured by the BSE IT benchmark, have risen over 40 per cent since last year as compared to 1.6 per cent rise in the broader Sensex during the same period. Traders could be taking off profits from the table.
2) Rupee stability: The sharp gains in IT stocks last year can be linked to an equally sharp fall in the Indian rupee, which hit a record low of 68.85 per dollar in August. Since then, India's fundamentals have vastly improved. India's current account deficit, which was the single biggest reason for rupee fall last year, is likely to be less than 2.5 per cent of GDP this fiscal as compared to a record 4.8 per cent last fiscal. So, tech companies are unlikely to make windfall gains this year on account of rupee depreciation.
3) Reports of slowdown in the world's two biggest economieshave hurt sentiments, traders said. Tech stocks have seen strong gains on optimism of higher demand for IT services from key markets of US and Europe. However, a US survey showed an unexpected drop in manufacturing output in January. Analysts said that may be due to the extreme cold weather that hit the country, but is nevertheless disappointing for an economy that hopes to be rebounding.
4) Foreign institutional investors, who put in $20 billion in stock markets in 2013, have turned sellers. FIIs typically invest through exchange traded funds (ETFs) and incremental selling can hurt frontline tech stocks the most, as they are all a part of the Nifty. INFY will be in focus because FIIs own over 40 per cent in the company.)
5) Investors could be shorting tech stocks: stock-wise rotation and sector-wise rotation will take place at the bottom. Tech stocks had held the markets so far, but will correct now.