While stocks of American companies like Meta are rallying after layoffs and other cost cutting measures, an expert believes that the Indian IT services industry is on the wrong side of corporate America trimming costs.

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"We tend to think that the stock market has to directly reflect the economy, but you need to be conscious of the composition of indices and these big mega stocks that drive the indices. So, it is logical that the narrower NASDAQ 100 is outperforming the broader NASDAQ composite, you are seeing the Indian IT services industry being on the wrong side of corporate America cutting costs. So, to me the market is very logical, but you need to understand what is driving these big stocks in the market," Adrian Mowat, Emerging Market Strategist, Investor at Hong Kong SAR told CNBC-TV18 on April 18.

He noted that Meta share prices are rallying from very low valuations. “It was single digit multiple, and it rallied because they have been cutting costs, they are spending less money on the metaverse and so it’s very logical that that company with very high free cash flow and increasing free cash flow is rallying. But how are they rallying? They are rallying because they are laying off staff and cutting costs,” he explained.

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Mowat’s remarks come on a day when shares of Indian IT services firms are witnessing a slowdown. Subdued performance and weak guidance from TCS and Infosys - India's top two software services companies have dragged its peers along with them, even before they declare their respective quarterly results. In fact, the Nifty IT index saw its biggest fall in three years on April 17. The steep fall also brought down the companies’ valuation multiples below the ten-year averages.

During the COVID-19 pandemic too, experts had said that cost-cutting efforts of corporate America in 2020 — reducing rent, cutting travel, and especially eliminating jobs — would dramatically improve the bottom line and accelerate profits, which was one of the big reasons why the market was rallying then

Mowat said that the US market, meanwhile, is seeing a narrow upmove. "Big mega stocks that are cutting costs are moving higher, when you look at the broader, like the Russell indices, etc. That might be a better reflection of what is going on in the economy." The Indian economy and currency are relatively stable, the Emerging Market Strategist pointed out.

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He believes the IT sector may continue to underperform in India while infrastructure spend is seeing a meaningful rise in the country. According to him, there isn't a clear sector trend in the Indian stock market. The best performing stock year-to-date is ITC, which tends to reflect a relatively defensive bias in investors’ thinking. HDFC has done alright, but some of the other banks have gone down, he said.

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