IT spends may not pick up even after US polls

Trends suggest there is low co-relation between the two

With US elections around the corner, the wave of protectionism has started again. This is because presidential candidate Donald Trump is talking about putting a lid on the flight of jobs outside the US. This can be achieved to some extent by tightening the norms or completely banning the temporary work visas which, if implemented, can impact Indian information technology (IT) services companies. However, historical evidence suggests such statements typically end up being just election rhetoric and no concrete measures are implemented. If analysts are to be believed, the same is expected this time, too. “There is a genuine lack of IT talent in the US and now even customers of Indian IT vendors have started aggressively lobbying to prevent any irrational protectionism,” says Sagar Rastogi, technology analyst at Ambit Capital. He adds that Trump has changed his stance on the H1-B visa issue multiple times.

Though the likelihood of stricter norms being implemented is low, has this rhetoric led to lowering of IT spends by clients in a year of US elections? The answer is no. “Our analysis of the past three election years indicates the US election has not been a material factor. For instance, during the 2012 election, both spending and employment remained nearly unchanged before and after the election,” write analysts at IIFL, led by Sandeep Muthangi, in a recent report. This also lays to rest the Street’s belief that US’ IT spends will rise meaningfully a couple of months after the elections.

The chart shows barring 2004, IT spends did not pick up even after the elections. This also means spends are a function of business cycles of the clients and the large shifts in technology spends.

What’s worse, this time around, the IT sector is also facing headwinds of its own. While the US economic growth is still benign, the full impact of the Brexit is yet to play out. The Brexit could lead to lowering of IT spends by companies based in the Europe/UK markets, particularly from the banking and financial services sector. On the other hand, digitisation is increasing at a rapid pace and Indian companies are not leading the change. This is unlike the last technology boom in early 2000s when they were at the forefront of the rapidly growing outsourcing/offshoring business. As companies re-align their business models in an increasingly digital world, they could witness heightened volatility in their revenues and margins, believe analysts. Rising automation though could help companies offset some of the profitability pressure.