PMC Weekly Review - February 10, 2017

A Macro View: The H-1B Visa: Will It Be “Everywhere You Want to Be?”

Anyone watching the news recently has seen President Trump’s refugee and travel ban spark quite the contentious debate. Dozens of the tech industry’s major players, including Apple, Google, and Facebook, filed amicus briefs supporting suits against the President’s plan to curb travelers and refugees from select Muslim nations. These firms also are gearing up to fight possible changes to the H-1B visa program, which has been vital to the tech industry’s ability to attract qualified overseas workers. Subsequently, the notion that
any changes to this program will stifle growth and increase costs in the tech world has gained momentum. These changes may be particularly important in the large cap growth space, where tech companies tend to comprise a large portion of many growth managers’ holdings, with the Information Technology sector making up about 32% of the Russell 1000 Growth Index.

These potential changes have led to questions that are confusing to many folks: What is an H-1B visa? How will these potential changes affect tech companies and, ultimately, their investors?

The H-1B visa program began in 1991 under the Immigration Act of 1990, and was designed to give US companies access to highly skilled foreign workers. Currently, the US grants about 85,000 visas each year, which are effective for a three-year period and can be renewed for an additional three years, followed by a path to obtaining a green card. Presently, the minimum annual salary for H-1B visa holders is $60,000, but the average salary for these types of workers is about $75,000. Today, there are approximately a million H-1B visa holders residing and working within the US.

So, what changes could the Trump administration make to the program? Possible changes include: one, increasing the minimum salary for H-1B visa holders (the minimum salary hasn’t increased from $60,000 since 1991); two, imposing a bidding system in which employers who are willing to pay higher salaries would have preference for potential employees over lower-salaried employees; or three, limiting a company’s number of employees holding an H-1B visa. However, the Trump administration is restricted to making mostly administrative changes to the application process, as Congress can make more sweeping ones, including changing the total number of visas granted. So the idea that President Trump can unilaterally make wholesale changes to the program is largely

If changes do occur, which companies will be affected? The majority of these visas are granted to workers in the tech industry, namely IT services, software, hardware, and internet-related jobs. Most estimates place the share of tech industry workers holding H-1B visas between 10%-15%. However, the highest concentration of employed H-1B visa holders is in IT consulting and outsourcingrelated jobs, which tend to pay lower wages (roughly between $70K and $90K per year). These companies are likely to be more concerned about any wage increases, either through changes in legislation, or by cutting the number of visa holders they can employ.
Examples of such companies include Infosys, Tata Consultancy Services, Wipro, Cognizant, and Accenture.

Larger IT-related companies that are more software, internet or hardware-related (such as IBM, Microsoft, Oracle, Amazon, Google, and Apple), tend to pay significantly higher wages and have relatively fewer H-1B visa holders, so their bottom line is likely to be less affected by mandated wage increases. Furthermore, investors should be aware that software, internet, and hardware companies make up a much larger portion of the market (and indices), while consulting and outsourcing companies account for a more limited share. For example, Apple comprises about 5.5% of the Russell 1000 Growth index, whereas Accenture is roughly 0.70%, so any market effects from those companies will likely be more muted.

What implications does the H-1B visa situation truly have for the affected tech companies? Clearly, the changes could lead to lower margins, more prominently in IT consulting and outsourcing businesses, and possibly fewer employees holding H1-B visas at those companies. On the flip side, these changes could boost wages for American workers at those companies, as they may hire more American tech workers should Congress increase the minimum salary for H-1B visa holders. However, considering the persistent lack of Americans pursuing tech-related careers, finding qualified Americans is still likely to be a problem.

Re-establishing jobs in American citizens’ hands seems to be the definitive goal of the Trump administration, and many believe the H-1B visa program now takes jobs out of the hands of qualified American citizens. Currently, the implications of these changes seem to be framed by the tech industry as curbing entrepreneurial thought by limiting valuable insights from skilled foreign workers, but the implications so far may not be as wide reaching for most tech companies. No matter how this shakes out, the proposed changes are likely to increase labor costs slightly, and possibly reduce future margins for a modest specific subset of tech companies. But these changes may also present more opportunities for qualified American tech workers. Additionally, investors should note that the likelihood of continued political rhetoric regarding this issue could increase short-term volatility among all tech-related stocks, especially if individual firms are called out on social media.

Ultimately, investors and portfolio managers should pay close attention to changes to immigration laws and their enforcement, as well as how these decisions may affect tech companies.

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