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Nifty IT may lose its outperformer tag vs Nifty50 if mean reversion plays out

PE of Nifty50 & Nifty IT at 0.68 is 1 standard deviation away from 7-yr mean of 0.79.

, ET Bureau|
Feb 26, 2019, 08.05 AM IST
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The price ratio of the Nifty50 and Nifty IT index is 0.68 currently.
The Nifty IT index has been outperforming the benchmark Nifty50 index by 10 per cent since the beginning of the current year following better fundamentals such as higher growth potential and favourable currency movement. But, according to the technical indicator of the index price ratio, the trend may not sustain in the near term.

The price ratio of the Nifty50 and Nifty IT index is 0.68 currently. It is one standard deviation away from the seven-year mean value of 0.79, according to data from Bloomberg. Data of the last seven years of the priceratio suggest the ratio tends to revert to the mean after reaching 0.64-0.66 levels.

According to the mean reversion theory in finance, securities’ prices and historical returns eventually revert to the long-run mean. There is only one instance in the past seven years when the price ratio dropped below 0.66. In March 2014, it fell to the lowest level of 0.61. It reported a sharp reversal within three months and peaked at 0.85.

“As the price ratio bounces up to the mean value, a round of underperformance in tech stocks could not be ruled out in the near term,” said Neeraj Agarwal, vice-president, alternative research, IDFC Securities.

The recent price-ratio reversion was in October-November 2018, when it improved from 0.66 to 0.75. The NSE IT index declined by 11 per cent, while the Nifty moved up 3 per cent.

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