INSUBCONTINENT EXCLUSIVE:
The Nifty IT index has been outperforming the benchmark Nifty50 by 9% since the beginning of the year
The outperformance, however, may not last going by the historical trend
The ratio of the Nifty50 and the Nifty IT indices, referred as the price ratio, is currently at 0.68 according to Bloomberg data
Historically a trend reversal has been observed at such levels
The seven-year average ratio was 0.78.
According to the mean reversion theory used in finance, securities prices and historical returns
eventually return to long-run mean
Neeraj Agarwal, vice-president, alternative research at IDFC Securities said that the underperformance of technology stocks cannot be ruled
out in the near term as the price ratio tends to bounce up from the support level
“Any gain in the IT stocks from hereon should be used as an opportunity to exit out of technology stocks,” he added.
In the past four
instances since 2015, whenever the price ratio dropped to 0.68, the Nifty IT index has lost 7.1% on average
Also, the lowest and the highest underperformance of the Nifty IT index against the Nifty 50 was 9.9% and 29.5%, respectively.
