Series 137 – Mean reversion in asset preference is a recurring feature of markets

Over the last 30 years, the Nifty-to-(Gold + Silver) ratio has repeatedly moved through cycles of excess optimism and excess caution, before reverting toward its long-term range.

Historically, major lows in this ratio have coincided with periods of heightened risk aversion such as 2001–03, 2008–09, 2013, and March 2020. In each of these phases, capital had disproportionately shifted toward protection assets.

As conditions normalised, the relationship mean-reverted, and Indian equities delivered strong subsequent returns, often in the 40–120 percent range over the following two years.

The current environment differs in one key respect. While the ratio is again reflecting a shift in relative preference, equity valuations today are not compressed, relatively.

This suggests that any mean reversion ahead is likely to be driven more by allocation normalisation and earnings delivery, rather than broad-based valuation expansion. The implication is not aggressive positioning, but disciplined balance in sectors where there is visibility of growth.

At Itus Capital, we follow a growth-oriented strategy built on a core belief: markets move in cycles, and portfolios should adapt accordingly.

 

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