A shift in speculative activity from equity cash market to derivatives market could be a factor, a Morgan Stanley​ study says

How long have investors in the Indian markets been holding on to stocks in the backdrop of high volatility and tepid returns in the past four years? Morgan Stanley has come out with an interesting report which addresses this question.

The study finds that investors are holding on to equity investments much longer now than they were during the bull phase between 2003 and 2007.

Back then, the average holding period was around 20 months, or a little over a year-and-a-half. It now stands at around 35 months, or nearly three years, having almost doubled compared with the bull phase. To be sure, the rise has been gradual since mid-2003, but has accelerated since 2009.

The average holding period for foreign institutional investors (FIIs), who account for a large part of trading in the cash market, had steadily come down to as low as 14 months by the end of the bull market in early 2008. Since 2009, it started rising sharply and now stands at 22 months, Morgan Stanley’s calculations show. This is the highest level for FIIs since 2004.

Why are investors holding on to stocks longer now than they did during the bull phase between 2003 and 2007, when the Indian markets rose by over 500%?

Morgan Stanley points out that one factor may be the shift of speculative activity from the equity cash market to the derivatives market.

Cash market turnover now amounts to less than 10% of derivatives market turnover. The extent of intraday trading in the cash market has come down. With less speculative activity in the cash market, the calculation of investors’ holding period would naturally be influenced.

Even so, it’s interesting to note that investors, including FIIs, are holding on to Indian stocks for longer periods.

In the past, such a rise in the level of holding period of stocks had occurred during bear markers and right before the onset of a bull phase, such as between mid-2000 and 2003.

But with the uncertainty in the global economy, and considering that Indian markets have already doubled from their lows during the financial crisis, it seems unlikely that they are on the verge of another bull run.

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