Fear of Missing Historic Rally Has Koreans Borrowing to Invest
(Bloomberg) -- South Korean individual traders, known for their love of risk, are poised to pour a record amount of borrowed money into the nation’s $1.4 trillion stock market.
Deposits for stock trading at local brokerages have surged to 46 trillion won ($38 billion) in June, the highest on record, compared with about 31 trillion won in March, according to data from Korea Financial Investment Association.
With the benchmark Kospi index having come close to erasing its 2020 loss on hopes for a quick economic recovery from the coronavirus, those funds are quickly being deployed. The total balance of margin financing by Korean retail stock traders rose to 11.8 trillion won as of Thursday, the highest since June 2018 when it touched a record of 12.6 trillion won, the data show.
Abundant liquidity sparked by record-low interest rates and stimulus at home is driving mom-and-pop investment at the fastest-ever pace, said Lee Hyo-Seok, an analyst at SK Securities Co. Lee said retail investors tend to favor health care and electric vehicle-related stocks in the technology-heavy Kosdaq Index, which has jumped 11% this year, topping even the Nasdaq Composite’s solid performance.
With borrowing costs high, investors tend to quickly use their loans for short-term trades, according to a spokesperson at the Financial Investment Association. For example, Shinhan Investment Corp. charges an effective annual rate of 3.9% for 7-day and 6.5% for 15-day loans for stock trades, compared with the less than 2% rate typically charged by local banks for one-year loans.
“There’s fear of missing out among the day traders,” said Kevin Jin, a health-care analyst at Korea Investment & Securities Co. “They are not like institutional investors, who invest based on calculations. Korean stocks will move regardless of valuations or stock levels for a while, responding to news flow more,” due to the influence of retail players.
Foreign funds have sold a net 23.8 trillion won worth of Kospi shares this year, while local institutions have offloaded 6.7 trillion won. In contrast, Korean retail investors have bought a net 27.8 trillion won of stocks, providing a large source of support for the market.
The Korean market is now showing the same signs of concern about overheating that have gripped markets around the globe. The Kospi fell 2% on Friday while the Kosdaq slumped 1.5%. The Kospi’s 14-day relative strength index dipped below the 70 level that signals overheated levels for the first time in nine sessions.
SK Securities’ Lee said there is some worry that the high level of borrowing could result in individuals selling stocks to meet margin calls when stocks drop. Lifting of the six-month ban on short-selling in September poses another risk. Korean regulators are reviewing whether to extend short-sell ban, Financial Services Commission Chairman Eun Sung-Soo said at a daily briefing on Thursday.
“Everyone may start to worry about a plunge ahead of the lift of the short-sell restriction,” Lee said. “But if you ask me if Korean retail investors keep buying local stocks, and I’d say they definitely will, this bubble will last for at least two years.”
©2020 Bloomberg L.P.