Debt-financed investing hits 'record high' on hopes for 5,000 points…concentrated in shipbuilding, defense and semiconductors

'Thought it'd go straight to 5,000 points' debt-financed investing breaks COVID-19 era record

Sectors with concentrated debt-financed investing account for 50% of KOSPI market cap

"If a single forced liquidation occurs, the index could swing"

Forced liquidations also at a yearly high

Share of forced liquidations relative to unsettled receivables surges

Recently, the domestic stock market's balance of "debt-financed investing (borrowing to invest)"—which fell after hitting '4,200 points (KOSPI 4,200)'—reached an all-time high. Individual investors' debt-financed investments were concentrated in KOSPI stocks. They were primarily focused on capital goods stocks such as shipbuilding, defense and power infrastructure, and semiconductor stocks represented by Samsung Electronics and SK Hynix. Market participants warned that attention should be paid to forced liquidations, which also set a yearly record.

Domestic market debt-financed investing at record high…higher than during COVID-19

According to the Korea Financial Investment Association, as of the most recent trading day on the 6th, the domestic market's margin loan balance stood at 25,878,152,000,000 won. The margin loan balance refers to the amount individuals borrowed from securities firms to buy stocks.

This exceeds the previous record of 25,700,000,000,000 won on September 13, 2021, by about 170 billion won. September 2021 was a period when countries rapidly cut interest rates to stimulate the economy amid the COVID-19 fallout, sustaining a liquidity-driven market. At that time, the number of margin loan users in their 20s surged 2.9 times compared with the end of 2019 before COVID-19. Around the 2020 'Donghak Ant Movement', interest in the domestic stock market rose sharply, and those expecting a market uptrend borrowed on margin to buy stocks.

As of the 6th, the margin loan balance on the KOSPI market was 16,093,000,000,000 won, and on KOSDAQ it was 9,784,800,000,000 won, showing that margin buying was overwhelmingly concentrated on the KOSPI. This contrasts with early January, when the sudden martial law situation had frozen the market and KOSPI margin loans stood at 9,157,700,000,000 won and KOSDAQ margin loans at 6,524,500,000,000 won. The KOSPI index briefly touched the 4,200 level, which is thought to have drawn margin trading to the KOSPI.

43% of 'debt-financed investing' concentrated in shipbuilding, defense and semiconductors

This year, individual investors' margin purchases have been concentrated in capital goods such as shipbuilding, defense and power infrastructure, and in semiconductor stocks. In other words, margin buying piled into sectors that led the market rally this year.

As of the settlement date on the 31st of last month, capital goods stocks accounted for 3,900,000,000,000 won, making up 27.7% of total margin balances. Margin purchases of semiconductor stocks reached 2,200,000,000,000 won, about 15.8% of the total. The next largest sector for margin loans was materials—including chemicals, steel and nonferrous metals—with a margin balance of 1,500,000,000,000 won (10.8%).

Unlike in 2021, a notable feature recently is that individual investors' margin buying has increased in a direction opposite to cash purchases. Lee Bo-mi of the Capital Markets Research Division at the Korea Institute of Finance pointed out, "From April through the end of October this year, while private (cash) purchases by individual investors showed net selling in the KOSPI market, margin purchases instead increased," adding, "This differs from the usual pattern in which a single actor buys or sells in the same direction whether in cash or on margin."

The researcher analyzed this as a split among individual investors between those betting on declines ('inverse group') and those using leverage ('leverage group'). From April to October, as foreigners and institutions were net buyers and the KOSPI rose sharply, some individual investors borrowed to leverage their positions expecting leading stocks to continue rising, while others likely sold their previously cash-based long positions expecting a correction.

The researcher said, "While margin loans rapidly increased, the top ETF net purchase by individual investors was KODEX 200 Futures Inverse 2X," adding, "This indicates that individual investors' market outlooks and investment strategies are diverging."

Debt-financed investing concentrated in certain sectors…"Beware of forced liquidation"

Against this backdrop, warnings have emerged to be cautious of forced liquidation risk. Forced liquidation refers to the procedure by which a securities firm forcibly sells collateral stocks to recover the money it lent when the price of borrowed stocks falls and collateral value drops below a certain threshold.

According to the Korea Financial Investment Association, forced liquidations on the 6th amounted to about 21,865,000,000 won, the largest so far this year. This is roughly three times the monthly average daily forced liquidation amount of 7,500,000,000 won. The share of forced liquidations relative to unsettled receivables rose from an average of 0.49% in January to 2.3% on the 6th.

Because debt-financed investing is concentrated in sectors that account for a large share of domestic market capitalization, an increase in forced liquidation size could easily cause sharp index swings.

The combined market cap of the country's two major semiconductor large caps—Samsung Electronics (579,532,600,000,000 won) and SK Hynix (422,241,400,000,000 won)—alone exceeds 30% of the KOSPI's total market capitalization (3,252,008,000,000,000 won). Adding major capital goods stocks such as Hanwha Aerospace and Hanwha Ocean raises that share further.

Lee Bo-mi of the Capital Markets Research Division at the Korea Institute of Finance said, "Capital goods and semiconductor sectors, where margin loans are concentrated, account for over 50% of the KOSPI market cap," adding, "If stock prices fall, forced liquidations could amplify price declines in those sectors, and the spillover effect on the index could be substantial, so caution is needed."

Seon Han-gyeol, Reporter always@hankyung.com