Kospi’s 44% One-Month Slump Leaves Margin Traders Reeling

Pessimism is spreading across South Korea’s stock market after the Kospi plunged about 40% from its recent peak in just one month. Forced liquidations have surged, driving out retail investors who borrowed to buy stocks, while margin loan balances have shrunk by nearly 10 trillion won in little more than a month. Trading in single-stock leveraged exchange-traded funds and investor deposit balances has also fallen, signaling a sharp retreat in aggressive retail risk-taking.

Outstanding margin loans stood at 28.935 trillion won as of July 31, according to the Korea Financial Investment Association. That marked the first time the balance had fallen below 30 trillion won in about six months. The figure was down about 10 trillion won from this year’s peak of 38.6 trillion won on June 24, meaning more than a quarter of margin financing evaporated in a little over a month.

Margin loans are a key gauge of debt-fueled stock investing because they allow investors to borrow from brokerages to buy shares. The decline points to a pullback in leveraged trading. Loans backed by pledged securities have also been falling. The balance stood at about 25.4493 trillion won as of July 31, down nearly 3 trillion won from 28.1 trillion won on March 5. With both indicators declining at the same time, demand for leverage tied to stock holdings appears to be weakening broadly.

The Kospi fell from 7,096.89 on July 23 to 5,593.56 on July 30, a drop of more than 1,500 points in five trading days. That helps explain the surge in forced selling. Forced liquidations tied to unpaid margin purchases jumped from 13.9 billion won on July 28 to 61.1 billion won on July 29, more than quadrupling in a day. The total then rose to 103.8 billion won on July 30 and 122 billion won on July 31.

Another factor behind the decline in margin balances was a wave of forced liquidations during a highly volatile stretch marked by repeated circuit breakers and sidecar curbs. Investors who had borrowed from brokerages to buy stocks were forced out of their positions. Forced liquidations tied to unpaid margin trades in the domestic stock market totaled 992.8 billion won in July. These trades are ultra-short-term credit transactions in which investors borrow from brokerages to buy shares. If they fail to repay the balance, typically within two days, the brokerage forcibly sells their holdings on the next trading day to recover the debt.

In particular, the unprecedented back-to-back circuit breakers on July 28 and July 29 were followed by 103.8 billion won in forced sales on July 30 and 122 billion won on July 31. The pattern points to a vicious cycle in which falling stock prices triggered further declines, as investors either repaid margin debt voluntarily or were liquidated.

Taken together, the data show that the market rout and the jump in forced selling have sharply reduced overall demand for leverage backed by stocks. The Kospi, which hit an intraday high of 9,384.59 on July 19, slid to 5,262.77 intraday on July 29, a 43.9% plunge in a little over a month. The index has since recovered above 6,300, but investors have yet to shake off the shock.

The boom in single-stock leveraged ETFs has also cooled in August. After financial authorities raised the minimum deposit for single-stock leveraged and inverse ETFs to 30 million won on July 31, trading value in those products fell sharply for a second straight session.

Trading value, which stood at 12.4 trillion won on July 30, fell into the 3 trillion won range on July 31, the first day of the rule change. It dropped again to the 1.2 trillion won range on August 3. Retail investors also turned net sellers in major single-stock leveraged ETFs, stepping back from aggressive leveraged bets.

According to Epic AI, an AI-based investment information platform, the Kospi has given back more than 60% of its gains for the year. Morgan Stanley’s capitulation index, which measures the degree of panic selling during sharp market declines, fell to minus 2.53 as of July 30. Excluding the roughly minus 3.1 readings seen during the global financial crisis and the Covid-19 pandemic, that was the lowest level on record.

Morgan Stanley said the market has effectively reset as much of the bad news has already been priced into shares. Still, the firm said foreign inflows will likely be the key driver for South Korean equities in the second half because tighter leverage rules and an exodus of retail investors have weakened domestic buying power.

The bank also described the decline in margin loan balances as a sign of deleveraging and said renewed foreign buying would be critical for any further gains in the Kospi. The backdrop remains challenging. Data released by the Financial Supervisory Service on July 31 showed foreign investors were net sellers of 49.336 trillion won of listed shares in June.

Foreign investors were net sellers of 50.979 trillion won on the Kospi and net buyers of 1.643 trillion won on the Kosdaq. They extended their selling streak to six straight months from January through June. The June total was the largest monthly net sale on record, topping May’s 47.019 trillion won. Foreign investors were also net sellers of 2.8429 trillion won of Kospi shares that day.

Kang Kyung-ju, Hankyung.com reporter qurasoha@hankyung.com