KOSPI’s fate under ‘Middle East risk’: burden of 32 trillion won in leveraged investments vs. 119 trillion won in sideline cash

According to The Financial News, an intense battle is expected between record-high leveraged stock investments using borrowed money and unprecedented levels of sideline cash waiting to enter the market. The first trading day after the holidays on the 3rd, when renewed Middle East risk will be fully reflected in the market, is seen as the main battleground. The key point to watch is how much bargain-hunting demand from individuals and institutions will come in, set against the heavy profit-taking by foreign investors last month.
According to the Korea Financial Investment Association (KOFIA) on the 2nd, outstanding margin loans for stock trading stood at 32.3685 trillion won as of the 26th of last month. This is up about 2 trillion won in just one month after surpassing the 30 trillion won mark for the first time on January 29, when the balance reached 30.0925 trillion won. Margin loan balances represent the amount investors have borrowed from securities firms to buy stocks and have not yet repaid. As the Korea Composite Stock Price Index (KOSPI) broke through the 6,000 level and remained strong, a fresh wave of funds appears to have poured in over the past month.
At the same time, bets on a market decline have also increased. Short-selling balances in the KOSPI market reached 1.9393 trillion won as of the 27th of last month, the highest level since short selling was fully resumed at the end of March last year. Short selling is an investment strategy in which investors borrow shares and sell them, then buy them back at a lower price if the stock falls and return them, pocketing the difference.
Some analysts believe that the large scale of leveraged investments and short selling will amplify volatility in the domestic market on the 3rd. In a correction phase, investors may rush to unwind risk by dumping stocks bought with borrowed money, and when this is combined with short-selling positions, downward pressure could intensify.
Others argue that because money continues to flow steadily into the domestic stock market, a sharp plunge is unlikely. In the KOSPI market last month, institutions and individual investors were net buyers of 14.8593 trillion won and 4.035 trillion won, respectively.
In particular, investor deposits, which represent sideline cash waiting to be deployed into stocks, hit a record high of 119.4832 trillion won as of the 26th of last month. Individual investors also have considerable experience with how the market has tended to recover after sharp sell-offs.
Lee Jae-man, a researcher at Hana Securities, noted, "Investor deposits have recently been hitting all-time highs," and analyzed, "With sideline cash at record levels that can flow into the domestic stock market, conditions are favorable for a valuation re-rating."
Brokerages expect selling pressure from foreign investors to remain heavy for the time being due to the Islamic Republic of Iran (Iran)’s recent airstrike. Foreign investors were net sellers of 21.0731 trillion won in the KOSPI market last month, continuing their profit-taking. With geopolitical uncertainty now added to the mix, the consensus is that this selling trend will persist. In fact, of the 1.9393 trillion won in short-selling balances as of the 27th of last month, 1.5781 trillion won was held by foreign investors.
However, as overall investor sentiment in global equity markets has not been severely damaged, some observers expect bargain-hunting by institutions and individuals to limit the downside. On the day in question, Japan’s Nikkei 225 index plunged as much as 2.66% intraday but pared losses to the mid-1% range by the close. Major Asian markets also fell by around 1%, a more subdued reaction than feared. Bitcoin likewise dropped to the 63,000-dollar level on the 28th of last month, immediately after news of Iran’s airstrike, but rebounded to around 66,000 dollars on the day.
Lee Sang-heon, a researcher at iM Securities, commented, "Given the domestic market’s recent rapid gains, valuations are already stretched, and now an additional source of uncertainty has emerged," adding, "Foreign investors are likely to continue taking profits. However, inflows of individual funds, centered on investor deposits, should come in and help narrow the losses."
The prevailing view is that the direction of the domestic stock market hinges on whether this phase of uncertainty becomes prolonged. Lee added, "The biggest variable is a rise in oil prices driven by a prolonged closure of the Strait of Hormuz and similar developments. If higher oil prices feed into inflation, interest rates and required returns will rise, increasing downward pressure on stock prices."
yimsh0214@fnnews.com Lim Sang-hyuk Reporter