32 Trillion Won in Margin Debt vs. 119 Trillion Won in Cash Deposits: Fierce Battle Expected on KOSPI [Middle East Under Fire]

An unprecedented clash is expected between record-high margin-based stock purchases and massive cash sitting on the sidelines. The first trading day after the holidays on the 3rd, when renewed Middle East risks will be reflected in the market, is set to become the main battleground. The key question is how much buying will come from foreigners who recently took profits, versus bargain-hunting by retail and institutional investors who have been steadily accumulating shares.
According to the Korea Financial Investment Association (KOFIA) on the 2nd, outstanding margin loans stood at 32.3685 trillion won as of the 26th of last month. This is about 2 trillion won higher than the 30.0925 trillion won recorded on January 29, when the balance first exceeded 30 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 large amount of additional leveraged money appears to have flowed in over the past month.
At the same time, bets on a market decline have also increased. Short interest on the KOSPI market reached 1.9393 trillion won as of the 27th of last month, the highest level since short selling was fully reinstated 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, returning the shares and pocketing the difference.
Some analysts warn that the large scale of margin trading and short selling could amplify volatility in the domestic market on the 3rd. In a correction phase, investors may rush to unwind risky leveraged positions, and when this selling is combined with short positions, downward pressure on prices could intensify.
Others argue that because funds are flowing steadily into the Korean market, a sharp plunge is unlikely. In the KOSPI market last month, institutions and individuals were net buyers of 14.8593 trillion won and 4.035 trillion won, respectively. In particular, investor cash deposits waiting to enter the market hit an all-time high of 119.4832 trillion won on the 26th. Many retail investors have learned from experience that the market tends to recover after steep declines.
Lee Jae-man, a researcher at Hana Securities, stated, "Investor cash deposits have recently been hitting record highs," and added, "With dry powder at its highest level and ready to flow into the domestic market, conditions are favorable for a positive valuation re-rating."
Brokerages expect selling pressure from foreign investors to intensify for the time being following Iran's airstrike. Foreign investors were net sellers of 21.0731 trillion won in the KOSPI market last month, continuing to lock in profits. With geopolitical uncertainty now added to the mix, the consensus is that their selling will continue. In fact, of the 1.9393 trillion won in short interest as of the 27th, 1.5781 trillion won was held by foreign investors.
However, as global investor sentiment has not been severely damaged, some 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. Other major Asian markets also fell by around 1%, showing a calmer reaction than feared. Bitcoin likewise dropped to around $63,000 on the 28th, immediately after news of Iran's strike, but later rebounded to about $66,000.
Lee Sang-heon, a researcher at iM Securities, noted, "Given the recent sharp rally in the domestic market, valuations are already stretched, and now an additional source of uncertainty has emerged," and predicted, "Foreign investors are likely to continue taking profits. However, inflows of retail funds, centered on investor cash deposits, should come in and help narrow any declines."
The prevailing view is that the direction of the domestic stock market will hinge on whether this phase of uncertainty drags on. Lee added, "The biggest issue is whether a prolonged blockade of the Strait of Hormuz will push up oil prices and feed into inflation. If inflation accelerates, interest rates and required returns will rise, increasing downward pressure on stock prices."


yimsh0214@fnnews.com Im Sang-hyuk Reporter