KOSPI’s 44% Slide in a Month Leaves Retail Margin Traders Reeling

Pessimism is spreading across South Korea’s stock market after the KOSPI tumbled about 40% from its peak in just one month. Forced liquidations have surged, pushing out retail investors who piled into stocks with borrowed money, while margin-loan balances have shrunk by nearly 10 trillion won over the same period. Trading in single-stock leveraged exchange-traded funds and investor deposits has also declined, underscoring a sharp retreat in aggressive retail risk-taking.

According to the Korea Financial Investment Association on Aug. 4, outstanding margin loans stood at 28.935 trillion won as of July 31. The balance fell below 30 trillion won for the first time in about six months. It 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 disappeared in just over a month.

Margin loans are a key gauge of debt-fueled retail stock buying because investors borrow from brokerages to purchase shares. A decline in the balance signals that leveraged investing is losing steam. Loans backed by deposited securities are also 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. The drop in both indicators suggests broader weakness in demand for leverage tied to stock holdings.

The slide coincided with a sharp jump in forced selling after the KOSPI fell from 7,096.89 on July 23 to 5,593.56 on July 30, losing more than 1,500 points in five trading days. Unpaid margin-account liquidations rose from 13.9 billion won on July 28 to 61.1 billion won on July 29, then climbed to 103.8 billion won on July 30 and 122 billion won on July 31.

Another driver of the drop in margin balances was a wave of forced liquidations in a volatile market marked by repeated circuit breakers and sidecars. Investors who borrowed from brokerages to buy stocks were forced out of their positions. Total unpaid-margin liquidations in the domestic stock market reached 992.8 billion won last month. Such trades are ultra-short-term credit transactions in which investors borrow from brokerages to buy shares. If they fail to repay the balance within two days, brokerages typically sell the holdings on the next trading day to recover the debt.

Back-to-back circuit breakers on July 28 and July 29 led to 103.8 billion won of forced liquidations on July 30 and 122 billion won on July 31. The resulting cycle of falling prices prompted more investors either to repay margin debt voluntarily or to be liquidated.

Taken together, the indicators show that the market rout and the surge in forced selling have sharply reduced demand for equity-linked leverage. The KOSPI hit an intraday high of 9,384.59 on July 19 and then sank to 5,262.77 intraday on July 29, a 43.9% plunge in just over a month. The index has since rebounded above 6,300, but investors have yet to recover from the shock.

The boom in single-stock leveraged ETF trading 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, turnover in those products fell sharply for a second straight session.

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

According to EpicAI, 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 how severely investors dump stocks during a rout, fell to minus 2.53 as of July 30. Excluding the 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 been reset as much of the bad news has already been priced into stocks. Still, the bank said the direction of South Korea’s stock market in the second half will hinge largely on whether foreign money returns, as tighter leverage rules and the exit of retail investors have weakened domestic buying power.

Morgan Stanley also described the decline in margin-loan balances as a sign of deleveraging and said renewed foreign inflows will be crucial for any further rise in the KOSPI. The backdrop remains difficult. 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 sold a net 50.979 trillion won of KOSPI stocks and bought a net 1.643 trillion won on the Kosdaq market. They extended their net-selling streak to six straight months from January through June. June’s 49.336 trillion won of net selling was the largest on record, surpassing 47.019 trillion won in May. Foreigners were also net sellers of 2.8429 trillion won worth of KOSPI shares that day.

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