Stock market rages on thanks to ample liquidity

A dealer smiles in front of an electronic trading board on the floor of a branch in Hana Bank, Aug. 11. Korea Times file

By Lee Kyung-min

The stock market continues to rage on, illustrated by its trading volume hitting a record high over the past few months, data showed Friday.

Underpinning the rare extension of the strong bullish sentiment in the much-volatile equity market is cheap borrowing costs enabled by record-low interest rates, coupled with tightening real estate policies forcing investors to seek alternatives to the property market.

While the KOSPI closed at 2,407.49, Friday, down 30.04 points, or 1.23 percent, from the previous session, the figure is considered a minor setback following a rapid uptrend for the past ninth consecutive sessions.

Korea Exchange data showed the trading volume of the large-cap KOSPI and tech-heavy KOSDAQ between Aug.1 and 13 averaged 31.2 trillion won ($26.3 billion), up 31 percent from July's daily average of 23.9 trillion won.

The daily average figure for August is highly likely to soar given an increasing number of retail investors are turning to the equity market. Individual retail investors accounted for 72.8 percent of the total as of Aug. 13, already exceeding July's figure of 72.5 percent.

Yet concerns over possible loss is lingering, as leveraged trading is also on the rise.

Korea Financial Investment Association (KOFIA) data showed the amount leveraged total came to 15.1 trillion won in Aug. 7, expected to easily double last year's average of 9.7 trillion won.

Alarmed by the rapid increase of leverage, many brokerages have halted their policy whereby investors can borrow about 100 percent of the initial capital at a rate of between 7 percent or 8 percent. They include Korea Investment and Securities, NH Investment and Securities and KB Securities.

The collective move is a clear indication that the amount that can be borrowed has reached a limit, according to Korea Standard Chartered Bank's Korea investment strategist Hong Dong-hee.

“Stock investors seeking leverage with brokerages despite the rather high interest rate compared to below-3-percent ones offered by commercial banks show they have maxed out their borrowing capacity,” he said.

High leverage could be a major cause for concern because as much as gains may more than double in a bullish market, losses will be just as rapid in a bearish one because repeated failures to meet margin calls will lead to liquidation, wiping out total investments in as little as a couple of trading days.

The calls are made by brokerages to demand more funds or securities to the “margin account” whose balance has fallen below a certain level following losses. Repeated calls gone unmet will lead to liquidation, whereby brokerages will sell shares in the account at the lowest possible price at the opening of the following trading day.

Meanwhile, Bank of Korea data showed the country had a record high of 3,077 trillion won in M2 in June, up 23.2 trillion won or 0.8 percent from a month earlier. M2 is a measure of money supply alongside M1. M1 includes monies that are very liquid such as cash, checkable deposits whereas M2 encompasses M1 but with less liquid savings, certificates of deposits and money market funds. A rise in M2 is explained by an increase in borrowing backed by a low interest rate.