Retail investors step up leveraged bets as KOSPI soars

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A growing number of retail investors are taking out margin loans and unsecured loans, propelled by the country’s benchmark KOSPI index surging past an all-time high of 4,200 mark this week, market watchers said Wednesday.

The leverage- and borrowing-fueled rally is stirring concern over heightened volatility, in case of short-term wild swings due to foreign capital outflows.

Further advancing the view is the market’s growing dependence on semiconductor giants such as Samsung Electronics and SK hynix. Foreign holdings in each of the two shares stood around near 50 percent as of the end of October. Any rapid foreign sell-off could trigger sharp dives in the two, leading to faster investor losses.

According to data from the nation’s top five banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — unsecured loans extended to household totaled over 105.9 trillion won ($71 billion) as of Friday, up 1.18 trillion won from the end of October.

The surge came in just one week, surpassing the entire increase recorded during October when the figure stood at 925.1 billion won.

This is the fastest weekly jump in about four years since July 2021.

Most of the increase came from overdraft borrowing, which jumped 1.06 trillion won. Non-overdraft unsecured loans rose by more than 114 billion won.

Many say the short-term surge is explained by retail investors increasing equity holdings amid months of the sustained KOSPI rally.

Most of the loans are believed to fund stock holdings last week when foreigners sold over 7 trillion won in the KOSPI market.

At the time, retail investors bought over 7.4 trillion won worth of KOSPI shares.

When the index briefly plunged over 6 percent Nov. 5 to the 3,800 level, overdraft account balances spiked over 623 billion won on that day alone.

Also rising is margin loans whereby investors can borrow against the value of the stocks in their brokerage account, using them as collateral.

According to the market data, margin loans stood at over 26 trillion won as of Friday, the highest level since September 2021.

The increase is dangerous, since foreign fund outflows could trigger forced liquidations, prompted by margin calls.

Margin calls are where a brokerage demands the account holder to put cash into a margin account when the value of the share prices in the account falls below the required “margin” level. If the investor fails to come up with more cash, the brokerages sell positions at the lowest possible price, known as a forced liquidation.

“Margin loans are heavily concentrated in capital and semiconductor shares,” said Lee Bo-mi, a research fellow at the Korea Institute of Finance.

“If share prices fall, forced liquidations could intensify price declines in these sectors.”