The overheated fervor of the "KOSPI 5000 era" is spilling over into a surge of borrowing to invest, prompting securities firms to lock down lending one after another.
According to the financial investment industry on the 3rd, KB Securities decided to temporarily restrict margin purchase orders starting that day until further notice. Trading is allowed within a credit balance of 500 million won, but credit purchases are not possible beyond that. On top of restricting securities collateral loans for stocks, funds and equity-linked securities (ELS) on the 28th of last month, KB Securities has now blocked margin financing as well.
Korea Investment & Securities Co. also decided the same day to temporarily suspend its securities collateral loan service, citing the exhaustion of its margin lending limit. NH Investment & Securities will also halt new securities collateral loans starting on the 4th and adjust its margin financing limit. For domestic stocks the firm classifies as grade C, the margin financing limit will be reduced from 100 million won to 50 million won.
Securities firms are rushing to tighten lending because the Financial Investment Services and Capital Markets Act caps margin lending at 100% of equity capital. From investors' perspective, securities collateral loans are preferred because their interest rates are relatively low, and securities firms also block collateral loans before margin financing to manage limits.
When the KOSPI and KOSDAQ plunged more than 5% and 4% on the 3rd, individual investors snapped up 4.8 trillion won worth of domestic stocks. That surpassed the all-time record net purchase amount of 4.4921 trillion won set on Jan. 11, 2021, as individuals expecting a rebound after a sharp short-term drop moved aggressively to buy the dip. This is why people are talking about a "second Donghak Ant Movement." That day, the KOSPI and KOSDAQ indexes rebounded sharply, recovering the 5,200 and 1,100 levels, respectively.
Borrowing to invest is currently at an all-time high. According to the Korea Financial Investment Association, as of the 2nd, the balance of margin loans in the domestic market stood at 30.4731 trillion won. The main board balance was 20.0982 trillion won and the KOSDAQ market was 10.3749 trillion won, up about 3.2 trillion won from the end of last year (about 27 trillion won).
With market volatility elevated, continued lending curbs by securities firms are seen as a sign the market is nearing the limits of leverage it can bear. Given the potential for further declines from forced selling, investors need to be cautious.
Lee Sang-ho, a research fellow at the Capital Market Research Institute, said, "Leverage investing is increasing among investors who feel so-called FOMO (fear of missing out) during an index uptrend," and added, "Given recent market volatility, extra caution is needed in using margin financing, and a prudent approach that considers corporations' fundamentals is required."