As the domestic stock market continues a strong rally, with the KOSPI recently breaking through the 7,000 level, the Financial Supervisory Service sounded a warning about short-term trading centered on individual investors and "debt-fueled investing."
At a press briefing held at the headquarters of the Financial Supervisory Service in Yeouido, Seoul, on the 11th, Deputy Governor Hwang Sun-oh said, "The KOSPI is continuing a strong rally, including breaking through the 7,000 level," but added, "Rather than taking a rosy view of the market as a whole based solely on the index's rise, it is time to examine the risks that lie behind the rally."
◇ Korean market heavy with individual investors… concerns over volatility
The Financial Supervisory Service especially views the expansion of short-term trading centered on individual investors as a risk factor. Deputy Governor Hwang said, "Our stock market has a high share of individual investors," and explained that individual investors, in particular, show a strong tendency toward short-term trading. He warned, "Short-term trading not only amplifies market volatility but can also erode investment returns as transaction costs accumulate."
By trading value, the share of individual investors in the domestic market is relatively high compared with major overseas markets, at 40%–50% for KOSPI and around 70% for KOSDAQ. The average daily turnover, which shows how actively stocks trade in a day, was also high. As of April this year, KOSPI turnover was 1.48%, about 6.7 times that of the U.S. S&P 500 (0.22%), and KOSDAQ was even higher at 2.56%.
Concerns were also raised about the rise in margin financing. Deputy Governor Hwang said, "As of the end of April, margin financing stood at 0.58% relative to market capitalization, the lowest level in five years," but added, "Outstanding margin balances have increased to 35.7 trillion won over the same period, so investor losses could widen due to forced selling if stock prices fall." He continued, "We are closely examining trends in margin balances and the status of risk management at each securities firm," and said, "If needed, we will take preemptive measures to ensure market stability."
In fact, when the market plunged in early March due to the Middle East war's impact, the scale of forced selling surged. As of Mar. 5, the amount of forced selling was 108.4 billion won, about 22 times the daily average in the previous year (4.8 billion won).
In addition, concerns were raised about investor herding related to the single-stock leveraged ETFs for Samsung Electronics and SK hynix scheduled to launch on the 22nd. Deputy Governor Hwang said, "With the introduction of single-stock ETFs, concentration in specific stocks could intensify," and added, "We plan to provide sufficient investor education before the launch and closely monitor trading patterns and fund flows after the launch."
◇ Tighter oversight of securities firms and listed companies
Along with this, the Financial Supervisory Service plans to strengthen risk management in line with the expansion of commercial paper and investment management accounts (IMA) issued by comprehensive investment banks. Deputy Governor Hwang said, "Commercial paper has a funding maturity of less than one year, while more than half must be invested in corporate finance assets, making maturity mismatch management between funding and investment crucial," and explained, "IMA also has a principal protection obligation, so if investment assets deteriorate or securitization is delayed, it could affect the soundness of comprehensive investment firms."
However, noting that the current liquidity ratio of comprehensive investment firms was 115% as of the end of March this year and the standalone liquidity ratio of commercial paper was 163%, he added, "This is not about a current problem arising, but about managing preemptively in preparation for potential future risks."
It also announced plans to strengthen accounting inspections to expedite the exit of insolvent companies. The Lee Jae-myung administration has tightened delisting criteria, which could increase incentives for window-dressing. The Financial Supervisory Service will expand by more than 30% year over year the screening targets for companies with signs of distress and will operate a joint monitoring system in which the accounting, investigation, and disclosure departments respond together. It also plans to establish a mid- to long-term roadmap to shorten inspection cycles to 10 years for KOSPI and 5 years for KOSDAQ to improve the timeliness of accounting reviews and inspections.
In addition, the Financial Supervisory Service will strengthen disclosure reviews to protect shareholder rights in line with the enforcement of the revised Commercial Act. It will encourage companies to provide more thorough disclosures related to their duty of loyalty to shareholders and will pursue improvements to the Data Analysis, Retrieval and Transfer System (DART) and revisions to disclosure forms.
Meanwhile, the domestic stock market has recorded the highest gains among major countries this year. According to the Financial Supervisory Service, the KOSPI rose about 76% last year and added another 74% through the 7th this year. This far outpaces Taiwan (43%), Japan (21%), the United States (7%), and Europe (2%) over the same period. Some market experts, citing improvements in the semiconductor cycle, are setting KOSPI targets in the 8,000–9,000 range.