Overseas investment banks said Korea's retail investors are estimated to have logged about 56 trillion won in losses from leveraged exchange-traded funds (ETFs) during the recent stock market plunge. In particular, paper losses from retail investors who bought SK hynix on dips alone were tallied at more than 8 trillion won.
According to the IB industry on the 29th, Mohamed Apabhai, head of Asia-Pacific trading strategy at Citi Global Markets, estimated in a market report for institutional investors that investors in leveraged ETFs based on domestic asset recorded losses of about $38.7 billion (about 56.3 trillion won).
This material is not an official Citi Research report but a market commentary written by a stock trading division strategist for institutional investors.
According to the report, the market capitalization of Korean leveraged ETFs fell to a recent $19 billion (about 27.6 trillion won) from $52.5 billion (about 76.4 trillion won) on the 22nd of last month, wiping out $33.5 billion (about 48.7 trillion won) from the peak. Citi estimated that if it also reflects $6.2 billion (about 9.02 trillion won) of new inflows since then, retail investors' cumulative losses come to about 56.3 trillion won.
By underlying asset, the decline was largest in SK hynix leveraged ETFs. The related products' market cap shrank by about $17 billion (about 24.7 trillion won) from the peak, while KOSPI 200 leveraged ETFs fell by $10.5 billion and Samsung Electronics leveraged ETFs decreased by more than $5 billion.
Citi also suggested that the size of leveraged ETFs could shrink below $8 billion (about 11.6 trillion won) before year-end.
The report said retail investors are still buying on dips.
Individuals made net purchases of more than $16 billion (about 23.27 trillion won) in SK hynix since the 23rd of last month, but are estimated to be sitting on paper losses of about $5.7 billion (about 8.3 trillion won) from those shares alone. Citi's estimated average purchase price is 2.28 million won, putting the current loss ratio at 31.6%.
During the same period, retail investors also recorded paper losses of about $2.4 billion (about 3.5 trillion won) on their net purchases of Samsung Electronics.
Margin loan balances are still seen as elevated. The combined margin loan balance of the two markets stood at 32.7 trillion won as of the 27th, down from the late last month peak of 38.6 trillion won, but only about 65% of the margin positions accumulated since the start of the year have been unwound, according to estimates. Citi said the correlation between margin loan balances and the KOSPI 200 index reaches 92.2%, noting that the stock market's trend and the scale of leveraged buying with debt are moving closely together.
Apabhai said, "Retail investors are not dumping yet," adding that it is too early to turn optimistic on the KOSPI.
He presented as his base case that KOSPI 200 futures first fall to the 888 level, and projected that if this level breaks, they could drop to 754.6, the fair value reflecting macroeconomic variables.
Citi also added that, according to its own asset market bubble gauge, the Korean stock market has moved out of the previous "bubble" range but has not yet entered undervalued territory, assessing it to be at the boundary between "overvalued" and "fair value" at present.