'1 Year Adjustment Period' White Flag Raised by Retail Investors... Where Did the Departed Funds Go? "Debt Repayment"

[Asia Economy Reporter Lee Seon-ae] Individual investors are leaving the domestic stock market. They emerged as the main drivers behind the KOSPI breaking 3,300 and the KOSDAQ surpassing 1,000 through aggressive moves after COVID-19, but over the past year, they have effectively "surrendered" amid a sluggish market. Having experienced a 15-month bull market until June last year and nearly a year of a correction phase, accumulated fatigue appears to have led to their exit from the stock market. The problem is that the funds leaving are likely to flow into deposits due to the interest rate hike trend or be used for debt repayment, making it difficult for them to return to the stock market. Since there is little room for additional capital injection going forward, the future supply-demand leadership is expected to be held by foreign investors.

According to the Korea Exchange on the 10th, the average daily trading value by individuals in the securities market decreased to 10.9 trillion won in April, 9.6 trillion won in May, and 8.1 trillion won as of the first week of June. The average daily trading value in May dropped sharply by 40% compared to the same period last year. Individuals are withdrawing from the stock market. From January to April, individual net purchases amounted to 17.5737 trillion won. During this period, they alone absorbed the sell-offs from foreigners (10.7235 trillion won) and institutions (7.3281 trillion won). However, starting last month, they switched to net selling by offloading 1 trillion won. This is the first time this year that individuals ended a month with net selling based on monthly trading volume.

This is interpreted as fear of losses. To reduce losses, investors shortened their holding periods, and individual investors who had already entered loss zones began withdrawing funds due to fears of continued correction and decline. Lee Jin-woo, head of investment strategy at Meritz Securities, noted, "Individuals who had been buying stocks aiming for bottom-fishing appeared to have realized short-term gains and sold stocks to reduce losses when the KOSPI index rebounded in late last month."

Choi Yoo-jun, a researcher at Shinhan Financial Investment, analyzed, "Individuals actively bought stocks during the COVID-19 pandemic rally phase, and applying the weighted average purchase price concept to the KOSPI, it is estimated that they recorded a 25% return at the peak in June last year. However, as the correction progressed, they entered a loss zone this year."

The Korea Capital Market Institute evaluated, "Individuals tend to trade more actively when their previous returns are high and stock prices rise, but currently, with momentum declining, individual inflows are limited."

Accordingly, customer deposits, which serve as an indicator of investment enthusiasm and funds waiting to be invested in stocks, are also on a downward trend. According to the Korea Financial Investment Association, investor deposits totaled 57.5671 trillion won as of the end of last month. Investor deposits, which had maintained between 60 and 70 trillion won since last year, recorded 70.3447 trillion won in January this year, then consecutively decreased to 63.4254 trillion won in February, 63.2826 trillion won in March, and 61.4062 trillion won in April. Considering that deposits reached an all-time high of 77.9018 trillion won in May last year, 20 trillion won has evaporated in just one year.

It is expected to be difficult for the funds that left to flow back into the stock market. High inflation leads to an increase in nominal consumer spending. Real consumer spending is also on the rise due to increased household surplus rates and reopening consumption recovery. Strong demand underpins this, so there is considerable room for consumption to increase despite rising prices. Although consumer spending forecasts have risen, household income forecasts have turned downward due to declines in capital income and other factors. When consumption increases and income decreases, the discretionary funds available for investment decrease. Additionally, rising interest rates increase household debt repayment pressure.

Researcher Choi said, "Massive liquidity supply during the COVID-19 phase expanded debt across economic agents, and the average household debt balance rose to about 20 times total income. Due to the combination of increased debt and rising interest rates, household interest burdens have increased compared to the past, so discretionary funds are more likely to prioritize debt repayment over investment." He added, "This is a factor limiting individual inflows into the stock market, and with declining market momentum and rising interest rates, the shift of funds into deposits is expected to accelerate." He further stated, "Since the possibility of a dramatic reversal in individual supply-demand is low, the key to supply-demand will be held by foreigners."

This content was produced with the assistance of AI translation services.