[Increasing Stock Debt Investment] ① Rising Margin Trading Despite 10% High Interest Rates

Deposit funds fall to 45 trillion won, lowest this year... Margin loans increase to 17.3 trillion won
Aggressive investments to recover losses, higher loss probability due to stock market volatility

[Asia Economy Reporter Lee Seon-ae] Since December, so-called 'debt investment'?investing with borrowed money?has been increasing again. As individual investors left the stock market due to this year's market downturn, debt investment naturally showed a declining trend. However, recently, as the market reacted to the idea of slowing the pace of interest rate hikes and hopes arose that the bear market might be ending, debt investment appears to have returned to an upward trend.

The problem is that debt investment is increasing while investor deposits continue to decrease. A decline in deposits means many individual investors are taking a cautious stance on stock investment, viewing the market as weak. Accordingly, it is interpreted that those who suffered losses in this year's bear market have engaged in aggressive investment despite double-digit high interest rates to recover some of their losses during the 'short-lived rally.' However, experts warn that aggressive debt investment amid high market volatility could ultimately amplify losses, so caution is required.

According to the Korea Financial Investment Association on the 20th, from the 7th to the 12th, the balance of margin loans (KOSPI + KOSDAQ) exceeded 17.3 trillion won for four consecutive trading days. This is the first time since the end of September that the margin loan balance has reached the 17.3 trillion won level. After Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), stated at the December Federal Open Market Committee (FOMC) press conference on the 14th (local time) that "interest rate cuts are not being considered," expectations for a pivot in monetary policy diminished, causing the scale of debt investment to slightly decrease again. However, it has not fallen below the 17 trillion won level. As of the most recent available date, the 15th, the margin loan balance was 17.1902 trillion won.

The margin loan balance, which was around 23 trillion won at the beginning of the year, gradually decreased to 15.96 trillion won on October 18, falling into the 15 trillion won range. Due to the sluggish stock market, investment sentiment worsened, naturally reducing debt investment. However, it has been increasing over the past two months. After the KOSPI and KOSDAQ indices hit their lows at the end of September (KOSPI around 2150, KOSDAQ around 670), they responded to the idea of slowing the pace of rate hikes and achieved a short-term rebound of about 10%, which is the main reason for the increase in debt investment.

Experts are particularly concerned because debt investment has increased while deposits are decreasing. Deposits, which serve as standby funds for the stock market, are money that individual investors leave with securities firms for stock investment or funds remaining in accounts after selling stocks. Deposits, which exceeded 70 trillion won in January this year, have steadily decreased to a yearly low and currently stand at around 45 trillion won. Deposits were 49.6547 trillion won on the 1st but dropped to 45.2138 trillion won as of the most recent available date, the 15th, marking the lowest level of the year. This is the lowest since July 2020 (47.7863 trillion won), a span of two years and four months.

Along with investor deposits, the balance of securities firms' Comprehensive Asset Management Accounts (CMA), another major standby fund in the stock market, has also decreased. As of the most recent available date, the 15th, the CMA balance was 58.5857 trillion won, down 17.1% from 68.6293 trillion won at the end of last year. On January 3 this year, the CMA balance was 69.1867 trillion won, meaning it has decreased by more than 10 trillion won in one year.

Since individual investors still view the stock market as a bear market, the sudden increase in debt investment in December can be interpreted as more investors engaging in 'aggressive investment' to recover losses. Therefore, there is a strong call to approach debt investment more cautiously. With securities firms' credit interest rates reaching 10% due to rate hikes, the opportunity cost of debt investment is high. Margin loans refer to investors borrowing funds from securities firms using stocks as collateral to purchase stocks. Because stocks are relatively high-return and high-risk products with significant default risk, higher interest rates are applied compared to regular loans.

The continued high volatility of the stock market also increases the risks of debt investment. The interest rate hike cycle is likely to continue at least until the first half of next year, and the high interest rate level is expected to be maintained for some time. Additionally, concerns about an economic recession are growing, and experts are lowering their forecasts for the market bottom. Kang Dong-jin, a researcher at Hyundai Motor Securities, said, "Historically, the probability of a year-end rally during Fed tightening periods has been relatively low," adding, "The ongoing interest rate hikes are likely to act as a burden."

Kim Min-ki, a research fellow at the Korea Capital Market Institute, advised, "Individuals should avoid borrowing beyond their capacity to invest," and diagnosed, "Interest rate hikes are not over yet, and there is a risk that corporate values may decline as funds released during the liquidity phase are withdrawn."

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