The KOSPI has retreated to roughly where it stood at the end of July, but funding conditions around the market have deteriorated further. Margin loan balances — money borrowed to buy stocks — have risen about 4 trillion won since late July, while investor deposits, the cash waiting on the sidelines, have fallen by more than 7 trillion won. With foreign investors continuing to sell and domestic institutions having limited capacity to absorb those shares, analysts say the market has lost much of its momentum for a rebound.
Margin loan balances stood at 32.75 trillion won ($22.7 billion) as of Oct. 15, according to the Korea Financial Investment Association on the 18th. That is up 3.81 trillion won, or 13.2%, from 28.93 trillion won on July 31. Margin loans are funds investors borrow from brokerages to buy shares, and falling prices can trigger forced selling when collateral falls short. While retail demand in July centered on leveraged single-stock exchange-traded funds, the burden has since shifted to direct borrowing through margin accounts.
Investor deposits, by contrast, fell to 96.91 trillion won from 104.14 trillion won over the same period, a decline of 7.22 trillion won, or 6.9%. The figure is used to gauge potential buying power in the market. Recent increases in interest rates have pulled some money into bank deposits, and more investors have shifted funds to U.S. equities, leaving domestic liquidity thinner than at the end of July.
Money market fund balances, a short-term parking vehicle, moved the other way, rising 9.52 trillion won to 261.08 trillion won on Oct. 15 from 251.56 trillion won at the end of July. Retail MMF holdings, however, fell to 20.88 trillion won from 21.63 trillion won, while corporate holdings climbed more than 10 trillion won to 240.2 trillion won from 229.93 trillion won. The increase in short-term funds has not translated into greater buying power for individual investors.
Forced selling has surged during the recent slide. Shares liquidated against unpaid brokerage balances jumped about 12.7-fold to 80.5 billion won on Oct. 15 from 6.36 billion won on Oct. 8. Margin loan balances also fell 1.54 trillion won to 32.75 trillion won on Oct. 15 from 34.29 trillion won on Oct. 12. The drop was steepest on a single day, with balances falling about 956 billion won from 33.71 trillion won on Oct. 14, a sign that leveraged positions are unwinding quickly in the selloff. The decline reflects investors selling holdings to repay debt, as well as shares being liquidated when collateral runs short.
Supply and demand offer little relief. Domestic institutions would need to absorb the shares foreign investors are selling, but pension funds and other major institutions have limited room to add. October and November are also when global hedge funds concentrate their fiscal year-end accounting and book closings, raising the prospect of profit-taking or the unwinding of existing positions during November. With little prospect of foreign money returning soon and domestic institutional buying weak, analysts say the imbalance may persist.
"Liquidity in the domestic market is unlikely to recover unless foreign money flows back in," said Lee Hyo-seop, a research fellow at the Korea Capital Market Institute. "With buying power in short supply, the market will probably remain insensitive to good news and sensitive to bad news."