A surge in both leveraged buying and short-selling underpinning the recent rally of the main bourse KOSPI is raising questions about sustainability, market watchers said Sunday.
The leveraged buying is explained in large part by retail and institutional investors pouring borrowed funds into the stock market, buoyed by recent favorable macroeconomic conditions, including monetary easing cycle, as well as the Lee Jae Myung administration’s push for “KOSPI 5,000.”
Also boosting investor confidence are semiconductor-led earnings growth and improving liquidity conditions — all of which may contribute to an extended bullish sentiment and increased equity holdings.
However, equally strong is short-selling demand, propped up by skepticism that the recent short-term rapid surge in the KOSPI will undergo a correction that will be just as fast and sharp.
Critics say leveraged borrowing seeking immediate gains will fuel speculation, leading to heightened volatility and investor losses on the signs of faltering economic conditions.
According to Korea Financial Investment Association data, the volume of margin loans exceeded 22.8 trillion won ($16.2 billion) Friday, the highest since October 2021. This is close to the previous all-time high of 25.6 trillion won in September 2021. Margin loans extended by brokerages are a proxy for leveraged retail and institutional buying.
Equally climbing is short-selling demand. Short-selling refers to the sale of borrowed shares with the expectation of profiting from a price fall when the shares are bought back at a lower price. The tactic has been used widely by foreign and institutional investors seeking leverage to net greater gains.
The balance of net short-selling came to over 11.7 trillion won as of Sept. 16, more than tripling since March 31 when the figure hit 3.9 trillion won following the lifting of the ban.
Similarly, securities loans stood at 104.9 trillion won, maintaining the above-100 trillion won mark since Sept. 9. An increase in securities loans indicates future short selling demand.
The increase illustrates growing caution among institutional investors that recent market gains may be unsustainable, especially in semiconductors sectors that spiked over 30 percent.
SK hynix and Samsung Electronics shares surged amid renewed expectations of a semiconductor supercycle and global tech boom.
SK hynix surged more than 31 percent this month alone to 353,000 won on Friday.
Samsung Electronics hit a 53-week high surpassing the 80,000 won mark.
Analysts caution against margin trading.
“Margin loan investors can gain twice or more in a bull market, depending on the amount leveraged. However, the loss can be just as great,” a Kiwoom Securities report said.
“They will have to have their investment forcibly liquidated if they are unable to put up cash for the amount lost. This in a bearish market will lead to an outright loss.”
The recent rally similar to the postpandemic surge could continue. However, there is a real possibility that it could undergo a sharp correction, despite earnings momentum and government policy drive to bolster capital market, according to Kiwoom Securities analyst Han Ji-young.
“Half of investors are saying the momentum will continue, while the other half are bracing for the sharp fall,” Han said. “A continued rally will certainly bolster growth of the country’s stock market, strengthening its global profile. But a correction will lead to higher market volatility.”