Retail stock selloff from margin call-related sale aggravates downside in Korean markets

[Source: Yonhap]

Margin call on leveraged stockholdings has fanned downward spiral in Korean stock market.

The balance of margin account at local brokerages reflecting leveraged retail stock investment slipped to 19.5 trillion won ($15 billion) on Wednesday, according to the Korea Financial Investment Association. It dipped below 20 trillion won on Tuesday for the first time since Feb. 2, 2021.

A margin account is a type of brokerage account in which securities firms lend individual investors cash to purchase stocks, with the account used as collateral. Brokers make margin call, requesting account holder to deposit additional fund, when the account's value falls below minimum required level. If the account holder fails to respond, broker can sell stocks in the margin account.

The margin balance has thinned due to increased margin calls in the domestic markets under bearish run where gainers have been few.

In June, the triggered stock liquidation from margin call valued 21.2 billion won a day, up 28 percent from May, showed data at the Korea Financial Investment Association.

The number of margin accounts at the risk of forced liquidation surged to 7,644 Wednesday from 673 on June 2 at one unnamed big securities company. A mid-sized brokerage firm saw such account count jump to 500 from 20 earlier this month, according to sources at the companies.

On Thursday when Korean stock markets hit new annual bottoms to near the levels of before the boom year of 2021 boom, retail net sale topped 700 billion won with involuntary liquidation counted in.

Both Kospi and Kosdaq closed Thursday at new annual low, 2,314.32 and 714.3, respectively, on Thursday. They managed to recoup some losses during the morning session on Friday, but investors yet remain wary.

Analysts are adjusting down their prospect on the Kospi¡¯s bottom for the second half of this year to as low as 2,000.

Huh Jae-hwan of Eugene Investment and Securities projected Kospi to stop its fall at between 2,050 and 2,300, if earnings of Korean firms shrink 10 to 20 percent.

Some, however, see the Kospi has neared its bottom.

Han Ji-young of Kiwoom Securities expected downward pressure on Korean stocks to be limited since Kospi already shed 12.8 percent in June and 21.3 percent versus the beginning of this year.

Kospi¡¯s forward price-to-book ratio (PBR) is at 0.85x and trailing PBR at 0.92x now to near the average for the pandemic period, 0.77x and 0.79x, respectively, noted Han.

PBR measures the market capitalization of a company relative to the book value of its stock.

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