Forced liquidations and tighter ETF leverage rules have accelerated retail deleveraging, leaving foreign inflows as a likely key driver for South Korean equities in the second half.
Debt-fueled retail trading in South Korea has retreated sharply after a steep selloff in the Kospi triggered a surge in forced liquidations and drained leverage from the market. Outstanding margin loans fell to 28.935 trillion won as of July 31, down about 10 trillion won from this year’s 38.6 trillion won peak on June 24 and slipping below 30 trillion won for the first time in about six months, according to the Korea Financial Investment Association. Loans backed by pledged securities also declined to about 25.4493 trillion won from 28.1 trillion won on March 5, pointing to a broader weakening in appetite for borrowing against stock positions. The retreat followed a violent market drop, with the Kospi sliding from 7,096.89 on July 23 to 5,593.56 on July 30 and falling 43.9% from an intraday high of 9,384.59 on July 19 to 5,262.77 intraday on July 29 before recovering above 6,300. Forced liquidations tied to unpaid margin purchases climbed from 13.9 billion won on July 28 to 61.1 billion won on July 29, then to 103.8 billion won on July 30 and 122 billion won on July 31, while the July total reached 992.8 billion won. Trading in single-stock leveraged ETFs (exchange-traded funds that magnify gains and losses in individual shares) also cooled after regulators raised the minimum deposit for single-stock leveraged and inverse ETFs to 30 million won on July 31. Trading value fell from 12.4 trillion won on July 30 to the 3 trillion won range on July 31 and the 1.2 trillion won range on August 3, as retail investors turned net sellers. Morgan Stanley said much bad news has already been priced into stocks and described the fall in margin balances as deleveraging, but said foreign inflows would likely be crucial for any further gains because tighter leverage rules and a retreat by retail investors have weakened domestic buying power. The backdrop remains difficult, with Financial Supervisory Service data showing foreign investors were net sellers of 49.336 trillion won of listed shares in June, the largest monthly net sale on record, and extending a six-month selling streak.