Retail Investors Leaving the Stock Market as They Can No Longer Endure the Crash

[Asia Economy Reporter Kwon Jae-hee] The number of individual investors leaving the market is increasing amid the continuous plunge. The KOSPI index has fallen about 28% compared to the beginning of the year and about 35% from last year's peak due to the 'three highs phenomenon' of rising inflation, interest rates, and exchange rates. As a result, investor deposits have recorded their lowest level in about two years.

According to the Korea Financial Investment Association on the 4th, as of the 29th of last month, investor deposits were recorded at 51.8539 trillion won. This is about a 28% decrease compared to 71.7328 trillion won at the beginning of this year (January 3). In particular, on the 21st, investor deposits hit the lowest level this year at 50.7793 trillion won.

Investor deposits, which refer to the funds entrusted to securities firms by investors for stock trading, are classified as standby funds that can flow into the stock market at any time, making them an indicator to gauge the enthusiasm for stock investment. A decrease in these funds means that individual investors are leaving the stock market.

Investor deposits increased significantly after the second half of 2020 due to the liquidity-driven market caused by the COVID-19 pandemic. They rose from 27.3933 trillion won at the end of 2019 to 65.5227 trillion won at the end of 2020. The monthly average deposit size, which had generally maintained the 60 trillion won range since December last year, broke below 60 trillion won in May this year (59.9958 trillion won) and is currently threatening the 50 trillion won level.

Along with investor deposits, the credit transaction loan balance, known as the 'barometer' of the stock market, also shows frozen investor sentiment. As of the 29th of last month, the credit transaction loan balance was recorded at 17.4612 trillion won. The credit transaction loan balance has decreased for eight consecutive trading days since the 19th of last month, falling to the 17 trillion won level, which is the first time since July 18 and the lowest level this year.

The credit transaction loan balance, which indicates the scale of so-called 'debt investment' (bit-tu), represents the amount individual investors borrow from securities firms to buy stocks. If investors meet a certain margin rate (40-45%), securities firms lend the remaining amount to purchase stocks. For individual investors, this method allows them to buy many stocks with a small amount of money, enabling leverage to achieve high returns during a bull market. However, if the stock price of the borrowed stocks falls within the maturity period (usually around 100 days) and the collateral ratio is not maintained, securities firms forcibly liquidate the stocks held by individual investors through margin calls to recover the loaned amount. Large-scale forced sales can flood the market with sell orders, causing the stock market to plunge further.

Individual investors are leaving the market due to the relentlessly collapsing stock market. The KOSPI index has fallen 27.61% through the end of September this year, which is the third-largest drop after the 2000 IT bubble burst (-40.35%) and the 1990 crash (-33.72%) following the bubble burst after the three lows boom. The KOSDAQ index has fallen even more sharply. It has dropped 34.94% this year, the largest decline since 2008 (-37.41%).

The outlook for the fourth quarter is even darker. The securities industry is increasingly expecting the KOSPI bottom in the fourth quarter to possibly fall to the 2000 level. Samsung Securities forecasted the KOSPI bottom at 2000 for the fourth quarter, while Korea Investment & Securities and Hana Securities predicted the KOSPI bottom at 2100 for October. Eugene Investment & Securities warned that corporate profits could decrease by 5-10% next year due to the economic recession, which could push the KOSPI down to 1920.

Researcher Kim Young-hwan of NH Investment & Securities analyzed, "It is a double burden of recession concerns and global financial market instability due to the strong dollar," adding, "It is difficult to find momentum for a rebound."

Researcher Kim Yong-gu of Samsung Securities also diagnosed, "For the market trend to change, the 'three highs (inflation, interest rates, exchange rates)' must stabilize, but it is difficult to expect such changes in the fourth quarter."