Indebted South Korea retail stock buyers face reality check as short selling to resume

The retail stock buying frenzy has pushed the South Korean benchmark index up 40% in the past half year

  
Currency dealers wearing masks to avoid the spread of the coronavirus disease (COVID-19), work at a bank in Seoul, South Korea, September 10, 2020.

Currency dealers wearing masks to avoid the spread of the coronavirus disease (COVID-19), work at a bank in Seoul, South Korea, September 10, 2020.

REUTERS/Kim Hong-Ji

SEOUL/HONG KONG - South Korean mom-and-pop investors who have borrowed a record $63 billion to bet on soaring stocks will face a key test soon as authorities move to lift a ban on short-selling, capital markets experts said.

The ban, which has been in place since March to cushion markets from the impact of the COVID-19 pandemic, encouraged retail investors to go on a debt-fuelled buying binge.

Short selling could resume as soon as March 15, the Financial Services Commission flagged on Jan. 12, leaving small investors at risk if share prices tumble, analysts said. 

A flood of money from central banks, ultra-low or zero interest rates and COVID-19 vaccine rollouts have sparked a "buy everything" rally, helping world stocks add a whopping $33 trillion in value from their lows of last March. 

"If the (short-sell) ban is lifted, it could cause a crash and definitely upset retail investors," said Hwang Sei-woon, a capital markets research fellow at the Korea Capital Market Institute.

"But I think reintroducing of short selling seems like a reasonable policy decision as the market has been too heated. It could help better stabilize the market and prevent a big hit."

Short sellers sell borrowed shares in the hope of buying them back when prices fall and pocketing the difference.

The retail stock buying frenzy has pushed the South Korean benchmark index up 40% in the past half year, making it the best performing market in the world, but leaving some analysts to worry a bubble is emerging.

Retail investors accounted for 67% of the average daily trading volume on the main KOSPI market in 2020.

There were a record 35.4 million active institutional and retail investor accounts in Korea as of end-2020, 21% higher than in 2019, according to the Korea Financial Investment Association.

'PROTECT RETAIL INVESTORS'

Tightening restrictions in the property market have prompted unprecedented participation by both institutional and retail investors in stocks. 

"This is a fundamental change in Korea's asset allocation, which historically has been more linked to real estate holdings," UBS Group AG Korea country head Byung-il Lim told Reuters.

Investors have amassed a war chest of $63 billion in cash deposits at Korea's brokerages, the investment association said -- more than double of what has been held, on average, in each for the past two decades, according to a Bank of America report.

Kim Sung, a 35-year old physicist in Seoul who was attracted to the stock market to chase higher returns, is hoping authorities would put in place some measures to protect individual investors after re-introducing short-selling.

"Policymakers need to come up with an amendment to protect retail investors as short selling previously seemed to benefit those funds with a large amount of assets that could sway the market," he said.

Sung Tae-yoon, an economics professor at Yonsei University in Seoul, said the Korean market's strong performance over the past six months was the result of high global cash levels and low interest rates.

"Continuous and excess liquidity would likely be needed to carry on the current stock market's sentiment. If not, the market would take a big hit once the liquidity is gone."

(Reporting by Heekyong Yang in Seoul and Scott Murdoch in Hong Kong; Additional reporting by Cynthia Kim and Jihoon Lee; Editing by Sumeet Chatterjee and Kim Coghill) ((Scott.Murdoch@thomsonreuters.com;))

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