SEOUL, August 11 (AJP) — South Korea’s spectacular stock bull run has ridden increasingly on borrowed money, with retail leverage growing at nearly twice the U.S. pace, heavily concentrated in a handful of large-cap stocks and turning the rally into an increasingly high-stakes bet.
Outstanding margin loans reached 36.7 trillion won ($25.7 billion) at the end of June, 5.5 times the 6.7 trillion won recorded at the end of 2016, according to a report by Lee Hyo-sub, a senior research fellow at the Korea Capital Market Institute.
That translates into average annual growth of 19.6 percent. U.S. margin debt increased 2.8 times over the same period, from $530 billion to $1.5021 trillion, or 11.6 percent annually, meaning Korean margin borrowing expanded at roughly 1.7 times the U.S. pace.
Crowding in the money where the borrowed money went raises bigger concern.
During the pandemic-era retail boom in 2020 and 2021, roughly half of Korea’s margin loans were concentrated in the junior KOSDAQ market.
By the end of June this year, 28.6 trillion won, or 78 percent of the total, was tied to KOSPI stocks, compared with 8.1 trillion won on the KOSDAQ.
Lee said that suggests leverage has migrated toward large-cap stocks and become increasingly concentrated in volatile sectors such as semiconductors.
The shift has come alongside an extraordinary run in Korean equities. The KOSPI climbed 176 percent in the year through June 30, according to the report, far ahead of Taiwan’s 107 percent, Japan’s 73 percent, the Nasdaq’s 29 percent, Britain’s FTSE at 20 percent and China’s Shanghai Composite at 19 percent.
Lee attributed the rally to stronger semiconductor earnings, increased global liquidity and government policies aimed at reviving the domestic capital market. The sharp gains, in turn, drew more retail investors seeking higher returns through borrowed money and leveraged products.
The appetite for leverage has spread well beyond margin loans.
Assets in Korean leveraged ETFs tracking twice the daily movement of their underlying assets reached 39.4 trillion won at the end of June, more than 13 times the 3 trillion won recorded at the end of 2016. That represents annualized growth of 31.1 percent, roughly twice the pace of the global leveraged ETF market.
The structure of that market has also changed.
Korean leveraged ETFs were previously dominated by products tracking broad indexes such as the KOSPI 200. Since single-stock leveraged ETFs were introduced in the first half of this year, however, products tied to individual companies have increasingly driven growth.
That makes the leverage more concentrated. Individual stocks generally move more sharply than broad indexes, meaning the same two-times leverage can expose investors to considerably larger swings.
The bets are also overwhelmingly pointed in one direction: up.
Inverse leveraged ETFs, which magnify declines in their underlying assets, held just 1.4 trillion won at the end of June, accounting for only 3.5 percent of Korea’s leveraged ETF market.
Lee said the imbalance suggests retail investors are using leverage primarily to chase further stock-market gains rather than hedge risk. In short, retailers don't know the rules and stakes in the game.
Unpaid stock purchases, in which investors buy shares without immediately settling the full amount, reached 1.4 trillion won at the end of June, up 57 percent from the end of 2024. Contracts for difference, or CFDs, rose 60 percent to 1.9 trillion won over the same period.
Margin loans typically provide effective leverage of around two times.
An investor putting down a 45 percent margin could lose about 67 percent of their capital if the underlying stock falls 30 percent, and could lose the entire investment if it drops 45 percent.
Falling prices can trigger forced selling when collateral drops below required levels. Those sales can push prices down further, setting off a vicious cycle of another round of margin calls.
Leveraged ETFs can create a similar problem.
Because they target twice the daily return of an asset rather than twice its long-term performance, volatility itself can erode returns. If an index rises 20 percent and then falls 20 percent, it ends 4 percent lower. A two-times leveraged ETF would rise 40 percent and then fall 40 percent, leaving the investor down 16 percent.
Fund managers must also continuously rebalance their positions to maintain target leverage. During sharp market moves, large hedging trades can become concentrated near the close, potentially magnifying swings in the underlying stocks themselves.
The buildup, Lee claimed, is not simply as an investor-protection issue but increasingly as a financial-stability risk.
Tighter restrictions on single-stock ETFs alone could merely push investors toward other leveraged products at home or overseas, the report said, adding that Korea needs to move households away from short-term leveraged bets and toward diversified investment.
It recommended stronger tax incentives for Individual Savings Accounts and private pensions, improvements to retirement investment programs and greater benefits for longer stock holding periods, alongside stronger financial education.
The warning comes with an uncomfortable twist for a market that has rewarded increasingly aggressive bets.
Borrowing helped investors magnify one of the world’s strongest equity rallies. The concern now is what happens when Korea’s heavily leveraged market has to work in reverse.
The key improvement is the framing. I would not make the U.S. comparison the whole story. It is your hook. The actual story is: Korea’s bull run has built a layer of leverage underneath it, that leverage has moved into KOSPI heavyweight stocks and semiconductors, and investors are overwhelmingly positioned for prices to keep rising.
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