Stock Crash Wipes Out Leveraged Bets in Korea, Sowing Panic

As South Korean stocks crashed Wednesday afternoon, panic spread through Seoul’s financial district. At the small downtown office of Mirae Asset Securities, scores of clients hurriedly lined up to get their money out.

As South Korean stocks crashed Wednesday afternoon, panic spread through Seoul’s financial district. At the small downtown office of Mirae Asset Securities, scores of clients hurriedly lined up to get their money out. You can save this article by registering for free here. Or sign-in if you have an account. (Bloomberg) — As South Korean stocks crashed Wednesday afternoon, panic spread through Seoul’s financial district.

At the small downtown office of Mirae Asset Securities, scores of clients hurriedly lined up to get their money out. Some in the crowd had snapped up stocks on leverage — part of the mania that had turned the market into a national pastime and made the Kospi the world’s top-performing benchmark — and they were now desperate to unload them as the war in Iran rocked the global economy. They gestured and shouted to get the attention of Mirae employees who could help them sell the positions they couldn’t unwind online.

As they waited for help, their phones flashed ever-growing losses — the Kospi was down 8%, then 10%, then 12% — added to their angst. Just last week, the crowd of retail investors packing into offices like this one was rushing to tap into the AI frenzy powering the Kospi to one new record high after another. Even the president, Lee Jae Myung, had put up his own apartment for sale to buy stocks.

By signing up you consent to receive the above newsletter from Postmedia Network Inc. A welcome email is on its way. If you don't see it, please check your junk folder. But by the end of the long holiday weekend, the calculus looked very different. The US and Israeli strikes on Iran had sent energy prices skyrocketing globally, and few countries in the world are as dependent on oil and gas imports as Korea to power its economy.

All at once, that collective fervor among the retail crowd in Seoul — the ants, as they’re known — turned into collective dread. The borrowed money that fueled much of those stock gains added an accelerant to the rout. By the close on Wednesday, the two-day plunge in the Kospi had reached 18%, the worst loss globally. Some $625 billion in market value, much of it coming from high-flying tech names like Samsung Electronics Co.

and SK Hynix Inc., had been wiped out. “It was a ferocious sell off — clean out of hedge fund hotel. That’s a nickname for crowded longs we use,” said Matthew Haupt, portfolio manager at Wilson Asset Management in Sydney. Even after the declines, the Kospi is still up 21% this year and among the world’s top performers. But what the episode shows is just how fast a market dominated by leveraged, margin-fueled bets and amped up by frenzied day traders can sour, exposing the risks of an investment culture that had come to treat borrowing as a sure thing to bigger gains.

In Korea, leverage has become almost synonymous with the 14-million-strong legion of ants, turning what could have been an orderly stock market slump into chaotic unwind. Margin debt at a record of more than 32 trillion won ($21 billion) had forced a number of brokers to halt new loans after they hit their credit cap. Few on Wall Street saw a move this severe coming. There were the naysayers who warned about the overheated valuations, the high margin, the impact of elevated oil prices on the big crude consuming nation.

But there were also the pragmatists who believed that the global shortage of memory chips that fueled gains, combined with policy reforms and encouragement by President Lee, would deliver further gains. “Korea’s moves are at least somewhat indicative of the equity markets finally starting to take this risk seriously,” Ajay Rajadhyaksha, global chairman of research at Barclays Capital Inc., said on Bloomberg TV.

“For the first day, day and half, the markets were completely underpricing this risk.”  There were signs of trouble even before this week. Foreign funds that had spurred the market for much of last year abruptly turned net sellers in February, dumping a record amount of local stocks. Traders had also started swapping notes about certain funds bumping up against limits on their Korea exposure and various desks speculated about forced selling.  The rout in Korea accelerated this week even as global shares and oil prices edged higher on hopes the war could be short lived.

Those expectations have emboldened some investors, including Wilson Asset’s Haupt, to take a cautious long position. “Might not be for long, we will see. I just went long before it turned tactically oversold,” he said. Seongchan Kim, a Busan‑based naval engineering student who invested the entirety of his 17 million won savings from his 18‑month military service into equities last November, has also added more into the market.

“I tried short‑term trading before and lost heavily,” the 22-year old said. Back at Mirae, an elderly woman was told to wait in line for an hour before she could see someone. She had no interest in talking. The leverage, the war, the promises of a rebound — nothing mattered at the moment. She just wanted out. —With assistance from Abhishek Vishnoi, Jaehyun Eom, Gabrielle Ng, Jeanny Yu and John Cheng.

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