Panic Sweeps Korean Stocks in Biggest One-Day Crash on Record

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Panic Sweeps Korean Stocks in Biggest One-Day Crash on Record.

stock :: 11hrs ago :: source - bloomberg

By Sangmi Cha

(Bloomberg) -- Panic swept through South Korea’s trading floors as concerns over the Middle East conflict sent the world’s hottest stock market to its biggest-ever selloff.

Photographer: SeongJoon Cho/Bloomberg

From Wall Street strategists to mom-and-pop traders, few saw it coming. Optimism on artificial intelligence and the ensuing demand for memory chips was so strong that retail investors were piling in with borrowed money and analysts were raising their already-bullish calls on Korean equities.

Then came the Iran war. While the conflict has dragged down equities worldwide on concern that higher oil prices will stoke inflation, Korea’s losses have been exacerbated by a record build-up of margin debt. Leveraged wagers that once magnified gains are now accelerating declines, as heavy borrowing turns into forced liquidation with prices in freefall.

“Moves are too extreme so forecasting feels almost impossible — analysis doesn’t really help,” said An Hyungjin, chief executive officer at Seoul-based Billionfold Asset Management Inc. “Retail investors seem to hesitate as well, bids are fading since yesterday. While we’re picking quality names and hedging, this isn’t a clear opportunity.”

The selloff is a stark reminder of how swiftly market exuberance can turn into anxiety. Insatiable demand for memory chips and optimism over corporate reforms had helped push the Kospi up nearly 50% at its peak this year.

Yet there were signs that things were starting to get out of control. Margin debt as well as investor deposits at brokerages surged to new highs, with the rally focused on a handful of big stocks.

“There’s been a lot of buying on credit, especially those heavyweight stocks, with investors putting down only 30%-40% in margin deposit,” said Kim Dojoon, chief executive and investment officer at Seoul-based Zian Investment Management.

Those holdings are seeing forced liquidation, and if there’s another drop on Thursday, nobody will rush to catch a falling knife, Kim said.

That’s in part because economic uncertainties are rising — traders now see two rate hikes by the Bank of Korea on inflation risks. The country is among the most exposed to higher energy import costs.

One big question is whether policy makers will take action to stem the slide.

President Lee Jae Myung’s administration actively encouraged equity investment, seeing a booming stock market as one way to relieve economic woes ranging from sluggish consumption to a property bubble. Just last week, Lee’s office said the president himself has put his apartment on sale — taking action as top officials encouraged a so-called money move away from real estate into equities.

The government is closely monitoring stock markets and will actively use its 100 trillion won market stabilization program in case of excessive market volatility, Financial Services Commission Chairman Lee Eog-weon said in a meeting with market experts. Even with the slide, the Kospi remains up 21% this year and above the 5,000 milestone, which was part of Lee’s campaign slogan.

The Middle East conflict notwithstanding, the macro backdrop has been favorable, with chip shipments buoying exports and consumer sentiment getting a lift from equity gains.

Energy shares were among those that managed to rise on a bleak day. Daesung Energy Co., Kukdong Oil & Chemicals Co. and Korea Petroleum Industries all rose about 30%. Foreign investors ended up net purchasing 231 billion won ($157 million) worth of Kospi stocks after offloading more than 12 trillion won of holdings over the past two sessions.

This “may create select opportunities to build positions in companies and industries that are now trading at attractive prices,” said Park Sojung, a portfolio manager at Matthews Asia. “Korean industrials such as defense and shipbuilding may again be highlighted as beneficiaries of global instability, constrained supply, and Korea’s growing strategic importance.”

--With assistance from Winnie Hsu, Haram Lim and Kurt Schussler.