Retail investors running low on 'ammunition' as Kospi slides below 7,000

Investor deposits held at brokerages fell to their lowest level in five months, dropping into the 103 trillion won range, as the Kospi slid below the 7,000 mark.

The deposits totaled 103.88 trillion won ($70.1 billion) as of Wednesday, according to the Korea Financial Investment Association — the lowest since Feb. 13, when they stood at 99.27 trillion won.

The figure had climbed sharply from 87.83 trillion won at the end of last year, peaking at 139.69 trillion won on June 4. It has since trended lower as market volatility increased through July.

Investor deposits represent cash transferred into brokerage accounts to buy shares but not yet deployed — essentially a pool of standby funds waiting on the sidelines.

The drawdown is attributed to retail investors either buying the dip or withdrawing funds outright after the Kospi plunged 31.5% from its intraday high of 9,385.59 on June 19 to an intraday low of 6,429.03 on Sunday.

A decline in investor deposits does not necessarily mean investors are abandoning the market. However, a shrinking pool of standby funds signals that retail investors are running low on the "ammunition" needed to absorb future selling by foreign investors and others.

Foreign investors posted net selling of 9.83 trillion won on the Kospi this month through Friday, while retail investors net bought 10.76 trillion won, helping to put a floor under the index.

Retail buying momentum is fading, however. Retail investors net bought 35.09 trillion won in May and 42.4 trillion won in June, but their net purchases this month have fallen sharply to the 10 trillion won range.

Foreign investors have been net sellers for three consecutive months — offloading 44.72 trillion won in May and 48.62 trillion won in June before selling more than 9 trillion won so far this month.

The balance of margin loans — a gauge of debt-fueled investing — stood at 32.75 trillion won on Thursday, the lowest since April 9, when it was 32.72 trillion won.

The margin loan balance represents money that investors have borrowed from brokerages to buy shares and have yet to repay, reflecting how heavily retail investors are relying on borrowed funds.

The sharp swings in the market recently appear to have made retail investors more cautious than they were during the rally earlier this year.

"The resumption of military tensions between the United States and Iran has pushed oil prices back to their March-to-May levels, and markets are once again focusing on inflation risk," said Kim Seong-geun, a researcher at Mirae Asset Securities. "A conservative stance toward equities appears warranted for now."

Lee Jae-won, a researcher at Yuanta Securities Korea, said the rebound in oil prices and interest rates driven by the renewed US-Iran conflict represents a macroeconomic variable that could constrain the sustainability of foreign investor flows. "However, the Kospi's forward price-to-earnings ratio has fallen to financial-crisis levels, and on a relative valuation basis adjusted for return on equity, the index sits in a zone of extreme undervaluation," he said.

He added that foreign ownership of Samsung Electronics and SK Hynix has also fallen to historically low levels, leaving significant room for additional buying if the exchange rate stabilizes and spot purchases continue. "That said, a peak in forced selling does not necessarily signal a trend reversal, so it is appropriate to prioritize large-cap semiconductor stocks and broaden exposure to strong-earnings and oversold sectors — including Kosdaq — as supply-demand conditions improve through deleveraging."