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Investor deposits have fallen by more than 28 trillion won ($18.8 billion) in just over a month, but analysts say the decline should not be read as a sign that retail investors are fleeing the stock market or that demand is collapsing.

Net purchases of shares and ETFs by retail investors exceeded the drop in deposits, and estimates suggest that actual cash — excluding margin financing — continued to flow into brokerage accounts on a net basis.

Risks remain, however. Margin financing balances have hit a record high, and retail buying has been concentrated in the Kospi 7,000–8,500 range, raising the possibility that individual investors could become sellers if the index rebounds.

According to the Korea Financial Investment Association, investor deposits reached a record 139.7 trillion won on June 4, then fell to 111.3 trillion won on Tuesday — a decline of 28.4 trillion won, or 20.3 percent.

But a drop in deposits does not necessarily mean money is leaving the market. When retail investors buy shares, deposits fall by the amount spent on those purchases. Deposits also tend to rise when share prices climb and fall when they decline, making the figure a gauge that moves in tandem with the broader market.

In fact, retail investors bought domestic shares aggressively after the Kospi set a closing-price record on June 22. They net-purchased 27 trillion won worth of individual stocks and 8.8 trillion won worth of domestic equity ETFs.

Over the same period, customer deposits fell 21 trillion won. Combined net purchases of shares and ETFs totaled 35.8 trillion won — 14.8 trillion won more than the decline in deposits.

Hyundai Motor Securities interpreted this as evidence that retail money was deployed into stock purchases rather than withdrawn from the market. Kim Jae-seung, a researcher at Hyundai Motor Securities, said the drop in customer deposits should be seen as investment funds being used up through active buying during the market downturn that has continued since late June. He added that it would be premature to interpret the decline in customer deposits as a sign that retail investors are abandoning the domestic market or that retail demand is deteriorating, saying the drop in deposits is a result, not a cause.

Shinyoung Securities reached the same conclusion. After adjusting for settlement lags and changes in margin financing and unsettled receivables to estimate actual cash inflows from retail investors, the brokerage calculated that roughly 112 trillion won in actual cash had flowed into brokerage accounts from retail investors since November last year. Over the same period, the increase in deposit balances was 33.4 trillion won — meaning actual inflows were more than three times the rise in balances.

Kim said that looking only at deposit balances understates the true scale of inflows by about two-thirds, and described the recent decline in deposits as closer to a deployment of firepower than an exhaustion of it. The roughly 79 trillion won gap between the two figures, the analysis found, did not leave brokerage accounts — it was used to buy shares immediately upon entering those accounts and therefore never showed up in deposit balances.

Shinyoung Securities also noted that in past episodes of sharp Kospi declines, the practical benefit of mechanical selling was limited. An analysis of 48 instances since 2000 in which the Kospi fell 5 percent or more in a single day found that returns turned positive more often than not after a given period following the drop. The average return one week after a sharp decline was 3.6 percent, and the three-month average return was 13.2 percent.

Looking only at the 11 instances of single-day drops of 8 percent or more, the three-month average return rises to 21.4 percent. By contrast, 13 of the 48 cases recorded negative six-month returns after the sharp decline. Of those, 11 occurred during the IT bubble collapse of 2000–2002, and the remainder coincided with the onset of financial system crises such as the Lehman Brothers bankruptcy.

Shinyoung Securities said the current correction is difficult to characterize as the start of a systemic crisis or a bubble collapse, and cautioned against panic-driven selling during sharp market drops.

The brokerage cited the fact that the Kospi's 12-month forward earnings per share has been revised up by more than 5 percent even after the recent peak, while the 12-month forward price-to-earnings ratio has fallen to the mid-6x range as share prices declined. In other words, corporate earnings forecasts have not deteriorated, yet share prices have fallen sharply.

Kim said selling during a sharp decline has statistically offered little practical benefit, and that mechanical selling during a downturn — when the cause is not systemic risk — has historically meant missing the subsequent rebound.

Among the components of retail demand, leveraged investment funds are seen as the most vulnerable link. Margin financing balances hit a record 38.6 trillion won on June 24. That is 5.8 times the 6.6 trillion won recorded in March 2020, and 55 percent more than the 2021 peak of 24.9 trillion won.

However, the absolute size of margin financing balances alone is not sufficient to assess systemic risk, as overall market capitalization has also grown. The ratio of margin financing to market capitalization is in fact lower than in the past. Another difference from previous cycles is that margin exposure is concentrated in large-cap stocks such as Samsung Electronics and SK Hynix rather than small- and mid-cap theme plays — companies with high trading volumes and relatively solid earnings foundations.

Going forward, selling pressure on a rebound may matter more than retail investors' capacity for additional buying. Kim said that given the concentration of retail buying between Kospi 7,000 and 8,500, attention should focus less on diminishing investment capacity and more on the potential for sell-offs when the market recovers, noting that retail investors tend to sell when the domestic market rises and buy when it falls.


kacew@heraldcorp.com