Where Has Korea's Leverage Gone: Four Key Indicators to Watch

Glonghui, July 21 – The Industrial Securities Strategy team led by Zhang Qiyao stated that the current round of leverage reduction in the Korean stock market is being monitored from four dimensions:1. Margin balance: Comparing the largest margin balance declines during previous deleveraging phases, the current unwinding process is not yet halfway complete. As of July 16, the margin balance in the Korean stock market stood at 33.36 trillion KRW, representing 0.57% of total market capitalization. Since its peak, the margin balance in this round has dropped by 13.6%. The pace of deleveraging is faster than during the bear markets of 2018 and 2022 but slower than the subprime crisis in 2008. When compared to margin drawdowns in earlier deleveraging periods (30%~70%), the current unwinding process is still less than halfway through.2. Retail brokerage guarantee balance: Has fallen to the lowest level since early February. As of July 16, the retail brokerage guarantee balance declined by 28.7 trillion KRW to 108.1 trillion KRW, hitting the lowest level since early February this year, which points to a notable weakening of retail investors’ carrying capacity.3. Forced liquidation scale: Has significantly fallen from recent peaks. From July 13 to July 16, the size of forced liquidations in Korea was around 10 billion to 40 billion KRW, with the proportion of unsettled margin dropping below 4%, a clear decrease from the previous peak of 140 billion KRW/10%.4. Leverage ETF scale: Has declined significantly, but the reduction was almost entirely due to NAV drops, as most ETF share volumes actually rose against the trend. As of July 16, the AUM of the top ten leverage-related ETFs in Korea fell from $43 billion to $25 billion, with leverage exposure as a share of Korean market capitalization dropping from 2.1% to 1.6%. Estimates suggest that market maker rebalancing flows triggered by every 5% price swing accounted for 11% of Korea’s average daily turnover over the past month, down from 17%. It is noteworthy that this scale reduction was almost entirely due to NAV declines, while most leveraged ETF shares saw inflows, recording nearly $6 billion of net inflows during the Korean market correction phase.Among the four dimensions, considering market cap share, trading volume share, and the contribution of net inflows, leveraged ETFs are the key observation indicator, and changes in their AUM are highly correlated with the volatility of Korean stocks. If the scale of leveraged ETFs falls back to early April levels or the liability side continues to see sustained outflows, it can be interpreted as a clearing of leverage pressure.In summary, current positive signals in market liquidity include: 1) the size of the top ten leveraged ETFs has dropped nearly 40% from the peak, reducing the gamma hedge impact of price fluctuations, especially for SK hynix; 2) retail investors have continued to redeem their positions in domestic Samsung Electronics leveraged ETFs for the first three trading days of this week; 3) Korean retail margin balances show signs of stabilization; and 4) foreign capital has shifted from unilateral outflows to stage-wise inflows—Goldman Sachs PB data also indicates some recent hedge fund return. Historical experience shows that foreign capital inflows often coincide with inflection points to the upside.