South Korea’s financial regulator has vowed to curb short-term speculation by retail investors as their bets on tech stocks fuel fears of a market bubble.
Retail investors have made big bets on themes such as materials for electric car batteries, quantum computers and superconductors, making the tech-heavy Kosdaq one of the world’s best performers this year.
“Their investment patterns are very risky, so we are cracking down on leveraged buying and margin call risks,” said Lee Bok-hyun, governor of the Financial Supervisory Service. “They seem to have been lured by high volatility recently, which leaves more room for big profits.”
More broadly, he said retail investors lack incentives to invest for the long term. “Retail investors are not convinced of the long-term benefits of the market. We’ll expand and thoroughly implement measures to protect minority shareholders to restore market credibility and encourage their longer-term investment.”
With this in mind, Lee added that financial regulators will step up market supervision and strengthen punishment of those involved in unfair trading. The FSS has pledged more staff to help crack down on illegal sales activities by brokerages and asset managers, and the dissemination of false information by investment boutiques and advisory firms. The financial authorities plan to impose hefty fines and speed up investigations into irregular trading activities.
“It is important to root out unfair trading by institutions, large shareholders and insiders to regain investor confidence as there is a strong perception that only large institutions and large shareholders benefit from stock trading at the expense of retail investors,” Lee said.
His comments echo regulators’ concerns about leveraged speculative buying of “theme stocks” by Korean retail investors, with margin lending near historic highs.
Heavy retail buying of everything related to electric vehicle batteries has helped the Kosdaq gain about 20 per cent so far this year, more than double the 8 per cent rise in the benchmark Kospi Composite Index.
“Many retail investors are following a ‘high-risk, high-reward’ strategy, spurred on by sensational news and tips from YouTubers, Telegram [users] and other social media,” said Lee Seung-hoon, head of research at IBK Investment & Securities. “Their investment horizons are getting shorter and shorter, influenced by news flows with no fundamental basis.”
Analysts at Goldman Sachs have also expressed concern about the risk of margin calls for ordinary investors.
“There are some signs of overheating in the Kosdaq market in terms of stretched valuations, deteriorating earnings prospects, market concentration and leveraged retail activity,” John Kwon and other analysts wrote in a recent report.
Retail investors’ hopes for technological breakthroughs have fueled short-lived rallies in superconductors, quantum computers and energy storage material MXene in recent weeks, while geopolitical news such as Japan’s radioactive water discharge has sparked heavy retail buying of salt and seafood alternatives.
“Companies with visible data such as market size and earnings are no longer appealing to them as they seek profits of more than 10 times their investment,” said IBK’s Lee.
Despite the wild swings, analysts expect retail flows into the Kosdaq to continue given the high level of deposits in brokerage accounts since the pandemic.
Kim Mi-seon, a 56-year-old housewife in Incheon, is a fan of theme stocks. In August, she made a 20 percent return on her 30 million won ($22,000) investment in superconductor-related stocks.
“As soon as I heard the news about superconductors, I jumped into the stocks, excited by their potential,” Kim said. “Sometimes it is better to just cash in on a fad than to study things hard.”
