South Korea’s Retail ‘War Chest’ Shrinks by 51 Trillion Won, Threatening KOSPI Support

South Korea’s Retail ‘War Chest’ Shrinks by 51 Trillion Won, Threatening KOSPI Support

TREE NEWS reports: South Korean retail investors’ cash reserves have fallen sharply, raising concerns about the market’s ability to absorb foreign selling. Investor deposits held at brokerage accounts dropped to 88.68 trillion won (approximately $35.5 billion) as of October 22, down 51 trillion won, or 36.5%, from the record high of 139.69 trillion won set on June 4. The figure fell below the 90 trillion won mark on October 21 for the first time in nine months, hitting its lowest level since January 13.

The decline comes as the KOSPI index has faced sustained selling pressure. The benchmark index fell for seven consecutive sessions starting October 6 and plunged 7.57% on October 15 alone. It closed at 5,550.30 on October 23, down nearly 20% over the past month. Foreign investors have been net sellers throughout the period, and the shrinking retail cash pool is eroding a key source of support that had previously offset foreign outflows.

Deposits Plunge: 51 Trillion Won Evaporated in Four Months

Investor deposits refer to funds parked in brokerage accounts that have not yet been used to purchase stocks or other assets. They are often viewed as the “ammunition” for potential stock purchases. A decline in this metric can stem from either active buying or direct withdrawals, so the entire drop cannot be equated with capital flight. However, the speed and scale of the decline are noteworthy. In the first half of the year, deposits climbed steadily as the KOSPI rallied, with new inflows outpacing actual stock purchases. After peaking on June 4, deposits began a sustained decline, indicating that new retail money entering the market has slowed significantly and can no longer keep pace with buying activity.

The pace of the decline accelerated in October. Deposits fell from 100.44 trillion won on October 12 to 96.91 trillion won on October 15, and further into the 88 trillion won range the following week. Meanwhile, margin balances—a measure of leveraged investment—also fell to about 32 trillion won in mid-October. The simultaneous contraction of cash reserves and leverage reflects a broad cooling of investor sentiment amid heightened market volatility.

Retail Investors Still Buying, but New Money Has Dried Up

It is important to note that the decline in deposits does not mean retail investors have fully retreated. Data shows that from June 4 to October 23, individual investors were net buyers of 44.17 trillion won in the KOSPI market and 3.15 trillion won in the KOSDAQ market, with net purchases of ETFs reaching 28.25 trillion won. Retail investors remain net buyers in technical terms. The problem is that sustained buying has depleted existing cash, while new inflows have slowed dramatically. In the first half, new inflows exceeded purchase expenditures, allowing deposits to accumulate. In the second half, this positive cycle has reversed—retail investors are still absorbing supply, but the replenishment of their “ammunition” has slowed sharply, causing deposits to decline continuously.

This structural shift means that even if retail investors maintain net buying in the short term, their capacity to absorb foreign selling has been significantly diminished. The role of retail investors as “buyers of last resort” in the first half is becoming unsustainable as the cash pool shrinks. The combination of shrinking retail funds and persistent foreign selling creates a double pressure on the KOSPI. In the first half, retail investors used their ample deposits to absorb foreign sell orders on a large scale, stabilizing the market to some extent. Now that deposits have fallen back to early-year lows, retail investors’ buffering capacity has notably weakened. If foreign selling continues, the market lacks sufficient buying interest to offset it, and downside risks will accumulate further.

The simultaneous decline in margin balances is also worth watching. A contraction in leveraged funds often accompanies increased market volatility, and forced liquidations could trigger a negative spiral, further depressing the index.

Rebound Prospects: A Tug-of-War Between Fundamentals and Risk Sentiment

There is clear divergence in market views on the KOSPI’s outlook. Optimists argue that the profitability of core companies, particularly chipmakers, remains solid, and the index is significantly undervalued relative to fundamentals, leaving room for a recovery. However, cautious voices are equally strong. One securities firm official noted: “The recent decline in the KOSPI is indeed excessive relative to earnings fundamentals, but the catalyst that previously drove the market—the artificial intelligence sector—now faces considerable credit risk concerns, so it is too early to expect a sustained rebound.”

The emergence of AI credit risks has shaken the core logic that supported the market’s valuation expansion. Until this uncertainty dissipates, a large-scale return of retail funds is unlikely, and the continued shrinkage of the “war chest” will leave the KOSPI without sufficient private capital support during periods of stress.

Key Takeaways for Investors

• Liquidity risk is rising: The sharp decline in retail deposits reduces the market’s ability to absorb foreign selling, increasing the potential for sharp downside moves in the KOSPI.
• Leverage unwind adds to volatility: Falling margin balances raise the risk of forced liquidations, which could amplify market swings.
• Watch foreign flows and AI sentiment: A stabilization in foreign selling and clarity on AI-related credit risks are key prerequisites for a durable rebound.
• Fundamentals may provide a floor: Despite the negative sentiment, solid earnings from chipmakers could limit the downside for quality names.