🚨 Market's 'Surprising Rebound' and Increased 'Debt Investment'

Today Korean Economic News | 2025.01.13

📌 'Debt Investment' Increased Following Market's 'Surprising Rebound'... Betting on KOSDAQ and Biotech Stocks

💬 Leveraged investments are increasing as the domestic stock market recovers. Margin loans are growing rapidly, especially in the KOSDAQ market, with many investors expanding their investments under the perception that the market has hit bottom.

1️⃣ Easy to Understand

As the stock market rebounds faster than expected, so-called 'debt investments'—borrowing money to invest in stocks—are increasing again. Investors are particularly focusing on the KOSDAQ market and biotech-related stocks.

Let me explain with an easy example. Mr. Kim hesitated to invest when the stock market fell last year. However, when the market recently rebounded, he judged that 'it has hit bottom now' and took out a margin loan from his securities firm to invest more than he currently had. He particularly purchased stocks of biotech companies in the KOSDAQ market, which he believes have high future growth potential.

Like this, many investors think 'now is the time to buy' and are investing even by borrowing money. A similar psychology is at work as using a credit card to buy more items than usual during a sale period. However, such debt investments can lead to significant losses if stock prices fall contrary to expectations, so caution is needed.

2️⃣ Economic Terms

📕 Debt Investment

"Debt investment" is a neologism meaning "borrowing money to invest," primarily referring to using borrowed funds for stock investments.

• While it can maximize returns if the investment yield is higher than the loan interest rate, losses are amplified in the opposite scenario.
• It tends to become particularly active when the stock market shows an upward trend.

📕 Margin Loans

Margin loans are services where securities firms lend money based on a customer's credit.

• Generally, loans are available up to a certain percentage of the value of stocks held by the customer.
• Interest rates apply, and a 'margin call' requesting additional collateral may occur if stock prices fall.

📕 KOSDAQ Market

KOSDAQ is a stock market operated by the Korea Exchange, focused on small and medium-sized enterprises and venture companies.

• Companies listed are relatively smaller compared to those on KOSPI, with many high-growth companies.
• It has characteristics of relatively high investment risk due to its smaller market capitalization and greater volatility.

📕 Biotech Stocks

Biotech stocks refer to shares of companies based on biotechnology.

• This includes biotech-related companies in various fields such as new drug development, medical devices, and diagnostic kits.
• They have high stock price volatility depending on clinical results or government policies, with high growth potential alongside high risk.

3️⃣ Principles and Economic Outlook

💡 Background and Diagnosis of Market Rebound

• The recent rebound in the domestic stock market is the result of several factors working together. First, expectations for interest rate cuts by the US Federal Reserve have had a positive impact on the market. Second, expectations for improved performance in major export industries such as semiconductors, along with expectations for global economic recovery, have stimulated investment sentiment. Third, buying pressure has flowed in as the perception spreads that the Korean stock market is undervalued by global standards. The KOSDAQ market, in particular, is expected to have a larger rebound because it experienced a relatively larger decline last year. Market experts have differing views on whether this rebound is a short-term bounce or a signal of a trend reversal.

💡 Risks and Opportunities of Leveraged Investment

• Leveraged investment through margin loans is like a 'double-edged sword.' It has the effect of amplifying returns when the market rises, but losses are also amplified when it falls. The current surge in margin loans in the KOSDAQ market suggests that investors' risk appetite has increased. This can be seen as a positive signal that optimism about economic recovery is spreading, but excessive leverage is also an element that can increase market volatility and threaten the financial soundness of individual investors. Particularly when leveraged investments are concentrated in highly volatile industries like the biotech sector, the possibility of market shocks due to unexpected negative factors being amplified should also be considered.

💡 Characteristics and Outlook of the Biotech Sector

• The biotech industry is a representative high-risk, high-return sector. New drug development can bring enormous profits if successful, but there is also a high risk of failure in the clinical process. The recent increased investor interest in biotech stocks is due to the prominence of health-related industries following the global pandemic, increased medical demand due to an aging population, and innovative developments in biotechnology. Additionally, the government's policies to foster the biotech industry and the expansion of open innovation by global pharmaceutical companies are increasing the growth potential of domestic biotech companies, enhancing their investment appeal. However, experts emphasize that a selective approach is important when investing in biotech stocks, with careful analysis of individual companies' pipelines, technological capabilities, and financial status.

4️⃣ In Conclusion

The 'debt investment' phenomenon that has emerged along with the 'surprising rebound' in the domestic stock market is an indicator of changes in investors' risk appetite and improved market sentiment. Particularly, the investment fervor for the KOSDAQ market and biotech sector reflects expectations for growth potential.

However, recognition of the duality of leveraged investment and a cautious approach are necessary. A strategy of borrowing to invest can bring high returns if the market moves as expected, but it can lead to serious financial damage if it moves in a different direction than anticipated. This risk is even greater when using leverage for highly volatile assets such as the KOSDAQ market and biotech stocks.

Investors need to establish appropriate investment strategies considering their financial situation and risk tolerance. If considering leveraged investment, it's important to limit its proportion in the overall portfolio and secure reserve funds to prepare for potential margin calls. Additionally, a systematic analysis and long-term perspective approach are needed rather than emotional investment decisions.

Policy authorities and financial institutions also need to monitor the 'debt investment' phenomenon. Excessive leverage can affect not only individual investors but also the stability of the entire financial market. It's important to foster a healthy investment culture through appropriate regulations and investor education.

Ultimately, the market rebound and increase in 'debt investment' may be positive signals reflecting expectations for economic recovery, but excessive optimism and leverage use should be guarded against. Investors should always keep market volatility in mind and establish wise investment strategies that balance risk and return.