When Choi Jong Hyun found his 50 million won ($46,415) annual salary wasn’t enough to cover the 8 percent jump in rent for his Seoul apartment, he decided to cut back on stock investments rather than take on debt.
“I would rather cash out the stocks I now hold and not pay additional interest,” Choi, 32, who works in the financial industry and has about 50 million won of investments, said by phone on Sept. 24.
Investors like Choi are exiting South Korea’s stock market as rental costs climb to the highest level since at least 1986 and household debt rises to a record. Individuals sold a net 3.1 trillion won of shares in September, the most in nine months, while trading of Kospi index stocks fell to a six-year low, according to data compiled by Bloomberg.
The retreat by those investors, who accounted for about 45 percent of the nation’s equity trading this month, threatens to limit gains in the Kospi, which has rallied 8 percent since the end of June, according to Barclays Plc (BARC) and Hanwha Investment & Securities Co. (003530) Consumer confidence sank to a five-month low in September, even after a rebound in exports fueled the fastest economic growth in two years last quarter.
“Local participation is quite low,” Chanik Park, the Seoul-based head of Korea equity research at Barclays, said by phone on Sept. 24. “Consumer sentiment and investor sentiment at this moment is not that positive.”
The Kospi climbed 4.4 percent in September to 2,011.80 through last week, bringing its gain this year to 0.7 percent. The won strengthened 3.4 percent to 1,073.65 this month through Sept. 27, while the cost of protecting the nation’s sovereign debt against nonpayment using credit default swaps fell 10 basis points to 76, according to CMA. The yield on the nation’s five-year government bonds fell five basis points to 3.06 percent last week. The benchmark gauge closed 0.7 percent lower today at 1,996.96.
Foreign investors have fueled the Kospi’s rally as data showed the economy expanded 1.1 percent in the three months through June and exports jumped at a quicker-than-estimated 7.7 percent rate in August. International money managers plowed a net $7 billion into South Korean shares this month, the most on record, according to exchange data compiled by Bloomberg. The Kospi is valued at 1.06 times net assets, a 47 percent discount to the MSCI All-Country World Index.
“Local retail investors are likely to return to the equity market by the end of this year when the economic uncertainties are cleared and this year’s corporate profit figures are released,” Cho Seong Joon, a Seoul-based strategist at NH Investment & Securities Co., said by phone on Sept. 27.
For now, sales by individual investors are accelerating. Outflows this month were more than twice as large as the 1.4 trillion won of withdrawals during the first eight months of the year, data compiled by Bloomberg show. The 100-day average value traded of Kospi shares declined to 4.03 trillion won on Sept. 27, the lowest level since June 2007.
“Individual investors will be the group that could drive up trading volumes but this won’t be easy,” Kang Hyun Cheol, a strategist at Woori Investment & Securities Co., said in a telephone interview in Seoul on Sept. 25.
Individuals have low confidence and are also reluctant to buy as Kospi has struggled to pass a resistance level at 2,050, Kang said. The benchmark gauge has approached that level at least six times during the past two years before resuming declines, data compiled by Bloomberg show.
Finance Minister Hyun Oh Seok said on Sept. 25 that household spending is weak due to high levels of debt. Consumer confidence fell to the lowest level since April this month, according to the Bank of Korea. Home loans and credit extended to households increased 1.8 percent in the second quarter to a record 980 trillion won, the monetary authority said in an e-mailed statement on Aug. 22.
Lee Won Tae plans to start selling his 40 million won of equity investments to repay debt before interest rates rise. The 42-year-old senior manager at CJ Systems Co., an information technology service provider, took out a 200 million won mortgage four years ago to buy a three-room apartment in Mokdong, an eastern Seoul neighborhood known for its cram schools.
South Korea’s central bank, which kept its benchmark interest rate at 2.5 percent for a fourth straight month on Sept. 12, will probably increase it to 3 percent by the end of 2014, according to Goldman Sachs Group Inc.
‘Time to Exit’
“I’m eying a good time to exit,” said Lee, who earns about 100 million won a year and has two elementary school children. “I can barely support my family as I want my wife to take care of kids at home. Our budget will become much tighter as the kids grow.”
Younger professionals are also exiting the stock market as rental costs rise. Kookmin Bank’s index of lump-sum deposits used to pay rent in Seoul, known as Jeonse, climbed to a record 102.5 in August, the highest level since the lender began tracking the data in 1986.
The average Jeonse rent for Seoul apartments has increased for 12 straight months to 280 million won as of August, according to the Korea Appraisal Board.
Lee Jong Kyeong, 31, sold about 30 million won of shares and an exchange-traded fund when taking out a bank loan to pay the deposit for renting an apartment in central Seoul this year.
“Without any additional income, I had to cash out of my stocks,” said Lee, who works at a financial company in the capital. “I didn’t see significant returns on the shares that I own anyway.”