Retail investors are pulling back from South Korea’s benchmark KOSPI as the stock market faces mounting pressure from uncertainties such as President Yoon Suk-yeol’s recent martial law declaration and the U.S. central bank signaling a slower pace of rate cuts.
The share of retail investors in KOSPI trading volume has dropped to around 47% this month, reflecting cooling investor sentiment. The margin debt balance, the sum of money investors borrow from the brokerage to buy securities or short sell stocks, and a measure of retail investor sentiment, fell from 20 trillion won earlier this year to 15 trillion won ($10 billion) recently.
Analysts suggest that a market rebound will require a slowdown in declining corporate earnings, reduced exchange rate volatility and the return of foreign investor buying.
Retail investors accounted for 47.31% of KOSPI trading volume during the first 18 days of December, down 3.64 percentage points from November’s 50.95%, according to the Korea Exchange on Dec. 22. This marks the lowest level in over two years since January 2023, when retail investor’s share fell to 45.83% as the KOSPI index plunged to the 2,200 range.
The decline in retail investor participation has been more pronounced this year. The share of retail investors in KOSPI trading volume peaked at 58.49% in June, driven by rate cut expectations and optimism around artificial intelligence semiconductors, which boosted the KOSPI to the 2,700 range.
But a series of setbacks eroded this confidence, including the Black Monday market crash in August triggered by U.S. recession fears, uncertainties regarding U.S. President-elect Donald Trump’s second term, and political risks involving President Yoon’s failed martial law and subsequent impeachment. Retail investor share in the KOSPI plummeted below the 50% mark to its current level of 47% within six months.
Even in the KOSDAQ market, which typically sees a higher share of retail investors than KOSPI, retail investor participation fell to 77.1% this month, down from 79.34% in October and 77.34% in November.
The shrinking margin debt balance further illustrates this trend. Data from the Korea Financial Investment Association shows the margin debt balance fell from over 20 trillion won in July to 15.87 trillion won as of Dec. 19, hitting a yearly low of 15.16 trillion won on Dec. 12.
Market stagnation is also reflected in the low stock turnover ratio. The annualized turnover ratio of listed stocks on the KOSPI stood at 187.05% this year, the lowest level since 2010, according to the Korea Exchange. The stock turnover ratio measures the total volume of shares traded in a specific period divided by the number of listed shares. A high turnover ratio indicates strong investor sentiment and active trading, while a low turnover ratio suggests weak engagement.
The KOSDAQ’s annual turnover ratio was 425.58% this year, the lowest in a decade since 2014′s 399.39%.
Retail investors are increasingly turning to U.S. stocks. According to the Korea Securities Depository, net purchases of U.S. stocks by Korean investors reached $622.96 million between Dec. 13 and 19, up 21% from the $515.9 million the previous week.
This surge in U.S. stock purchases is unusual given the strong U.S. dollar, which typically discourages foreign stock investments due to higher conversion costs. However, recent trends suggest that Korean retail investors view U.S. securities as a safer bet. While the KOSPI has dropped by more than 9% this year, the S&P 500 index has surged over 25%, driven by growth in Big Tech and a robust U.S. economy.
