Investor Caution Grips South Korean Markets Amid Martial Law

Following President Yoon Suk Yeol's declaration of martial law, individual investors have been rapidly selling off stocks and holding their funds in cash. The heightened uncertainty in the stock market has led to a noticeable trend of cautious observation rather than active investment.

According to the Korea Financial Investment Association on Dec. 12, the total balance of comprehensive asset management accounts (CMAs) at domestic securities firms increased from 83.84 trillion won (approximately $58.522 billion) on Dec. 3, just before the martial law declaration, to 86.31 trillion won on Dec. 11, marking an increase of 2.47 trillion won. The CMA balance had peaked at 88.16 trillion won on Aug. 23 before dropping to 83 trillion won earlier this month. CMAs invest customer funds in products such as treasury bonds, certificates of deposit (CDs), and corporate bonds. These accounts are popular during high-interest-rate periods because they offer higher returns than savings accounts at commercial banks, even for one-day deposits.

During this period, most of the increase in CMA balances came from individual investors. The balance of individual CMAs rose from 71.68 trillion won on Dec. 3 to 73.89 trillion won on Dec. 11, representing an increase of 2.2 trillion won, accounting for 89.2 percent of the total increase.

The surge in stock market cash reserves following the declaration of martial law is not limited to CMAs. Investor deposits also rose significantly, increasing from 49.9 trillion won on Dec. 3 to 52.92 trillion won on Dec. 11, showing an increase of 3.02 trillion won. The balance of margin loans, on the other hand, decreased from 16.57 trillion won to 15.31 trillion won during the same period, marking a drop of 1.26 trillion won. This is the first time the margin loan balance has fallen to the 15 trillion won range since Aug. 27, 2020, when it stood at 15.88 trillion won. This strongly indicates that investors are avoiding risky asset investments and liquidating their holdings into cash.

The sharp decline in investor sentiment can be attributed to the belief that the already sluggish domestic stock market is unlikely to recover soon due to political uncertainty. Indeed, individual investors net sold 1.76 trillion won worth of stocks in the KOSPI market and 665 billion won in the KOSDAQ market between December 4 and 12, totaling 2.42 trillion won. Even on this day, individuals sold off 244.4 billion won worth of stocks in the main exchange despite the market's upward trend as the KOSPI index fluctuated following President Yoon's public address. The unstable exchange rate following the martial law declaration has also led investors to shy away from actively purchasing foreign stocks.

Jung Yeo-kyung, a researcher at NH Investment & Securities, predicted, "If the impeachment crisis reduces sales in local businesses and domestic consumption by foreigners by 5 percent this month, South Korea's GDP for the year could shrink by 0.04 percentage points." Choi Jae-won, a researcher at Kiwoom Securities, added, "Given the likelihood of a prolonged impeachment crisis, volatility in the stock and financial markets is expected to increase in the near term. Although the stock market has rebounded due to bargain hunting, profit-taking and sector rotation driven by political risks are likely to continue."