Decade-high margin levels in Asia help explain selling intensity

THE highest levels of margin debt used to buy stocks since the global financial crisis offer a clue as to why Asian shares tumbled, following a sell-off in precious metals.

The value of outstanding margin debt on China’s stock exchanges climbed to a record last week – amid soaring inflows into gold and silver exchange-traded funds (ETFs).

Similar measures for Taiwan and Japan surged to levels last seen in the financial crisis as gold, silver and global equities advanced to all-time highs.

The swiftness of the two-day pullback in precious metals and stocks is fuelling speculation – that some leveraged investors are being compelled to sell assets across their portfolios to meet funding obligations.

The “rapid unwind” across a number of asset classes is a sign that leveraged funds are exiting positions, said Nick Ferres, chief investment officer of Vantage Point Asset Management in Singapore.

The fund has “turned defensive”, with “a lot in short-dated bonds” in a bid to ride out the tumult, he said.

The selling of Asian stocks appeared relatively indiscriminate on Monday (Feb 2).

Tech-heavy markets such as South Korea slumped, sending the Kospi down by more than 5 per cent, while Taiwan shares, as well as US and European equity index futures, slid by more than 1 per cent.

Gold and silver plummeted. The US dollar strengthened for a second day, while Treasuries rallied across the curve.

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The escalating levels of leverage had already attracted the attention of Beijing. In January, Chinese authorities tightened rules on margin financing – a sign that they were growing uncomfortable with the recent rally in the country’s stock market.

The new rule requires investors to provide a margin that is equal to the full value of the securities they buy on credit, up from the previous threshold of 80 per cent. BLOOMBERG