Korean Seniors' "Last Stand": Surrendering Insurance, Borrowing Money, Going All-In on Samsung

Original Author: Koole, TechFlow

How frenzied has the South Korean stock market been recently?

The KOSPI index surged from 4000 points to nearly 8000 points in just six months. According to reports from the JoongAng Ilbo, the employee restrooms at a department store in Seoul's Gangnam District were completely packed every day at 3:30 PM closing time, with employees hiding inside to check their portfolios.

As of mid-May, the balance of margin loans taken out by South Korean retail investors from securities firms hit a record high of 36.47 trillion won (approximately 170 billion yuan), doubling within a year.

But there's something peculiar about where the money for this狂欢 is coming from.

According to a report in The Korea Herald, the three major life insurance companies in South Korea saw a combined 4.9 trillion won (approximately 23 billion yuan) in policy lapses during the first quarter, a 16.3% year-on-year increase. Savings-type life insurance policies saw the sharpest rise in surrenders, up 23.2%.

Savings-type life insurance is fundamentally a product designed to leave money for family. Surrendering these policies guarantees a loss, as the cash surrender value is lower than the total premiums paid. Yet, an increasing number of people are choosing to take a loss and cash out.

Where is this cashed-out money going? Most likely into another stock trading account.

Data obtained by a National Assembly member from the Financial Supervisory Service (FSS) shows that as of the end of the first quarter, South Korean retail investors had borrowed 27 trillion won from the top ten brokerages to trade stocks. Over 62.3% of this debt was incurred by individuals aged 50 and above.

The debt of the 60+ age group surged from 3.95 trillion won to 8.02 trillion won in one year, the sharpest increase among all age demographics.

Surrendering insurance to buy stocks – an entire generation of Koreans is using their future nest egg to try and catch the current market bottom.

Borrowing Because of a Bull Market?

Leverage in a bull market is called "amplifying gains," but in a bear market, it's "accelerating a wipeout." Korean seniors have already experienced one roller-coaster ride firsthand.

In early March, when the US and Israel launched a joint airstrike on Iran, global markets panicked. South Korea's stock market triggered circuit breakers for two consecutive trading days, with the KOSPI plunging nearly 13%.

According to an FSS report from late March, during that downturn, of the nation's 4.6 million retail trading accounts, those using margin loans suffered an average loss of 19%, compared to an 8.2% loss for those who didn't. Those borrowing to trade stocks lost 2.3 times more than those who didn't.

Broken down by age, the leveraged accounts of those over 60 suffered the most, with an average return of -19.8%, the lowest of any age group.

What's worse was waiting for them: margin calls.

Leveraged accounts have a margin call line. When the market value of the stocks in the account falls below this line, the broker sells them without consulting the account holder. The FSS received numerous complaints from retail investors at the time, such as "My stocks were sold without my knowledge" and "I was charged exorbitant interest."

A significant portion of these complaints came from elderly investors, who were unfamiliar with the trading rules. However, it turned out that those who held on through the March volatility ultimately won.

Korean stocks recovered all those losses within just over two months and have been climbing ever since. Those who endured the March downturn saw their accounts fully recover, and some even made a profit.

With volatility and upward potential, it was considered a successful "getting on the bus" experience, even if it meant borrowing to do so.

This successful experience thus becomes an excuse for even bolder moves next time. After the March circuit breakers, margin loans for Korean retail investors didn't shrink; they surged instead. Public data shows that total margin loan accounts hit a record high of 25 trillion won by the end of April and continued climbing to 36.47 trillion by mid-May.

In just a month and a half, Korean retail investors collectively borrowed an additional 11 trillion won (approximately 52 billion yuan).

Zooming into the individual level: In early May, a South Korean civil servant posted a screenshot on Blind, the Korean workplace community:

His account showed he had gone "all-in" on SK Hynix with 2.3 billion won (approximately $1.7 million), of which 1.7 billion was borrowed from a broker. In other words, he had 600 million won of his own capital, leveraged with 1.7 billion won of borrowed money.

Four days later, he updated that he had already made a profit of 267 million won.

On the same day, another employee of Seoul Metro, in his 20s, posted that rather than miss this wave, she would rather "see a complete crash" and go all-in, using 150% margin financing to buy SK Hynix. She even used the borrowed money as collateral to borrow again.

Such posts are discussed daily on the Korean Blind community.

Regulators weren't entirely oblivious to this FOMO frenzy. In late March, the FSS summoned major brokerages to strengthen risk controls, and some temporarily restricted new margin loans for overheated stocks. But the money already lent out remains, accruing interest at annual rates of 7% to 9% daily.

At an 8% interest rate, Korean retail investors collectively would pay nearly 3 trillion won (approximately 14 billion yuan) in interest to brokerages annually.

However, a 60-year-old leveraging up is a different story from a 30-year-old doing the same. A 30-year-old who gets margin-called has decades of salary ahead to recover. A 60-year-old being margin-called might lose their entire pension, left with depleted energy and an inability to earn back the losses.

If the next circuit breaker event hits, there may be no "recovery in two months" this time around.

At Tapgol Park, the Fluid Intelligence Among Seniors

Like all Korean retail investors, the nation's seniors are borrowing money to bet primarily on Samsung Electronics and SK Hynix.

Samsung Electronics is up 138% year-to-date, and SK Hynix has surged 189%. While the KOSPI has risen 80% overall, excluding these two companies, the remaining index components have only gained about 30%.

Combined, these two stocks account for over 43% of the KOSPI index weighting. Essentially, when these two rise, the entire Korean stock market rises with them.

A significant portion of the money borrowed by seniors flows into these two stocks. One-quarter of Korean retail investors' net buying this year went into Samsung and SK Hynix. The remaining three-quarters were spread across other stocks, which have only gained about 30% overall this year.

In Seoul's Jongno District, Tapgol Park is one of the city's oldest public parks. Young people rarely visit. Its regulars are groups of retired seniors who come every morning for free coffee, chatting about daily life, and playing chess. Time seems to flow slowly there.

According to the Kyunghyang Shinmun, the topics of conversation at Tapgol Park have changed this year.

Amidst the coffee-drinking, phrases like "My Samsung account went up again" crop up. Those playing chess ask, "Did you buy Hynix?" A 77-year-old gentleman told his middle school friends that Samsung and Hynix have been performing well lately and he's made a bit of money in his account.

A corner of Tapgol Park, crowded with elderly people playing chess

Source: Seoul Shinmun

But he didn't mention whether he had borrowed money, nor how much.

These topics don't appear out of thin air in the park. It's somewhat like an intelligence exchange at the village square. Perhaps one senior hears another made money in the park, checks their own account the next day, tries borrowing a little, and then potentially borrows more and more.

But asking why Korean seniors end up in leveraged stock trading accounts points directly to their retirement security situation.

According to OECD data, the relative poverty rate for South Koreans aged 65 and over is around 40%, the highest among OECD member countries. The replacement rate for the National Pension Service (South Korea's pension system) is chronically low. The OECD average is around 50%, whereas South Korea's is only about 31%.

Conversely, the labor force participation rate for those 65 and over is the highest in the OECD, meaning a large proportion of Korean seniors must continue working after retirement.

So, the free coffee often available at Tapgol Park is essentially a form of social welfare. A cup costs less than 500 won, a part of everyday life for seniors whose monthly pension is under $1,000.

But now, the seniors at Tapgol Park aren't just coming for free coffee and chess. They likely have KOSPI tickers open on their phones.

Since taking office, South Korean President Lee Jae-myung has actively promoted nationwide stock investment. He has publicly called himself a "big ant" (a term for retail investors in Korea) and included the KOSPI surpassing 5,000 points as a policy goal.

In other words, seniors borrowing to buy stocks is, to some extent, officially encouraged in South Korea.

The real bet these seniors are making is driven by anxiety: If they don't get on board now, they'll miss their last chance before retirement.

South Korea's semiconductor industry is cyclical, having experienced intense boom-and-bust cycles over the past three decades.

SK Hynix posted a loss of 4.26 trillion won in 2023, its worst performance in ten years. The transition from massive losses to a 72% operating profit margin in one quarter (surpassing Nvidia) underscores that cycles can turn just as quickly in the opposite direction.

And time might be the most precious commodity for these elderly leveraged investors.

The seniors at Tapgol Park are desperately trying to seize the current version's rally. The coffee is still free. The ticker on their phones never stops moving.