Traders are now more exposed to a fall in share prices

US traders borrowed US$460bil from banks and financial institutions to back shares, reports said. (August file pic shows traders working on the floor of the New York Stocks Exchange. - AFP)

STOCK market activity has reached record highs and so have margin debt levels.

Traders are now more exposed to a fall in share prices than at the height of the dot-com bubble at the turn of the century, and just before the financial crisis during the 2007 peak, said the Telegraph.

US traders borrowed US$460bil from banks and financial institutions to back shares.

Once cash and credit balances held in margin accounts of US$278bil were subtracted, this left net margin debt of US$182bil in July, said the Telegraph, citing data from the New York Stock Exchange.

The current stock market frenzy is reminiscent of the days prior to the 1929 stock market crash, said the Telegraph, except this time, margin debt is dominated by large hedge funds rather than retail investors.

The hope is that being more professionally run, these funds would act more responsibly in steadily unwinding their positions.

However, the reality of the situation is that borrowing on margin requires positions to be exited quickly to prevent losses; thus, a steady unwinding is impossible, said the Telegraph.

A key indicator of risk, the Chicago Board Options Exchange Volatility Index, or VIX, often known as the investor fear gauge, closed in the last week of August at 12.05 points, only three points from a record low, said the Telegraph.

Rising levels of debt is something to watch out for; record levels of debt incurred to buy shares are enough to sound alarm bells.

In case of sharp falls in share prices, these traders would be frantically looking for ways to cover losses incurred by margin trading.

In today’s stock market, the only modification to buying on margin is that the US Federal Reserve currently has an initial margin requirement set at 50%, said the Telegraph.

Despite that limit, margin debt has hit record highs.

Faced with rising non-performing loans from traditional sectors, China’s big banks are turning to new segments for financing.

For the first half of this year, the banks reported an increase in bad loans from the Yangtze delta, the country’s main export-focused manufacturing belt, as well as the Bohai industrial rim, said Reuters.

Several lenders said they expected bad loans to continue rising this year, especially from creditors in the steel, wholesale and shipping sectors.

Some of the high growth industries being courted are health, food and technology; other new sectors include asset management, trust lending and financial leasing.

Some banks, like Bank of China (BoC) , were also looking to extend loans to domestic clients through their overseas branches to capitalise on higher interest margins, said Reuters.

BoC said loans at its overseas branches rose almost 40% year-on-year at the end of the second quarter to 262 billion yuan.

An agile banking sector would be quick to spot problem areas of lending and develop new sectors. In that way, it maintains its sustainable operations and to a certain extent, earnings.

It also uses the opportunity to develop long-term areas of financing of a wider and more diversified spectrum.

In the Singapore property scene, the slew of measures to cool prices looks like they are having an effect.

Developers’ profit margins for new condominium launches have halved from a year ago, said the Singapore Business Times (SBT), quoting a focused study by Knight Frank.

Looking at condominium launches on 99-year leasehold sites acquired through the government land sales (GLS) programme, the global consultancy estimated that new launches this year could have seen margins dive to 5%-10.3%, said SBT.

In the hot market last year, record prices resulted in developers churning margins of 15.6%-22.5% for new launches.

Knight Frank studied a total of 24 project launches on GLS sites, but excluded freehold sites.

The average take-up rate in condominium launches has also fallen to 32.3% this year, down from 67.2% in 2013 and 96.9% in 2012, said SBT, based on the study.

In their efforts to cool the property market, governments should be careful not to cause a cash squeeze on developers.

In the case of China, financing rules for listed property firms are being relaxed by allowing those that qualify to sell medium-term notes in the interbank market, said Reuters, quoting three sources with knowledge of the matter.

Sales have slowed, new construction has dropped off sharply and banks have turned more cautious about lending to developers and home buyers, said Reuters.

Money raised from the sale of notes can be used to fund new residential housing projects, supplement operating cashflows and repay bank loans.

“Developers that qualify include those that participated in affordable housing projects and focused on sales of medium and small-sized homes,” said Reuters, quoting one of the sources.

Columnist Yap Leng Kuen notes that for every action taken, there can be a reaction that is positive or totally negative.

BY YAP LENG KUEN