Taiwan’s stock market crisis shows global dangers of too much leverage
(Bloomberg) – Few things evoke fear in the stock markets like a margin call. That fear turned into panic in Taiwan on Wednesday, offering another warning to the world about what can happen when leverage relaxes. But by the end of the morning, the local benchmark had fallen nearly 9% in the worst day-to-day performance in its 54-year history. New data has shown a worsening of the Covid-19 epidemic in an island where hardly anyone is vaccinated. A growing slump in global tech stocks has also undermined the appeal of an industry-dominated market. But the rapidity of the plunge that followed suggested greater forces were at play. For months, bull market skeptics around the world have warned that increased leverage makes stock markets riskier – and the explosion of Archegos Capital Management in March was a reminder of this. Still, stocks continued to climb, with the MSCI All-Country World Index closing at a record high as recently as Friday. In the United States, margin debt topped $ 822 billion at the end of March – the latest data available. That’s a 72% increase over one year. On a smaller scale, the same has happened in Taiwan. With their conviction and history on their side, investors have taken more and more leverage. The result was a 46% increase in margin debt this year to around NT $ 274 billion ($ 9.8 billion) two weeks ago, the highest since 2011. By comparison, the index of Taiwan’s benchmark rose only 19% during this period, indicating that people took out loans faster than stocks appreciated. Local investors had little reason to fear losses. Taiwan’s economy has become one of the biggest winners in the US-China rivalry. Its chipmakers flourished as Washington sought to hamper Beijing’s efforts to build a national chip industry. During President Donald Trump’s four-year tenure, the Taiex benchmark has become the best-performing stock market gauge in the world, gaining over 90% in US dollars. The euphoria began to dissipate this week as the threat of inflation sank the Nasdaq, with tech stocks around the world following suit. As the Taiex slipped 3.8% on Tuesday in Taiwan, the level of margin debt fell NT $ 12.6 billion, the most since October 2018. This suggests that traders have faced margin calls from brokers to cover losses on their equity accounts. stimulated greater relaxation of leverage. (Comparisons are skewed by the widening of daily price limits for individual stocks in 2015.) “Margin trading has boosted the Taiex in recent months, which could worsen declines in the event of margin calls. Said MasterLink Securities Investment Advisory Chairman Paul Cheng Fear of further losses was evident in a stock market where individual investors account for around 60% of transactions. The derivatives market exploded with activity: more than 1.75 million options on the Taiex changed hands on Wednesday, the third busiest day since 2016. Traders caught bearish contracts even as dozens short-term options expired, the price of a put skyrocketing. as much as 7,757% Kevin Lee, trader at .KGI Securities, who has been a local stock trader for a decade, said clients began to panic as the morning wore on. “There were non-stop orders coming in,” Lee said. “Investors were crazy because there was a lot of news during trading hours and we didn’t know if it was true or not.” By the end of the day, the index had reduced its losses to 4.1%. But the damage to investor confidence was already done. For more articles like this please visit us at bloomberg.com Subscribe now to stay ahead with the most trusted source of business information.