Margin deleveraging

The RBA released the quarterly Margin Lending – D10 data tables today (XLS table), and its not a pretty picture for the Australian stock market.

One of the key factors in a new bull market in stocks, just like property, is a propensity for investors to borrow more on expectation of higher earnings – alongside a move to higher price/earnings ratio premia, reversal from a lower interest rate environment and the “lazy balance sheet” theory.

The ten year correlation with market values is obvious:

Margin loans vs market value for 10 years

But let’s focus on the last few years:

Margin loan nominal value since March 2009

The March 2011 quarter nominal value of margin loans outstanding – approx. $18 billion, is the lowest since the June 2005 quarter (approx. $18.5 billion), after rising to the heady heights of over $41.5 billion in the December 2007 quarter.

Margin debt deleveraging began in the December 2009 quarter and has accelerated, averaging 3.4% quarterly or over 12% in the last year.

This is also reflected in the number of client accounts, unadjusted for population increases, as shown below:

Client accounts and margin calls per day

The number of client accounts – approx. 220,000 – is now at the March 2009 low and goes someway to explain the reduced returns on the major institutional retail and wholesale investment houses (e.g AMP today). The chart above does not capture the number of margin calls during the recent market correction.

The disleveraging continues as corporate balance sheets are reducing their gearing, P/E ratio premia are falling (for the same or even higher earnings) and a central bank still torn between keeping rates steady and possibly raising them, the behavioural factors required to start a new bull market are non-existent.

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  1. Thanks Prince, great post.

    That first chart shows a big divergence between the rising share market and declining margin loans, for the period between the March 2009 market low and the April 2011 high. If I had known that earlier, would have been a nice extra piece of ammo for the bearish case, in the constant war in my head between the bullish and bearish arguments.

    I wonder if around the margins (no pun intended) the RBA numbers are affected by an increased use of CFDs as a means of exercising leverage. I’m sure for many trader types, CFD trades have replaced margined share trades, and that would have to impact the total value of margin loans.

    • I’m not sure if CFD margin is captured in the RBA stats, but I’m sure I’ve read somewhere else that the total amount of CFD investment is small compared to margin lending (around 70K accounts I think).

      I haven’t used margin in years, I use warrants (mainly for super) or CFD’s.

      • Hi Prince,
        Just out of interest, are CFDs the main way you would take a short position on Australian equities?

  2. Do You Feel Lucky Punk?

    That covers leverage on the buy side. Is there sell side leverage data available e.g. the ASX has daily short sell info but is this accumulated and accessible anywhere?

  3. Do You Feel Lucky Punk?

    The ten year correlation with market values is obvious:

    how are you defining market value and where does the number come from?

    i.e. it is not the value of the underlying security (based on the tables …I don’t have today’s release, I am going on last months)

    Another interesting thing is the proportion of credit limit being taken up. An indicator of punter enthusiasm.

  4. Hmm…

    So that is what the housing market would have looked like without the FHBG boost(Chart 1)

    Prince, just wondering if demographics is playing its part in the unwinding of margin debt?

    • Do You Feel Lucky Punk?

      bear in mind that some of the unwinding would not necessarily have been voluntary, particularly during the GFC.

      chart 1 remains confusing …waiting on Princes reply above. Market value in the chart is not the market value of the securities being bought …and even if it was then the correlation would be expected because you leverage up a certain %

      And based on the actual numbers it is clearly not the share market capitalization. So it is unclear (to me) what is being plotted.

  5. Thanks Prince, this is a top post, and it’s also nice to know another reason for the indices falling off.

  6. Many traders have taken up FX trading for their leverage hit.

    The stats in your article therefore suffer from a very unstable/changing base effect.

  7. good article. I actually recently looked at this myself after a number of friends commented they were “close to getting a call”. The decline margin lending growth seems to correlate nicely with the rise in the household saving ratio (rho = -0.66). So looks like mums and dads are returning to the old method of wealth accumulation.

  8. The third graph is fascinating. If during the ’08 market meltdown 300 per thousand borrowers (30%) were receiving margin calls EACH DAY, virtually all borrowers would have received a call – and been stung badly enough to exit margin borrowing completely. Of the die-hards still borrowing this way, currently ~30 per thousand receive a margin call EACH DAY. If there are 21 trading days a month then 30 x 21 = 630 per thousand or 63% get a call to adjust their position each month (some will be repeat calls, but how many calls would it take to revise one’s stragedy). Here is why people have fled: they lost their shirt.