Risk takers return
Published in the Daily Telegraph, May 2010
A decline in timid inaction by investors has seen the number of margin loans increase, a clear sign that confidence is returning to the market almost two years after the global financial crisis, writes Karina Barrymore
A rising share market is luring back investment risk takers, as margin loans start to increase again.
For the first time since the global financial crisis began almost two years ago, Reserve Bank of Australia data has recorded a substantial increase in the amount of money borrowed for margin trading.
In the three months to December 2009, margin loans jumped almost 5 per cent to $19.2 billion.
The number of people with margin loans also increased 10 per cent to 240,000 Australians.
Sharebroker and Wise-owl analyst Tim Morris says the move indicates investors are getting their confidence back.
"People's risk aversion has declined and that's coincided with the uptick in margin lending," Morris says.
But, he says the improvement in share prices has been relatively modest so far this year and borrowers would be hard-pressed to have made enough profit to outweigh the cost of their loans.
"Anyone taking out a margin loan up to December would have been taking on a big bet," he says. Ironically this time coincided with the top of the recovery to date, so bets taken out during that period haven't paid off to date," he says.
Margin lending is borrowing money to buy shares, using the shares as loan security.
Canstar Cannex analyst Mitchell Watson says the interest rate on margin loans is usually between 1.5 and 2 percentage points higher than a home loan.
Most margin loans are now charging interest rates between 8.8 and 9.25 per cent. Lenders will finance up to 70 per cent on low-risk shares, but only 50 per cent on volatile shares.
"If you borrow up to the maximum of about 70 per cent, you're putting yourself in a really sticky situation in terms of margin calls if the share price drops," Watson says.
When the loan-to-value ratio of the shares falls below a set level, the lender will issue a margin call. This means extra cash or security must be paid within 24 to 48 hours or enough shares will be sold to bring this ratio down.
Wealth Within founder and chief investment analyst Dale Gillham says investors seem more cautious this time around.
Typically, 6-7 per cent of past margin lending had protection strategies applied to limit losses if the market fell. But this has now lifted to about 10 per cent of loans, he says.
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