Margin calls, forced selling not surprising in current market, say some brokers
(SINGAPORE) Veterans of previous crashes say it’s not that bad this time, at least not yet. But broking houses are taking no chances.
They are battening down the hatches and checking the credit quality and margins of clients. Some investors are complaining about being required to make immediate top-ups or being forced into selling, as fear now rules the street.
‘Sure, there’s forced selling,’ said one local dealer who has been in the industry since 1986.
But the situation is not unusual given the panic selling, he added, saying that he has seen it all before.
‘We make sure clients’ credits and margins are okay,’ said another stock market veteran.
Hui Yew Ping, managing director of OCBC Securities, said: ‘With a market downturn like this, some level of margin calls are expected.
‘We have a good risk management process to handle this. Our overall prudent approach to share margin financing also ensures that we are able to continue business as usual as we are accustomed to market volatility.’
He added that OCBC Securities’s unique Share Financing Simulator comes in handy for customers to anticipate how market movements affect their margin account and, as a result, they can manage the risks and investment decisions better.
A DBS spokeswoman did not comment when asked if DBS Vickers was forcing clients to sell if they could not meet margin calls.
The Straits Times Index fell 50.6 points, or 1.7 per cent, yesterday to close at 2,866.55, its lowest since Dec 21, 2006. Since Monday, it is down 7.7 per cent, the biggest two-day drop since Sept 21, 2001. The index is down 25 per cent from its Oct 11 high, but many stocks have plummeted much more.
NOL yesterday at $2.80 is more than 55 per cent below its $6.15 high on July 16. The Singapore Exchange at $8.70 is almost half its $16.40 peak on Oct 8.
DBS Group Holdings and United Overseas Bank have lost about 30 per cent from their 52-week highs while OCBC is down almost 24 per cent.
‘It’s not that bad, actually,’ said Tang Wee Loke, executive director at UOB Kay Hian. He said the 1997-98 Asian financial crisis and the 2003 Sars outbreak had been far more damaging.
He recalled that the 1985 Pan-El crisis was the worst blow to the Singapore stockbroking community. The collapse of marine salvage, hotel and property conglomerate Pan-Electric led to a meltdown resulting in the shutdown of the stock exchange for an unprecedented three days. ‘Everyone thought they were going to die,’ he said.
Reforms which followed helped the industry weather the 1987 October stock market crash, he said.
A retired broker said the crash this time has yet to result in actual losses for some people because of their profits in 2007. ‘They are losing their profits and it’s cutting into the flesh, another 10 per cent more, then it would be into the bone,’ he said.
Assessing yesterday’s mood, Mr Hui said that overall it had been an orderly day in OCBC Securities’s dealing room.
‘Since last week, we have already issued an advisory to all our brokers and remisiers to exercise caution in view of the uncertainty in global equity markets,’ he said.
Timothy Wong, DBS Group Research’s head of regional equities, told clients yesterday that it was poor market sentiment, or high risk aversion, that was ailing the markets.
He said Asia is perceived as ‘a high risk, high return asset class, so with uncertainty on the horizon, you get flight to quality from foreign funds, back to their US and European home markets’.
He said: ‘There are a lot of absolute-return funds who must make money even in a falling market, and therefore seek out short positions.’
These funds cannot just stay neutral and out of the market, he said.
Phillip Securities analyst Leng Seng Choon said Asian economies are quite strong and this stock market crash is quite different from the 1997 Asian financial crisis.
‘Today, the balance sheet of many Asian countries are stronger than in 1997-98.’
Their relative strength will help offset a recession in the United States, should it happen, he said.
For instance, the Singapore economy has a stream of activities in the pipeline, including a robust construction sector, which will result in growth, said Mr Leng.
Source: Business Times 23 Jan 08