Margin lending back in the mainstream media

Discussion in 'Sharemarket News & Market Analysis' started by Simon Hampel, 23rd Jan, 2020.

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  1. Simon Hampel

    Simon Hampel Founder Staff Member

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    I was interested to see an article about margin lending on the ABC news website this morning: There's a risky way to supercharge your savings that some Australians are embracing

    Margin lending was a huge topic back in 2006/2007 during the huge bull market we had in the lead up to the GFC. Indeed the most popular article I wrote on the InvestEd website (now InvestChat) was a technical article about how margin lending worked (it was full of mathematical formulas).

    When the GFC hit and the market kept dropping and dropping, most people with margin loans (if they didn't know how to manage them) ended up in a world of pain. Since then, lending criteria for margin loans has tightened up significantly and they have become very much a fringe product compared to the main stream they were back in the mid-2000's

    But now that we're back into record territory on the ASX, and real estate prices are seen by many as being too high, while interest rates are at record lows - it seems that margin lending is back on the agenda.

    Indeed, the linked article mentions that there has been a strong growth in margin loans recently:

    "Figures from the Commonwealth Bank show, in the three months to September, the amount of money tied up in margin lending shot up from roughly $11 billion — where it had been for several years — to $17 billion.

    That is an increase of more than 50 per cent."​

    Given it's been 12 years since the GFC, there will now be a new generation of enthusiastic investors who have never lived through a serious market crash / downturn - and these people are likely to take advantage of the low interest rates and the promises that margin lending offers to gear up.

    It will be interesting to see what impact this has moving forward - I'll certainly be keeping an eye out for more mainstream media coverage of margin loans. Wonder if we'll see a return to the day-trading mania of the dot.com bubble days (or are all the day traders now trading crypto currencies?)
     
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  2. JasonC

    JasonC Well-Known Member

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    I took out a margin loan back in 2000 but got spooked by the dot com buble in 2001. Never gone back to it (as I much prefer the significantly cheaper credit using residential IP's as security) however was tempted a few times. Probably a clear sign that the market is starting to get overheated if those types of articles are coming into the popular press.

    Regards,

    Jason
     
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  3. PandS

    PandS Well-Known Member

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    Good the more the better cos when the margin call begins I be ready and exercise Warren Buffet Call options :D
     
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  4. JasonC

    JasonC Well-Known Member

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    I noticed that some of margin loans (looking at you Comsec/Colonial) are offer 65% margin on the CFS Geared Share fund - which internally has a target gearing ratio of 55%. What could possibly go wrong with that!

    Jason
     
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  5. Simon Hampel

    Simon Hampel Founder Staff Member

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    Wow - that's rather generous. I've held the CFS Geared Share fund in my SMSF for a long time now - it can be very volatile.
     
  6. JasonC

    JasonC Well-Known Member

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    I have some of it in my super and in some trust funds for the kids. Really should transfer some of the balance into a non-geared fund for a while. Returns have been great - in good times!

    Jason
     
  7. SatayKing

    SatayKing Well-Known Member

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    Have fun playing with matches, kiddies. :D

    It'll happen. Maybe not this week or the next but it will.
     
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  8. gman65

    gman65 Well-Known Member

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    Bubble trouble!

    Margin lending I think is fine as a strategy, but you don't leverage in at the (close to the top of) a bubble.
     
  9. ChrisP73

    ChrisP73 Well-Known Member

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    Ya don't think it's just super organised investors getting their credit in order so they can scoop up when the market collapses spectacularly? :cool:
     
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  10. Simon Hampel

    Simon Hampel Founder Staff Member

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    ... but we've just broken through for a new record high ... it's all blue sky from here, right? :rolleyes:
     
  11. hammer

    hammer Well-Known Member

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    It feels a bit like when the cleaner or taxi driver starts telling you about shares and all the rich guys use that as their cue to cash out...
     
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  12. Simon Hampel

    Simon Hampel Founder Staff Member

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    I don't think we're quite at that stage yet.
     
  13. Simon Hampel

    Simon Hampel Founder Staff Member

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    Based on some comments made by @petewargent on Twitter, it seems that the article may have asserted a sudden growth in margin lending which isn't necessarily the case.

    Here is Pete's version of the chart which is from the same data that the ABC was referring to:

    EO_qDQDX4BAnYb8.jpg

    That strong upswing in Sep 2019 is what prompted the following to be written in the ABC article:

    "Figures from the Commonwealth Bank show, in the three months to September, the amount of money tied up in margin lending shot up from roughly $11 billion — where it had been for several years — to $17 billion.

    That is an increase of more than 50 per cent."​

    It turns out, that's not actually what happened (and the CBA charts actually mentioned this - it was just missed by the journalist who wrote the article).

    What happened is that the RBA changed the source of the data! From https://www.rba.gov.au/statistics/tables/xls/d10hist.xls?v=2020-01-24-09-24-29

    The data are compiled based on information supplied by banks and brokerage firms offering margin lending facilities. Between end-June 1999 and end-June 2019, these data were compiled from a survey that was conducted by the Reserve Bank on a quarterly basis. From September 2019, these data have been compiled from quarterly returns collected by APRA.

    I believe the basis for the change is that the APRA results should be more accurate (uses returns rather than surveys) - meaning that there probably really is $17B in margin loans, but it also probably didn't get there in the space of a single quarter.

    So the assertion from the ABC that "margin lending has increased by more than 50% in a quarter" doesn't really seem to be accurate.

    As a more general comment about margin loans - one of the main things that has changed between the GFC and now is that margin lenders can't just arbitrarily increase your margin loan when you ask for it - you actually have to prove serviceability.

    In the leadup to the GFC, margin loans were basically just asset-loans. If you had the collateral in place (ie shares or property), then they would simply lend against that without any questions about whether you could afford to pay back the loan. Paying back the loan was never a part of the equation - you typically capitalised interest back into the loan and if you needed to pay out the loan, you sold the asset to do so.

    The typical pattern was - tip in some cash and top it up with a margin loan to buy some shares (or funds, etc). As the shares went up in value, your loan limit would increase and so you simply increase the loan amount to purchase more shares. They went up as well, and you just kept increasing and buying - there simply weren't any limits, provided that you could manage the capitalised interest ... until the shares went down in value and you exceeded your loan-to-value ratio and you got a margin call!!!

    In the post GFC world, those rules changed. So while I was easily able to borrow well in excess of $1m to invest in shares pre-GFC based purely on the value of my share portfolio - now, I have a fixed limit and need to apply for an increase and show I can service that debt.

    So I doubt we will see such a huge ramp up in margin lending ever again, unless those rules are relaxed.

    It's not time to call the peak yet.

    Also limiting the increase in margin lending would be the large range of new products available such as CFDs, which give you a form of leverage into markets that work quite differently to margin loans.
     
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  14. petewargent

    petewargent Buyer's Agent Business Member

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    cheers for the h/t

    couple of thoughts here:

    Pete Wargent Daily Blog: Margin call
     
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  15. ShireBoy

    ShireBoy Well-Known Member

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    Is this you, or Pete talking here?
     
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  16. Simon Hampel

    Simon Hampel Founder Staff Member

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    I haven't quoted Pete at all in my post, other than copying the chart he posted on Twitter. All words which are not clearly indicated as quotes, are mine.
     
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  17. ShireBoy

    ShireBoy Well-Known Member

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    Thanks Simon. It was your paragraphing and eloquent structure that fooled me into thinking it was a copy/paste dump. Thanks for sharing your thoughts :)
     
  18. Snowball

    Snowball Well-Known Member

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    So you’re saying it’s possible the figures were misconstrued to create a somewhat alarming media article... I don’t believe it ;)
     
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  19. Silverson

    Silverson Well-Known Member

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    Could our friends in the US be reading this and having a chuckle.
    The Dow broke through previous records highs in 2013 (14,100), since then as we know there has been lots of blue sky!

    I still feel as if it’s a better time to buy than sell, albeit maybe not in an aggressive manner. Sure we may see a pull back this year or next but I’m very bullish on this country and our future.

    Also in your opinion could we see a strong pullback in the US and still have positive returns in Australia, or US sneezes we catch a cold etc?
     

The shift to the regions has been quite profound with Millennials and Gen X leading the way. It seems affordability, lifestyle, and working from home have been the key drivers from which these generations have been able to take most advantage.