Margin loans in for rough ride August 06, 2006 12:00am Article from: Font size: + - Send this article: Print Email THOUSANDS of investors who borrowed to join the stock market bandwagon face a "choppy" ride after last week's interest rate rise, a leading expert has warned.
While some analysts remain upbeat about the prospects for such geared share investments, Macquarie Graduate School of Management lecturer Nigel Finch said borrowers should consider reducing their market exposure. "I think we're in for a bit of a rough ride ahead," he said.
Margin loans, similar to a mortgage for property investors, have exploded in popularity over the past five years.
According to Reserve Bank statistics the number of accounts has almost doubled to 156,000 since 2000, driven by an increase in funds lenders are willing to provide, as well as greater interest from investors seeking a slice of the currently booming stock market.
However, Mr Finch said rising interest rates and growing economic uncertainty would place downward pressure on share values, possibly creating a domino effect on margin lenders.
"The issue is there are so many people exposed in the margin lending market," he said. "As (lenders) are making more margin calls there will be more forced sellers.
"When all that forced selling happens the next morning, it will drag prices lower."
When stock values fall below an agreed level, lenders make a margin call -- a demand that part of the loan be repaid immediately.
Since most small investors do not have the cash to make the repayment, they are forced to sell shares.
Mr Finch argued higher interest rates also increased the cost of margin loans, saying lenders should consider reducing their principal voluntarily.
"A sensible precaution for people would be to take profits now -- to start cautiously to chip away and create a bit of a buffer."
InfoChoice analyst Denis Orrock was less concerned, pointing to a historically low level of margin calls.
According to the Reserve Bank margin calls stood at 0.26 per day, per 1000 borrowers in March.
That was well below the recent historical peak of 7.8 per day, set during the dotcom crash of 2001.
Mr Orrock said margin lenders were less vulnerable to interest rate rises because repayments were tax deductible.
