Retail traders in South Korea face big losses after bets on billions of dollars of Brazilian government bonds soured, prompting calls for regulators to better protect mom-and-pop investors from risky products.
Investors in the Asian country have ploughed about Won8tn ($6.8bn) into treasuries issued by the South American nation, only to see the assets plummet in value after the Brazilian currency nosedived.
The fiasco has renewed concerns over the lack of regulatory oversight of the booming market for exotic, and often volatile, financial products promoted to retail traders and retirees, some of which have been subject to spectacular meltdowns.
Long-term bonds issued by Brasília have been favoured by rich South Korean investors over the past decade, due to their higher yields relative to other treasuries and the benefits of a bilateral tax treaty. The investments have been touted to retail traders by banks and brokers.
But the investments have been hit hard by a more than 20 per cent plunge in the Brazilian real against South Korea’s won this year. The coronavirus pandemic has had a crushing impact on the Brazilian economy, causing the fiscal deficit to widen and the central bank to slash interest rates to record lows. Many South Korean investors failed to hedge against currency risks when buying the bonds.
“I thought that it was a safe bet because they are government bonds. But I am really worried about the exchange rate now. But what can I do about it?,” said CH Lee, a Seoul-based retiree in his late 50s, who last year invested nearly Won250m in 10-year Brazilian treasuries. “I just plan to hold them until maturity, hoping the exchange rate will turn favourable by that time,” he said.
South Korean investors holding the 10-year Brazilian government bonds maturing in January 2029 currently face an estimated 17.5 per cent loss, according to NH Securities.
“We’ve been recommending investors sell the bonds as there is no investment merit now that interest rates in Brazil have become lower and the real is likely to fall further,” said Shin Hwan-jong, head of the global credit team at NH Investment & Securities.
Experts have criticised financial regulators for not doing enough to shield investors from risky products. Retail traders in South Korea have been stung in recent months by lossmaking investments in hedge funds heavily exposed to structured products and in private equity funds with questionable investment practices.
Earlier this year, South Korean investors were exposed to heavy losses after investing in exchange traded funds tied to crude oil, whose price crashed when Covid-19 barrelled through the global economy.
The Brazilian bonds have “speculative grades but local brokerages and banks continue to sell these risky assets without properly assessing their risk levels”, said Bruce Lee, a former hedge fund manager. “No country in the world sells bonds with speculative grades to retail investors. Moral hazard at local financial institutions is serious.”
Moody’s warned in May of the growing risks to its “stable” outlook on Brazil’s sovereign debt rating, which is two notches below investment grade. Rival rating agencies Fitch and S&P have also lowered their outlook for Brazil.
“These are direct investments by individual investors. They should be responsible for the investment losses incurred by market volatility,” said a spokesman for the Financial Supervisory Service, South Korea’s financial regulator.
this story was amended on 11 August to correct the amount invested in Brazilian bonds by Mr Lee
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