In February I touched upon the relationship between margin lending and equity prices. There has been a lot of talkabout the increase in margin lending in the United States markets as a sign that markets will soon peak. Some of this is summarized here.
But how does it look in the Australian market? The short answer is that the level of margin lending in Australia has continued to decline in both nominal and relative terms over the past year, and indeed since the Global Financial Crisis.
Below is a chart with total Australian margin lending as a percentage of the total market capitalization of all ASX listed companies on the left axis, and the All Ords Price Index on the right. During the bull run that led up to the GFC margin lending steadily increased up to a peak of over $40bn AUD, or 2.9% of the total market capitalisation of the ASX.
The period that followed dealt a crushing blow to margin borrowers. Many Australian investors have no doubt learned their lesson and stayed away from margin lending.
While the US market continues to make all time highs its important to put our own market’s appreciation in perspective. The ASX is still well short of its all time high, and by the measure of margin lending at least it seems that most market participants are still keeping their heads.