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Gen Ys, executives seek upside in margin loans

Savvy Gen Ys and company executives are braving extreme volatility and tumbling markets, and becoming more active in margin lending as they hunt for better returns in a low interest rate environment.

But margin calls are also on the rise as the plunge in oil, mining and bank stocks hits hard.

A 25 per cent slide in the share price of ANZ since August 2015 and a 38 per cent tumble by BHP Billiton over the same time will put pressure on even the most conservatively geared portfolio.

But while the number of margin calls is creeping up on Reserve Bank of Australia figures, by and large investors are wary of the extreme sharemarket volatility and are being conservative. Total margin lending sits at $12.3 billion and has been mainly steady for three years.

Generation Y, or those born between 1984 and 1996, are keeping their heads when it comes to risk.

Chris Smith, the national winner of the Certified Financial Planner of the Year award in 2015 and a partner with VISIS Private Wealth, says Gen Y and experienced business people are becoming more active in margin lending.


They are factoring in the sharp volatility but gearing conservatively. But they've decided the holding costs in a low interest rate environment are low enough, and the future returns rewarding enough.

A common method for Gen Y is to regularly buy shares or managed funds on the market dips and match those buys with a similar amount that has been borrowed. Often the goal is to build up a deposit for a house and the lessons learned from the global financial crisis are being closely heeded.

"They've got pretty significant cash flow and they're just doing something that will mean they're going to get there a little bit quicker," Mr Smith says.

But they are structuring the portfolio conservatively and factoring in that share prices might slide a long way in the short term.

Lessons learnt

Company executives are also looking to buy up, having seen the cycles play out during their careers. Of course, they are steering well clear of their own companies, because of the damage that margin lending did in the GFC when the shorters honed in on vulnerable executives.

"I know I've got a lot of this stock but shouldn't we be buying more?" is the common question Mr Smith is asked amid the market sell-off.

They've got pretty significant cash flow and they're just doing something that will mean they're going to get there a little bit quicker.

Chris Smith, VISIS Private Wealth partner

Total margin loan balances according to the RBA's latest figures were $12.3 billion for the September quarter of 2015 compared with $11.9 billion a year earlier and $12.7 billion in the September quarter of 2012.

Contrast that to the heady days of December 2007 when the sharemarket was at its peak and margin loans totalled $41.6 billion.

The RBA's statistics show the average number of margin calls per day in the September quarter of 2015 reached 0.88 per 1000 clients, up from 0.56 in each of the June and March quarters of 2015. In September, 2013 it was 0.53 per 1000 clients.

This ratio was at an all-time high of 8.60 margin calls per 1000 clients in December 2008 when share prices plunged to the sharemarket low reached in March 2009 in the wake of the GFC.

Commsec chief economist Craig James says the sharp volatility in sharemarkets over the past few months and the GFC's enormous impact on wealth being in such recent memory are having a large influence.

The large swings in the Australian sharemarket, where falls and rises of 1 to 2 per cent have been common over the past few weeks, are at the forefront of people's thinking.

"People do tend to get slightly jaded as a result of that," Mr James says.

The GFC delivered important and painful lessons for many investors who had over-leveraged.

"It did have a big influence on people's confidence levels and their investment preferences," Mr James says.

Mr James says it is unclear whether Gen Ys will bring a longer-term shift in attitudes to investment as they climb the ranks into better-paying jobs.

"It remains to be seen in terms of the Gen Ys," he says.