Stock prices in Korea fall due to disappointment over tax reform proposals and trade-related uncertainties
South Korea's Kospi Index Plunges Amid Tax Reform Concerns and Trade Tensions
South Korea's stock market experienced a significant decline on Friday, with the Kospi index dropping by about 4%. The plunge ended a rally that had gained momentum since June 4.
The main reasons for the Kospi's sharp decline were the negative market reaction to the tax reform plan perceived as unfavorable, the surge in the won-to-dollar exchange rate, and growing uncertainty from trade tensions between South Korea and the US.
The tax reform plan, unveiled on Thursday, includes the lowering of the capital gains tax threshold for major shareholders and the reinstatement of the stock transaction tax. These measures have disappointed investors, who had expected more favorable measures such as a significant dividend income tax cut.
The won-to-dollar exchange rate exceeded 1400 won for the first time in over two months, signaling a weaker won that added downward pressure on the market. The context of the US-South Korea trade tariff negotiations and new tariff impositions also rattled investors, contributing to the sharp drop in share prices on the Kospi index.
In addition, the agreement between Korea and the US to apply a 15 percent tariff on Korean imports, while lower than the initially threatened 25 percent, continues to weigh on the market in Free Trade Agreement-beneficiary sectors, such as autos.
The selloff was led by institutional and foreign investors, with foreign investors selling 656.5 billion won worth of shares on Friday. Institutional investors offloaded 10.7 trillion won worth of shares, while retail investors bought a net 1.63 trillion won worth of shares.
As a result, the Kospi closed at 3,119.41 on Friday, marking a decrease of 3.88% from the previous session. The tech-heavy Kosdaq index also decreased, closing at 772.79, marking the first time it finished below 800 since July 15.
Analysts expect the market to experience a consolidation phase due to recent overheating unwinding. They note that small triggers could prompt swift profit-taking and a rapid unwinding of overheated positions, warranting caution. The second-quarter earnings season is unfolding, leading to a consolidation phase in the market.
Policy momentum, which had been a strong driver of the July rally, has crumbled under the weight of investor disappointment. The market is experiencing a consolidation phase due to recent overheating unwinding, according to analyst Lee Kyoung-min of Daeshin Securities.
In summary, the Kospi's sharp decline was primarily due to investor disappointment and backlash against the government's proposed tax reform plan, combined with concerns over new US tariffs and a weakening Korean won. The capital gains tax threshold for major shareholders has been lowered to 1 billion won from 5 billion won, and the stock transaction tax, which imposes a 0.2% levy on financial investment income, has been reinstated. These measures have disappointed investors and contributed to the selloff on Friday.
The proposed tax reform, which includes a reduction in the capital gains tax threshold for major shareholders and the reinstatement of the stock transaction tax, has displeased investors in South Korea's business sector, contributing to financial instability. The unfavorable measures, announced amid trade tensions, have led to a significant decline in South Korea's industry, as demonstrated by the Kospi Index's plunge.
