Korean stocks tumble on tax reform letdown, trade uncertainty
The Kospi closed at 3,119.41, down 3.88 percent from the previous session.
The selloff was led by institutional and foreign investors, who offloaded 10.7 trillion won ($7.6 billion) and 656.5 billion won worth of shares, respectively. Retail investors extended profit-taking for a second straight day, snapping up a net 1.63 trillion won worth of shares on Friday alone.
Friday's plunge snapped a rally that had gained momentum since President Lee Jae Myung took office on June 4, fueled by expectations of market-friendly policies. Those hopes had propelled the Kospi 20 percent, with the index setting a new annual high of 3,288 just a day earlier. But Thursday's late-session profit-taking signaled growing caution, which deepened sharply the following day.
Friday's decline marked the largest daily fall in two months and dragged the index below the 3,200 level for the first time in five sessions.
Markets reacted negatively to details of the tax code overhaul unveiled late Thursday, which fell short of investor expectations. Key changes include lowering the capital gains tax threshold for major shareholders to 1 billion won from 5 billion won, and reinstating the stock transaction tax, which imposes a 0.2 percent levy on financial investment income.
While separate taxation for dividend income is designed to boost investment, the higher-than-expected top tax rate of 35 percent on income exceeding 300 million won sparked concern among investors and companies, particularly those working to improve dividend payouts.
Sentiment was further dented by lingering uncertainties over trade policy. Although Korea and the US reached an agreement the previous day to apply a 15 percent tariff on Korean imports, which is lower than the initially threatened 25 percent, lingering concerns over Free Trade Agreement-beneficiary sectors, such as autos, continued to weigh on the market.
The tech-heavy Kosdaq index fared even worse, tumbling 4.03 percent to close at 772.79, finishing below 800 first time since July 15.
Spreading uncertainty has weakened the Korean won, pushing it above the 1,400 mark against the US dollar for the first time in about two months. As of 4:30 p.m., the won was trading at 1,404 won per greenback.
'Policy momentum had been one of the strongest drivers of the July rally,' said Lee Jae-won, an analyst at Shinhan Securities. 'That pillar crumbled under the weight of investor disappointment, fueling the sharp decline.' Lee noted that Friday's heavy foreign net selling was particularly critical in triggering the rout.
Lee Kyoung-min of Daeshin Securities said the market is entering a consolidation phase as the second-quarter earnings season unfolds and recent overheating unwinds.
'As investors reassess earnings across sectors that had surged on optimism or slumped on concerns, we expect rotation and relative value adjustments to accelerate,' Lee said. 'Even small triggers could prompt swift profit-taking and a rapid unwinding of overheated positions, warranting caution.'
jwc@heraldcorp.com
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