KOSPI Index Gains Shrink 0.7% After President's Tax Remarks

In a recent development, the president of South Korea expressed a differing view on the valuation of the country's stock market, which had just hit a new high. The KOSPI index closed at 3314.53 points on Wednesday, surpassing its previous record set in July 2021. However, the president's remarks on Thursday dampened investor enthusiasm, leading to a significant reduction in the index's early gains.

During a press conference, the president stated that the controversial capital gains tax reform proposal would be left to the National Assembly for decision. This ambiguous stance fell short of investor expectations for a clear abandonment of the plan. Consequently, the KOSPI index, which had initially risen by 0.9% in early trading, saw its gains shrink to just 0.2% by the end of the day.

The original proposal, introduced in late July, aimed to lower the threshold for individual shareholders subject to capital gains tax from 500 million Korean won to 100 million Korean won, thereby expanding the tax base. This proposal had sparked strong opposition from retail investors and triggered a wave of selling.

In his address, the president reiterated the notion that the Korean stock market is severely undervalued, citing insufficient demand as a potential reason. The KOSPI index has surged by approximately 38% this year, making it one of the best-performing indices globally. Analysts attribute this market enthusiasm to ongoing corporate governance reforms in the country and the global AI boom.

The president acknowledged that the capital gains tax reform proposal had raised doubts about the government's commitment to boosting the stock market. He stated that if the proposal were to harm the market, there would be no need to lower the threshold from 500 million Korean won to 100 million Korean won. He further expressed that persisting with the proposal until the end would be meaningless and that he would leave the decision to the National Assembly.

Retail investors in Korea often engage in significant selling before the end of the year to avoid the "major shareholder" threshold, a factor analysts frequently cite as contributing to downward pressure on the benchmark index. The president's remarks left the market disappointed, as investors had widely anticipated a direct announcement of the plan's withdrawal.

During the election campaign, the president had promised to usher in a "KOSPI 5000 era" to address the so-called "Korean discount," where companies are undervalued due to opaque governance structures and low dividend payouts. Since taking office, there have been widespread expectations that the president would fulfill his campaign promises by pushing for shareholder return reforms and stimulating the Korean economy.