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Foreign selling rocks the Kospi

Profit-taking and new tax code could herald the end of bullish run

Aug 08,2017
The Kospi has been on a bullish rally in the last couple of months since the Presidential election in May. However, there have been growing concerns that the recent momentum is coming to an end as foreign investors seem to be showing a change of heart.

Seoul’s main bourse failed to bounce back to the 2,400 mark on Monday, remaining in the 2,300 range for the third consecutive trading day.

Foreign investors were net buyers that kept the Kospi from falling on Monday. But earlier in the day foreign investors were net sellers and institutional and retail investors were net buyers.

In fact, in the last two weeks foreign investors have been selling off their stocks on the Korean market, raising concerns as to whether they were pulling out, which would bring the Kospi to a halt.

After the Kospi broke the 2,300 mark for the first time just two weeks after the new Moon Jae-in government officially launched, optimism spread among investors that helped the bourse break another record of 2,400 just two months later on July 13.

Market analysts at the time projected that the Kospi would even advance to 2,500 and 2,600 within the year. The only concerns are whether Korean companies will be able to keep their performances from falling amid the changed monetary policy in advanced economies, including the United States and Europe, that have started taking steps towards normalizing.

However, since the beginning of this month, disturbing signals have been detected. Since July 24 foreign investors have been dumping shares. It is estimated that in the last two weeks they have sold off 2 trillion won worth ($1.77 billion) of shares.

Some market experts say that the recent sell-off by foreigners was an attempt to profit from the recent improvement in the benchmark Kospi.

In fact Kim Young-il, a Daishi Securities analyst, said foreigners have been selling off shares in other emerging markets including Taiwan, India, Indonesia, Vietnam and the Philippines as well.

Like in Seoul, foreign investors have been increasing their stock holdings in emerging markets in the last six months. In the first half of this year foreign investors have net purchased $29 billion worth of stocks in emerging markets. But since July they have net sold $810 million worth of shares and by Aug. 3 sold $750 million worth.

“It’s likely that foreigners will continue to sell,” said Kim. “The point at which they will start buying stocks again is when the valuation of the stocks becomes attractive or when the euro appreciation eases.”

Kim projected that that point would come around the end of this month. Others point to the tougher tax reform that the Moon Jae-in government is pushing forward. The government last week announced a tax reform that applies higher tax rates on the wealthiest as well as on top conglomerates.

Under the new tax code that will be executed in January next year, the 20 percent tax rate applied to the profit made from selling shares - when the seller owns more than 300 million won worth of the stock - will be raised to 25 percent.

Foreign investors will also face tougher taxation on their investments.

The government plans to tax the profits that foreign investors make from selling their shares. Previously only those that own more than a 25 percent stake were taxed when selling their stock holding. But that ratio has dropped to 5 percent.

The tougher tax code, however, only applies to foreigners whose country has no taxation agreement with Korea. Countries that have a taxation contract that prevents double taxation will not be impacted by the new tax.

While some experts see the current share dumping as temporary, others point out that concerns over the slowing economy could have a major impact on the local stock market.

In a report released on Sunday the Korea Development Bank determined that the recovery momentum that continued since the fourth quarter of last year seems to be weakening. It noted that while the recovery trend remains, the rate at which the economy has been recovering has slowed, especially with various indicators including production, exports, consumption and even investment decelerating.


BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]


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