Tax reform jitters hit Kospi as foreign investors dump shares

Korea Herald

19 hours ago

Citigroup, Goldman Sachs warn of policy uncertainty after Seoul proposes corporate, capital gains tax hikes
Following South Korea's market-jolting tax reform unveiled Thursday, global investment banks are voicing concerns, signaling a potential reversal in the recent foreign buying trend on the Kospi.
The government's tax code overhaul proposal, including several rollbacks of earlier tax relief measures, such as a hike on corporate tax and tighter capital gains tax rules for major shareholders, prompted a wave of cautious commentary across foreign investment giants.
On Monday, Citigroup noted the government's proposal on the tax law amendment is likely to remain 'unfavorable' to the market.
"In our view, the heavier tax burden implications from the proposal will likely be unchanged. Corporate tax hike, securities transaction tax hike and education tax hike on financial industries will likely stay and they would remain unfavorable for business and equity market investors' confidence," the research stated.
Citigroup stressed, "a greater degree of policy consistency and transparency would be required to bolster equity market investors' confidence for corporate governance reform given conflicting policy signals."
On the same day, Goldman Sachs published a similar report, describing how the tax code announcement was followed by a 'negative' equity market reaction.
Highlighting dissenting views on tax code reform within the ruling party and a leadership transition in the party over the weekend, the report underlined that 'uncertainties in the tax policy outlook have also increased.'
Hong Kong-based brokerage CLSA also weighed in with a recent report titled 'Yikes, Tax Hikes,' noting that while it is unlikely the government's proposed tax reforms will pass the National Assembly in full, the market is likely to be disappointed in the short term by what it views as anti-market policies.
The reactions mark a stark contrast to the bullish tone foreign investment banks had struck in recent months on the local equity market, particularly following the presidential election in May.
In earlier months, major banking groups had been raising their Kospi targets and turning increasingly optimistic on the country's stock market outlook. The momentum, however, appears at risk of stalling for the time being amid renewed policy uncertainty, potentially triggering a reversal of foreign capital flows into the local equity market.
Though offshore investors had been net buyers of the Kospi in recent months, pouring in more than a combined 10 trillion won ($7.2 billion) between May and July, the move has stalled in recent days, as they turned to a net selling stance following the government's tax code reform announcement. Between the two trading days of Friday and Monday, foreign investors dumped shares amounting to a total of 573 billion won.
While the Kospi rebounded 0.91 percent on Monday, showing a partial recovery from its near 4 percent drop the previous trading day, major domestic brokerage houses forecast a period of market correction, pricing in concerns shared both at home and abroad.
On Tuesday, the Kospi stood at 3,194.65 points as of 2 p.m., up 1.49 percent from the previous trading day.