Investors dump Korean shares after tax reform; won plunges

Investors rushed to sell off South Korean stocks across the board, which dragged down the Korean currency value on Friday after the government announced a sweeping tax reform that will collect more tax from corporations and even individual investors.

Korea’s benchmark Kospi index sank 3.9% to close at 3,119.41, and the smaller Kosdaq market slumped 4% to 772.79.

This is the Kospi’s second-largest loss this year since April 7, when the market tanked more than 5% due to the US' reciprocal tariff announcement. It also marked the biggest loss since the new Korean administration took office in early June.

Losses were broad-based, halting the rally in the Kospi, one of the world’s top 10 performers this year with a nearly 30% year-to-date gain.

The market rout was largely triggered by the Korean government’s sweeping tax reform announced earlier Friday, which will increase the top corporate tax rate to 25% from the current 24% and lower the capital gains threshold for large shareholders to 1 billion won from the current 5 billion won.

It will also raise the stock trading tax by 0.1 percentage point.

MIXED SIGNALS

"Foreign investors are pulling out of the Korean stock market as they question the coherence of the government’s market-support measures," said Kim Soo-hyun, head of research at DS Investment & Securities.

“Korea is sending mixed signals. While some officials tout a Kospi 5,000 target, others are rolling out policies that run counter to that goal, raising concerns among foreign investors," he added.

The Korean stock market, which had remained unsettled throughout last year, began rallying since President Lee, who has vowed to propel the Kospi to 5,000 points, came into office in early June. That level has never been reached in the history of the Korean stock market.

But analysts think the Kospi has yet to reverse its upward trajectory.

“The tax reform fell short of expectations, but that alone doesn’t explain today’s rout,” said Kim Hak-kyun, head of the research center at Shinyoung Securities Co.

“The broader market has not entered a structural downturn. Investors need to stay patient as the correction plays out.”

FOREIGN SELLING SPREE WEIGHS DOWN ON THE KOREAN WON

Foreign investors net sold 660.3 billion won ($470 million) worth of stocks on the main Kospi market, snapping their buying spree for eight consecutive sessions.

Institutional investors also dumped 1.07 trillion won worth of shares, while retail investors net purchased 1.63 trillion won.

Heavy stock selloffs by foreign investors dragged down the Korean currency, pushing it lower against the greenback.

The won ended at 1,401.4 per US dollar on Friday, up 14.4 from the previous session, marking the first time it has breached the 1,400 level.

BROAD-BASED SELLOFFS

Of the total 935 Kospi-listed stocks, 885 were hammered.

Among heavyweights, SK Hynix Inc., Samsung Electronics Co., HD Hyundai Heavy Industries Co. and LG Energy Solution Ltd. fell 5.7%, 3.5%, 2.9% and 2.5%, respectively.

Hyundai Motor Co. and Kia Corp. also lost 1.4% and 1.5%, each.

The country’s steelmakers also suffered heavy losses largely due to the hefty 50% duties on their US exports.

POSCO Holdings Inc. retreated 5.8%, Hyundai Steel Co. dropped 4.2%, and Seah Steel Holdings Corp. declined 4.9%.

Investors also took profit from the country’s defense stocks – LIG Nex1 Co. and Hanwha Aerospace Co. down 5.7%, each, while Hyundai Rotem Co. and Korea Aerospace Industries Ltd. also lost 3.9% and 3.8%, respectively.

But some shipbuilding-related stocks fared better on high expectations for deeper collaboration between Korean and US shipbuilders. Hanwha Ocean Co. and STX Engine Co. gained 4.5% and 3.6%, respectively.

There was also widespread carnage in the Kosdaq market, with nearly 89% of the total listed stocks beaten, including Rainbow Robotics Co., down 6.1%, and LigaChem Biosciences Inc., down 5.4%.

Write to Sookyung Seo at skseo@hankyung.com

Jennifer Nicholson-Breen edited this article.