Korean Stocks Decline Amid Selling Pressures: Market Analysis and Tax Reform Concerns

South Korean stocks recorded losses on the 22nd, weighed down by strong selling from foreign investors and institutions despite vigorous buying by retail investors. Retail participants infused over 500 billion KRW into the market; however, their efforts were insufficient to counterbalance the downward pressure. The tech-heavy KOSDAQ also ended the day with marginal losses, reflecting widespread market weakness.

According to the Korea Exchange, the benchmark KOSPI index dropped 40.87 points, or 1.27%, to close at 3,169.94. The index opened slightly lower at 3,210.12 compared to the previous session’s close of 3,210.81 and stayed in negative territory throughout the day.

On the KOSPI market, retail investors stood out as net buyers, purchasing equities worth approximately 511.4 billion KRW. Meanwhile, institutional investors offloaded net stocks valued at 413.9 billion KRW, and foreign investors sold a net 161.1 billion KRW worth of shares, adding significant selling pressure.

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Sector Breakdown: Widespread Losses Dominate

Most sectors saw significant declines, underscoring the bearish sentiment across the board. Machinery and equipment led the downturn with a steep drop of 4.84%. Electrical and electronics lost 2.00%, construction sank 3.01%, and metals fell 1.74%. Additional sectors such as IT services, retail, manufacturing, and medical precision instruments also witnessed losses exceeding 1%.

Among KOSPI’s major players by market capitalization, most stocks reflected the selloff. Samsung Electronics dropped by 2.65%, SK Hynix fell 1.47%, Hyundai Motor declined 1.20%, and Celltrion recorded a marginal dip of 0.17%. Bucking the trend, LG Energy Solution rose modestly by 0.76%, and Hanwha Aerospace posted a gain of 0.33%.

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Tax Reform Talks Cast a Shadow on Market Sentiment

Market participants monitored potential tax policy changes proposed by the South Korean government, raising concerns about their impact on the stock market. Key proposals include tightening the threshold for capital gains tax among major shareholders, raising securities transaction taxes, and altering the framework for dividend taxations.

One of the more contentious reforms involves lowering the major shareholder capital gains tax eligibility threshold from 5 billion KRW to 1 billion KRW. This measure aims to compensate for revenue adjustments linked to recently introduced "separated taxation" on dividend income.

Kim Doo-eon, a prominent analyst from Hana Securities, commented: "The primary goal of these reforms is to enhance tax revenues, but their implications for the asset market are twofold. The separated taxation on dividend income could lighten tax burdens, which may support the market. However, reducing the threshold for major shareholders’ capital gains tax could lead to higher tax obligations, potentially prompting end-of-year selloffs."

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KOSDAQ Extends Losses Amid Broad-Based Weakness

The KOSDAQ index, which also struggled, closed lower by 8.72 points, or 1.06%, at 812.97. Although the index opened slightly higher at 822.33 compared to the prior session’s close of 821.69, it quickly succumbed to selling pressure.

Retail investors remained net buyers on the KOSDAQ, purchasing shares worth 182.4 billion KRW. However, their buying was outpaced by foreign investors and institutions, which offloaded 40.6 billion KRW and 144.7 billion KRW of shares, respectively.

The sector-wise performance on KOSDAQ mirrored KOSPI, with most sectors posting losses. Machinery and equipment fell 2.35%, electrical and electronics dropped 1.83%, non-metals slid 1.74%, textiles and apparel declined by 1.45%, and transportation and warehousing tumbled 1.80%. In contrast, paper and wood demonstrated resilience, surging 8.73%, while telecommunications gained 1.12%.

Among top market-cap stocks on the KOSDAQ, losses were prominent: EcoPro BM fell sharply by 3.79%, Peptron declined 0.66%, HLB slid 0.99%, and Alteogen fell 1.45%. The sole bright spot among leading stocks was Rigencell Bio, which inched up 0.42%.

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Currency Market: Korean Won Strengthens Slightly

In the foreign exchange market, the Korean won gained modestly against the U.S. dollar. The USD/KRW exchange rate closed at 1,387.8 KRW, down 0.4 KRW from the previous day’s close of 1,388.2 KRW. The slight appreciation was attributed to easing market risks, though the broader sentiment remains cautious.

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Conclusion

The South Korean stock market’s underwhelming performance reflects the interplay of institutional and foreign investor selling amid looming uncertainties around proposed tax reforms. While retail investors attempted to buoy the market, sector-wide losses and bearish sentiment weighed on indices. With tax policy debates heating up and potential regulatory changes in sight, market participants are closely watching developments that could sway both retail and institutional activity in the weeks to come.