Peter S. Kim is a managing director at KB Securities.
KOSPI 5,000 reality check
Peter S. Kim
By Peter S. Kim
Recently, I hosted more than a hundred foreign investors at a conference held by KB Securities. The hottest topic of discussion centered on the reality check of achieving a stock market index of 5,000 points, a goal declared by President Lee Jae Myung.
After the martial law incident, Korean investors, both institutional and individual, have rallied behind Korea's stock market, surprising foreign investors. President Lee has been instrumental in boosting "animal spirits" with his promise to revamp Korean capital markets for the greater public's benefit. Lee's previous left-wing affiliation seems hardly recognizable as his policy promises are those typically associated with a market-friendly right-wing president. Local investors have not only welcomed this initiative, they are excited about the potential of the ruling party being empowered with a legislative majority. This is evidenced by the impressive rise in KOSPI year-to-date, making it the best-performing market in Asia.
President Lee has not only maintained the momentum behind the Corporate Value-up Program (CVP), which was a right-wing party initiative, he has also expanded the capital market revitalization mission beyond the CVP. The new government is focused on a broad range of measures, including incentivizing dividends, amending Commercial Code 382 (fiduciary duty of directors), and promoting market transparency and fair trading practices for retail investors. Korea has often seen incoming presidents waltz into a feel-good welcome with lofty and ambitious goals, only for the excitement to die quickly once the honeymoon period ends. With the Lee administration overseeing one of the most important transitions in Korean history, it is a good time to put a realistic perspective on the KOSPI 5,000 target and beyond.
From August 2024, over a consecutive nine-month period, foreign investors dumped over 40 trillion won ($28.7 billion) of KOSPI-listed stocks. But they have been left surprised by the resilience of Korean equities in the face of the tariff war, a slowing domestic economy and the aftermath of the martial law incident. Following President Lee's election win, foreigners finally began to return, but the buying so far has been only a fraction of the 40 trillion won sold, indicating the dilemma of chasing the market after big outperformance.
The hesitancy of foreign investors is understandable: Despite the market rally, there is scant momentum on macro data or corporate earnings. The domestic economy is stable but hardly improving as concerns over U.S. tariffs continue to loom. Corporate profits have shown only gradual improvement since the sharp decline last August. Given the lack of visible improvements in fundamentals, global funds are understandably frustrated by being left behind in this rally. The puzzling buying momentum from local investors, however, is being driven by hopes of long-term structural change, not short-term fundamentals; this is another unusual phenomenon since local investors historically have been more skeptical of any structural reform promised by their government.
The new administration recently announced changes in taxation policy related to dividend income and capital gains on stocks. In terms of dividend income, the new scheme stipulates that Korea will now treat dividends separately and apply a 20 percent tax rate for amounts between 20 million won ($14,400) and 300 million won and 35 percent above 300 million won. Previously, dividend income tax was included in overall financial income; annual financial incomes of more than 20 million won was subject to a 45-49 percent rate, the highest tax rate in Korea. Hence, the new scheme potentially lowers this significantly. Historically, dividends have been considered an income stream reserved for the wealthy, based on the assumption that anyone who holds stocks large enough to receive 20 million won in dividends must be ultrawealthy.
In terms of the capital gains tax on stocks, the threshold for "large shareholder" was lowered to 1 billion won from 5 billion won; in other words, zero capital gains taxes will now apply only to those with less than 1 billion won in stock holdings. The recent market disappointment over the proposed changes can be largely attributed to concerns that this may force a sell-down of holdings to get below the zero tax threshold, putting downward pressure on the market from now to the end of the year. Korea's zero capital gains tax on stocks for retail investors is an exceptional case and presents a rare tax-free income for its citizens. Comparatively, capital gains tax on overseas stocks and exchange traded funds (ETF) is 22 percent; that said, this has not hurt the rush overseas by Korean retail investors, who have bought almost $100 billion of foreign stocks and ETFs since the pandemic.
The chasm between the tax treatment for capital gains taxes for stocks and dividend income tax has been one of the most irrational features of Korean capital markets. The existing tax structure has punitive taxes for dividend income recipients, while being massively favorable for stock traders. This is an explicit endorsement from the government that encourages short-term trading over long-term "buy and hold" culture. The latest announcement helps narrow the gap but falls short of total alignment. However, the trend has been set, and with nearly five years to go under President Lee, the direction remains positive for investors looking at long-term reform.
Sustained narrowing of the "Korea Discount" depends critically on making equities attractive for long-term investors over short-term traders. Thus far, Korean policies have been designed to attract existing Korean traders who typically participate in the local stock market. But the structural shift from domestic property to financial assets will require an entirely different set of incentives for investors who have a lower risk profile and seek stable, risk-adjusted returns.
KOSPI 5,000, therefore, cannot be achieved by policy alone, but could be attained in conjunction with a shift from a speculative culture to one that appreciates long-term investing. The road to structural reform is long and challenging, but we are seeing only the beginning, not the end of capital market progress.
Peter S. Kim is a managing director at KB Securities.