Retail US equity investors lukewarm about gov't tax incentives

Buildings housing brokerage firms in Yeouido, Seoul, Wednesday. Yonhap

Kim, a 41-year-old office worker in Seoul who holds shares of major U.S. tech companies, said she would rather pay the tax than sell the stocks.

“The recently rolled out tax exemption looks big in headlines, but it doesn’t come close to the upside I expect from the U.S. market,” she said, adding that she is not sure how the tax incentives can reverse a structural shift toward overseas assets.

“This is obviously a short-term measure. I don’t think retail investors would return to the problem-fraught KOSPI market where large-cap market leaders like SK hynix shares are placed under a warning over a standard meant to curb short-term price manipulations by speculative forces. At least the U.S. equity does not have that kind of unreasonable, nonsensical and baffling market rules.”

Another retail investor named Park, 35, who has steadily increased his U.S. equity investment over the past three years, is equally unconvinced.

“This feels like a policy aimed at fixing the Korean currency weakening against the U.S. dollar using individual investors,” he said.

“I think I speak for many retail investors with U.S. stocks when I say I don’t think giving up a potential return for a short-term tax incentive is the smart choice. The government is desperate to stabilize the won, but this is not the way to do it,” Park added.

These two are among the many Korean retail investors with U.S. equity holdings who have expressed lukewarm sentiments regarding the tax incentives rolled out by the finance ministry Wednesday.

The measures seek to encourage selling overseas stocks and reinvesting domestically in an effort to shore up the weakening won.

The move came as the Korean currency sunk to almost 1,500 won against the U.S. dollar, after a sharp depreciation sustained over the past few weeks.

It managed to recover significantly to the mid-1,440 won per dollar mark earlier on Wednesday, following unusually forceful verbal intervention by foreign currency authorities.

Officials from the Ministry of Economy and Finance and the Bank of Korea warned that excessive weakness in the won was undesirable, signaling their market intervention.

Central to the ministry’s tax incentive is a proposed Reshoring Investment Account, which would allow retail investors to receive temporary capital gains tax exemptions of up to 50 million won.

Those who sell overseas stocks by Dec. 23 will be eligible to have the proceeds converted into won, provided they invest in domestic equities for at least one year. Investors returning in the first three months of next year would qualify for a full tax exemption.

The earlier the return, the bigger the tax break. Those who move funds back in the second quarter will receive an 80 percent break. The benefit drops to 50 percent for those returning later in the year.

The government is also planning tax support for currency hedging by retail investors, encouraging brokerages to offer additional deductions tied to hedging costs.

The measures reflect policymakers’ concern that the sustained increase in overseas stock buying by retail investors continues to weaken the won.

From January through November, retail investors net bought about $30.9 billion in foreign equities, while selling 11.6 trillion won’s ($8 billion) worth of domestic shares.