Seoul stocks face fresh uncertainty as Democrats retake US Congress

Korean stocks face growing policy uncertainty after Democrats regained control of both the Senate and the House of Representatives in the U.S. midterm elections, according to market analysts, Wednesday.

They say obstacles to extending corporate tax cuts and the prospect of stricter oversight of Big Tech and artificial intelligence (AI) could fuel volatility in Korea’s tech-heavy stock market.

However, sweeping policy changes remain unlikely given U.S. President Donald Trump’s veto power and ability to issue executive orders, the analysts said. Over the medium term, Korean stocks are expected to be driven more by returns on AI investment, semiconductor demand and foreign investor flows than by the election outcome itself.

KOSPI closed slightly higher after a volatile session as investors assessed the implications of the Democrats’ victory.

After rebounding 2.24 percent in the previous session, the benchmark opened at 5,786.13, up 137.34 points, or 2.43 percent, and climbed as high as 5,828.13, a gain of 3.17 percent. It then reversed course, falling as much as 4.02 percent to 5,421.72, before recovering to close at 5,683.80, up 35.01 points, or 0.62 percent.

Samsung Electronics and SK hynix fell 0.68 percent and 0.14 percent, respectively. The Kosdaq closed at 714.95, up 10.56 points, or 1.50 percent.

Lee Ji-seon, an analyst at Toss Securities, said the Democrats’ takeover of Congress could heighten market volatility.

“An extension of corporate tax cuts could be harder to secure, while Big Tech and the AI industry could face closer regulatory scrutiny, adding to market volatility,” Lee said.

Still, Democrats would face significant hurdles in turning their legislative agenda into law, as Trump could veto bills approved by Congress.

“Even after clearing both chambers, legislation requires presidential approval, and Trump is likely to reject bills proposed by Democrats,” said Kim Sung-keun, an analyst at Mirae Asset Securities. “Overriding a veto would require a two-thirds majority in both the House and Senate, which would be difficult without cooperation from Republicans.”

He also said the Trump administration could rely on executive orders to keep its current policies in place.

Analysts advised investors to watch actual AI spending by major U.S. customers and demand at Korean chipmakers, alongside any policy shifts following the election. Stability in oil prices and the exchange rate will also be key to the market outlook.

“Investors are showing signs of fatigue after repeatedly confronting uncertainty over the AI industry since October,” said Han Ji-young, an analyst at Kiwoom Securities. “The pressure on companies to demonstrate profitability will persist with each earnings season.”

However, Han said AI-related stocks had already undergone a substantial correction since October, while pressure from oil prices and interest rates had eased.

The won-dollar exchange rate has recently fallen to the low 1,300s after breaching 1,500 won per dollar in intraday trading earlier this year. In the Seoul foreign exchange market Wednesday, the won weakened by 0.5 won to close onshore trading at 1,341.5 won per dollar.

“Any further correction is more likely to take the form of an extended period of sideways trading than another sharp decline in prices,” Han said.

Analysts also view renewed foreign buying as crucial to a market recovery, with overseas investors extending their net selling streak to a seventh month in November.

Yet lingering uncertainty surrounding the Middle East and political developments in major economies could keep a sustained return to foreign buying out of reach for at least another three months, according to Lee Kyung-soo, an analyst at Hana Securities.

Lee examined periods in 2002, 2008 and 2020 when sharp market declines coincided with prolonged foreign selling. He found that KOSPI tended to rebound after spending about three months establishing a bottom, while foreign investors generally turned net buyers after six months. The proportion of observations in which foreigners became net buyers was just 26 percent after three months, rising to 57 percent after six months and 94 percent after a year.

“Our quantitative analysis suggests that a rebound in KOSPI and a sustained return to net buying by foreign investors may be at least three months away,” Lee said.

Still, some analysts expect the conclusion of the U.S. midterm elections to remove a source of uncertainty and potentially encourage foreign investors to return.

“Reduced political uncertainty following the U.S. elections could support a recovery in global risk appetite,” said Lee Sang-yeon, an analyst at Shinyoung Securities.

“Foreign investors turned net buyers of Korean futures last week, while net program buying increased, both positive signals,” Lee said. “This week, attention will be on whether they keep buying futures and scale back their selling in the cash market.”