[Major Shareholder 300 Million Controversy] Possible Year-End Temporary 'Sell-Off Bomb'... Individual Investors Should Be Cautious of Volatility

[Asia Economy Reporter Eunmo Koo] If the Enforcement Decree of the Income Tax Act, which lowers the major shareholder requirement for stock capital gains tax from 1 billion KRW to 300 million KRW starting next year, is implemented, a temporary increase in sell-off volume by individual investors at year-end will be inevitable. Because of this, there are expectations that market volatility will increase as the year-end approaches.

The biggest market concern regarding the lowering of the major shareholder requirement for stock capital gains tax is the fear of a year-end "sell-off bomb." Investors trying to avoid being designated as major shareholders may flood the market with a large volume of sales at year-end, increasing market volatility and causing stock prices to fall sharply. Generally, in December, selling pressure increases as individual investors rush to avoid capital gains tax, and in the year before the revision of the major shareholder criteria, net selling intensity was generally higher than usual.

Since 2012, individual investors have continued net selling in both the KOSPI and KOSDAQ markets every December. In particular, the net selling amounts by individuals in December 2017 and last year, just before the change in major shareholder criteria, were 5.1317 trillion KRW and 4.823 trillion KRW respectively, more than twice the recent 10-year average of about 2.1 trillion KRW.

This year, since the major shareholder requirement is significantly lowered, the taxable target will also expand greatly, and the selling pressure on individuals is expected to be greater than before. Yoon Kwan-seok, a member of the Democratic Party of Korea, based on data from the Korea Securities Depository, predicted that if the government lowers the major shareholder requirement for stock capital gains tax to 300 million KRW, the taxable stocks will increase by a total of 41.5833 trillion KRW. This is close to 10% of the total stock holdings of individual investors, which amount to 417.8893 trillion KRW. The number of taxable major shareholders is also estimated to increase from 12,600 to 93,500, an increase of 80,900.

The market supply and demand is already showing signs of change, reflecting concerns about an increase in year-end sell-off volume. Individual investors, who had been continuously buying since the beginning of the year, recorded net selling of 1.1256 trillion KRW in the KOSPI market as of the 28th of this month. On the other hand, foreigners (1.1276 trillion KRW) and institutions (217.5 billion KRW) absorbed the individual investors' volume and switched to net buying. As a result, investors may be exposed to risks due to temporary volatility expansion. Lee Jae-sun, a researcher at Hana Financial Investment, explained, "It is necessary to pay attention to volatility in sectors where individual net buying proportions have been high or returns have been high since the beginning of the year."

However, since this is a temporary factor unrelated to the market's fundamental strength, the possibility of a stock market crash is considered low. Choi Yoo-jun, a researcher at Shinhan Financial Investment, said, "Given that the low interest rate and quantitative easing environment is maintained and the economy is expected to recover faster next year than this year, concerns about year-end volume are likely to be only temporary. If the price drop expands due to capital gains tax-related sell-offs, investors who have not entered the market so far may rather start buying at the low point."