One Day Before the General Election, 'Concerns Over Value-Up Speed'... Stock Market Volatility Expansion Inevitable

KOSPI Consolidates This Month
Market Sentiment Affected by General Election
Attention on Low PBR Stocks' Rebound Depending on Election Results

As the stock market shows sluggish trends recently, market attention is focused on the 22nd National Assembly election, which is just a day away. This is because there is a possibility that investment sentiment could shrink depending on the general election results. In particular, with corporate value-up programs playing a significant role in boosting the stock market in the first quarter of this year, if concerns arise about the progress of these programs depending on the election results, the volatility of related stocks is expected to inevitably increase. Experts advise that it is necessary to prepare for the possibility of increased volatility in sectors or stocks that may be sensitive to policies.

According to the Korea Exchange on the 9th, the KOSPI, which rose 3.95% last month, has shown a breathing spell with a 1.06% decline so far this month. This is interpreted as a pause after the rise and a wait-and-see attitude toward external variables, including the general election scheduled for the 10th.

As the general election approaches, market volatility also appears to be expanding. The KOSPI 200 Volatility Index (VKOSPI), known as the "fear index," has been on an upward trend this month. The KOSPI 200 Volatility Index, which was in the 16-point range at the end of last month, rose intraday to 18.22 on the first day of early voting for the 22nd general election on the 5th, marking the highest level since February 26 (18.91).

Kim Young-hwan, a researcher at NH Investment & Securities, said, "The 22nd National Assembly election is scheduled for the 10th, and currently there are disagreements between the ruling and opposition parties regarding corporate tax and financial investment income tax (financial investment tax), so the election results could act as a factor influencing the stock market." He added, "It is necessary to prepare for the possibility of short-term volatility expansion in stocks in sectors that may react sensitively to government policies."

Market reactions are also expected to vary depending on the voting results. Cho Jun-gi, a researcher at SK Securities, predicted, "Basically, the impact of the general election results on the stock market is likely to be small, but if the results are extreme, the market could strongly reflect them."

In particular, low price-to-book ratio (PBR) stocks related to the corporate value-up program, which the government has strongly driven to boost the stock market this year, are expected to be affected by the general election results. The domestic stock market, which had been weak since the beginning of the year, rebounded after the government's announcement of the corporate value-up program in January, mainly led by low PBR stocks. Kim Sung-no, a researcher at BNK Investment & Securities, said, "Based on past experience, the impact of general election results on stock prices was almost negligible, but this time, the election could be a significant short-term issue for the stock market because it could influence the pace of the government's value-up program." He added, "It will be interesting to see whether the process leading to the amendment of the Commercial Act after the election proceeds smoothly."

Han Ji-young, a researcher at Kiwoom Securities, also noted, "The general election results related to the momentum of the corporate value-up program policy are important because they could affect the stock prices and demand-supply of low PBR stocks, which have recently returned to early February levels." She pointed out, "After this general election, the key point to watch will be whether continuity can be secured for the current administration's policy to resolve the Korea discount (undervaluation of the Korean stock market)."

Lee Kyung-min, a researcher at Daishin Securities, said, "If the Democratic Party of Korea secures more than 200 seats, doubts about the implementation and momentum of the value-up program may increase." He added, "If the People Power Party secures more than 150 seats, expectations for the value-up program will rise again, which could help reverse the mood of low PBR stocks."

Besides the corporate value-up program, other government policies are also expected to be inevitably influenced by the general election results. The government is promoting the abolition of the financial investment tax and the expansion of tax benefits for Individual Savings Accounts (ISA) to advance the capital market. Kang Dae-seok, a researcher at Yuanta Securities, said, "The government's key tasks for capital market advancement include abolishing the financial investment tax, expanding ISA tax benefits, improving dividend procedures, and incentives for treasury stock cancellation, which require amendments to tax law, the Commercial Act, and the Capital Market Act." He pointed out, "With the lowest rate of government-submitted bills reflected in the 21st National Assembly and the combination of a divided National Assembly and lame-duck period, the government's policy momentum is expected to weaken further." The financial investment tax is a 20% tax on income generated from all financial investment products such as stocks, bonds, funds, and derivatives. It was originally scheduled to be implemented last year but was postponed for two years through an agreement between the ruling and opposition parties. The Democratic Party of Korea opposes the abolition of the financial investment tax, calling it a "tax cut for the rich," so whether it will be abolished or implemented is expected to be decided depending on the election results.

With stock market volatility expected to be inevitable for a while due to the general election, there is an opinion that attention should be paid to sectors with improved earnings in the first quarter of this year. Researcher Kim Young-hwan said, "There is a possibility that uncertainty in the stock market will increase before and after the general election." He added, "At times like this, it is necessary to increase concentration in certain areas, and continuous interest in sectors with improved first-quarter earnings, centered on semiconductors, is needed."