[Why&Next] Wavering Financial Investment Tax, What High-Net-Worth Individuals Choose

Major Securities Firms PB Interview
High-Net-Worth Investors with Large Stock and Bond Holdings Increasingly Dissatisfied with Capital Gains Tax
Portfolio Adjustments Underway Ahead of Capital Gains Tax Implementation
Recently, Investment Focus Shifts More to Global Interest Rate Cuts than Capital Gains Tax

Regarding the financial investment income tax set to be implemented from next year, its enforcement remains uncertain. While high-net-worth individuals are closely monitoring the direct impact of the tax, they are reacting more sensitively to the increased market uncertainty caused by the postponement of its implementation. Recently, as the likelihood of a delay has increased, investors appear to be focusing more on interest rate cuts rather than the financial investment income tax when devising their investment strategies.

On the 2nd, Asia Economy interviewed private bankers (PBs) from major securities firms, revealing that most high-net-worth individuals hold a negative view of the financial investment income tax, although perspectives vary depending on the proportion of their investment assets.

Oh Jeong-taek, Director of the Investment Center Banpo WM at Mirae Asset Securities, said, "The proportion of clients affected by the financial investment income tax reaches 80-90%. Investors who primarily invest heavily in stocks and bonds tend to have a particularly negative view of the tax."

On the ground, high-net-worth individuals with financial assets exceeding 1 billion KRW have breathed a sigh of relief as the tax is leaning toward being postponed. However, a considerable number have expressed intentions to adjust their investment portfolios in advance. Although the Democratic Party of Korea has settled on postponing the tax, concerns remain that the possibility of its normal implementation could exacerbate the 'Korea discount' phenomenon, which refers to the undervaluation of the Korean stock market.

A representative from Daishin Securities’ asset management center located in the Gangnam area of Seoul stated, "It should be assumed that all asset owners with financial assets over 1 billion KRW are considering portfolio readjustments." He added, "They have started adjusting bond maturities, and those who manage their assets skillfully are meticulously coordinating the timing." He continued, "Conservative investors tend to hold many deposits or dividend-type products, which are already subject to comprehensive financial income taxation with rates up to 50%. These investors consider risk when adjusting portfolios, and if the financial investment income tax adds taxes on risky investments, their activity will likely decrease further."

'Uncertainty' Variable... Active Portfolio Readjustments

Some investors view the financial investment income tax as an opportunity to readjust their portfolios. A representative from Korea Investment & Securities said, "Major shareholders have always paid taxes, so the introduction of the financial investment income tax does not significantly affect them. They seem to see this as a chance to revisit their portfolios."

Even if the tax is introduced, investor positions vary depending on the products subscribed to, investment periods, and amounts invested. The Korea Investment & Securities representative explained, "Investors who only invest in bonds are newly taxed on capital gains, making them the most disadvantaged by the tax. Conversely, those investing in various products such as funds and stocks can offset losses in one area with gains in another."

Another PB team leader from a large securities firm said, "Reactions to the financial investment income tax differ depending on asset size and investment asset proportions. Those with smaller assets (who may not be subject to taxation) or very large shareholders (subject to major shareholder capital gains tax) tend to have negative views but show weak active responses. Customers with high proportions of stock investments (including direct and indirect products) and bond investments express dissatisfaction with the policy's effectiveness." He added, "They naturally expect higher taxes and will need to manage limits carefully in the future. Therefore, they vaguely believe that the introduction of the financial investment income tax will result in disadvantages."

Many investors respond more sensitively to the uncertainty caused by the financial investment income tax than to its direct impact. Director Oh said, "There seems to be considerable disappointment over the prolonged uncertainty and postponement of the tax's implementation, which has increased volatility. While stock markets in the U.S., Japan, and even China are rising, Korea is being left out, which causes dissatisfaction."

As the likelihood of postponement grows, high-net-worth individuals’ attention is shifting toward interest rate cuts. Director Oh said, "Following the U.S., China is also cutting interest rates, leading to a stock market rebound, and investors are devising strategies accordingly. Customers are focusing on changes in interest rate policies and portfolio rebalancing in response."

Daishin Securities expects demand for long-term portfolio adjustments to increase after the U.S. presidential election concludes. Recently, most investors have been analyzing their entire portfolios, trimming profits, and restructuring portfolios short-term to align with interest rate changes and stock market conditions. A Daishin Securities representative explained, "Recently, significant profits have been realized from long-term government bonds and domestic and U.S. government bonds, and investors are taking profits. With the recent market correction, short-term safety nets have been established, leading to additional purchases of stocks and indices. However, since uncertainty will return after the rapid rebound ahead of the election, chase buying or long-term portfolio changes are expected only after November."