"KOSPI 5000 Is Coming": Started as Top Performer in H1, Now Boxed In by Disappointment [Lee Jaemyung Administration 100 Days]

On July 30, the KOSPI closed at 3,254.47, up 23.90 points (0.74%) from the previous session, marking a new all-time high. Yonhap News

The KOSPI, which started off strong buoyed by expectations for the launch of the new administration, has become trapped in a narrow range. The KOSPI, which soared on optimism after President Lee Jaemyung emphasized the arrival of the "KOSPI 5000 era," managed to recover the 3,000-point level for the first time in three and a half years. It then surpassed the 3,200 mark, fueling hopes that it would break through the previous all-time high of 3,316.08 set in June 2021. However, the anticipated breakthrough did not materialize. The government's tax reform plan, announced at the end of July, fell far short of investors' expectations. Optimism quickly turned to disappointment, and on August 1, the day after the tax reform announcement, the KOSPI plummeted by 3.88%, marking the steepest drop since the launch of the Lee Jaemyung administration. Since then, the KOSPI has remained trapped within a narrow range between 3,100 and 3,200.

KOSPI, Which Ranked First Globally in Returns in the First Half, Drops to 12th in the Second Half

In the first half of this year, the KOSPI rebounded strongly, overcoming its previous sluggishness. The index rose as valuation appeal emerged following last year's poor performance and expectations grew for the resolution of political uncertainty. The momentum intensified around the June presidential election, resulting in a steep upward curve.

Looking at the KOSPI's monthly returns this year, June stood out with a remarkable 13.86% gain. June was the only month to record a double-digit increase, reflecting optimism surrounding the launch of the new administration.

As a result, the KOSPI posted the most impressive returns among global stock markets in the first half of the year. According to the Korea Exchange, the KOSPI rose 28.01% in the first half, the highest among the G20 stock markets. After falling nearly 10% last year and ranking among the worst performers globally, the KOSPI showed a dramatic turnaround in the first half of this year.

However, the index has failed to maintain this momentum in the second half. As of September 3, the KOSPI’s return since the start of the second half stood at 3.67%, dropping it to 12th place among G20 stock markets. The KOSDAQ, which was ranked 8th, fell to 16th. The KOSPI declined by 1.83% in August, marking its first monthly decline in five months.

The main reason for the KOSPI’s lackluster performance in the second half has been the tax reform plan. After a period of steep gains in the first half, the market was already susceptible to a correction, and the tax reform plan provided the decisive trigger. Despite concerns about the rapid rise, the KOSPI still gained 5.66% in July, but then plunged 3.88% on August 1, the day after the tax reform announcement on July 31. This was due to investor backlash after the threshold for major shareholder capital gains tax was lowered from 5 billion won to 1 billion won, and the maximum tax rate for separate taxation of dividend income was set at 35%, rather than the 25% proposed by Lee Soyoung of the Democratic Party.

The market, which had been anticipating a breakthrough above 3,300 points, quickly froze. The KOSPI’s average daily trading value, which reached 15.1998 trillion won in June, dropped to 10.3929 trillion won in August, a decrease of nearly 5 trillion won. Customer deposits, often regarded as sideline funds for the stock market, exceeded 70 trillion won in early July but fell to 65 trillion won as of September 3.

Lee Kyungmin, a researcher at Daishin Securities, said, "The previous administration's tax-cutting stance has been reversed, and with corporate tax reductions, the major shareholder threshold for stock capital gains tax, and the securities transaction tax all returning to 2023 levels, confidence in the government's market-friendly approach has been undermined, leading to disappointment and weakening investor sentiment."

Will the Boxed-In Market Continue Until Year-End? Policy Credibility Must Be Restored

Market participants are predicting that the stock market will remain subdued through the end of the year. Park Seungyoung, a researcher at Hanwha Investment & Securities, said, "The KOSPI's 3,254 points recorded on July 30 is likely to be the high point for the year. The tax law revision fell short of market expectations. While I do not believe the major shareholder requirement is as important as some suggest, it is disappointing that the maximum tax rate for separate taxation of dividend income was raised from 25% to 35%. With the implementation of separate taxation on dividend income delayed by a year, a more conservative outlook toward the domestic stock market has taken hold. The stock market is expected to remain subdued through year-end."

Uncertainty persists as the major shareholder requirements, which investors are sensitive to, have yet to be finalized. The ruling party conveyed its opinion to the government on August 10, after a high-level party-government meeting, that the current major shareholder threshold should be maintained. However, there have been no follow-up measures or discussions since then. Kang Jinhyuk, a researcher at Shinhan Investment & Securities, said, "Noise surrounding the major shareholder capital gains tax is likely to persist. Neither the presidential office nor the government has announced any follow-up discussions or plans regarding the major shareholder capital gains tax. However, the opposition party has proposed an income tax law raising the threshold to 10 billion won, and the ruling party also communicated its stance to maintain the current threshold after the high-level party-government meeting. Given its limited effectiveness, revisions could be made during discussions between the party and the government rather than pushing ahead as is."

Some experts emphasize the importance of restoring investor trust in government policy. Kim Byoungyeon, a researcher at NH Investment & Securities, said, "There is ongoing noise regarding trust in government policy. If market concerns materialize and the KOSPI ends the year below the 3,000-point level, it could be interpreted as a sign that the symbolic significance of the new administration's policy direction has faded. Consistency in policy communication and effective implementation are key to the re-rating of the Korean stock market's valuation."