Started CFD Taxation... Some Stocks Present 'Supply-Demand Normalization' Opportunity

Selling Volume Floods from Early Year to Pre-Tax March
Sell-Off Pressure Expected to Weaken from Taxation Start in April

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] With the imposition of capital gains tax on Contracts for Difference (CFD) starting this month, some analysts predict that the supply and demand of certain stocks will normalize.

According to the Korea Exchange on the 3rd, the KOSPI closed at 3112.80 the previous day. This is the first time since February 19 (closing price 3107.62) that the closing price has surpassed 3100. After reaching an all-time high of 3266.23 intraday on January 11, the market had been trading within a box range of 2950 to 3100 until recently, but signs of breaking out from this range have appeared.

Industry experts attribute this to improvements in foreign investor demand. In particular, CFDs have been used as a means to avoid stock capital gains tax at year-end, leading to significant funds flowing into the stock market through CFDs. CFDs are over-the-counter derivative contracts that settle daily profits or losses based on stock price movements without actually purchasing the underlying stocks. Depending on the stock, leverage of up to 10 times can be applied. Since CFDs were previously tax-exempt, large individual investors reportedly used them as a method to avoid capital gains tax.

However, with capital gains tax applied to CFDs starting April this year, funds that flowed into the market via CFDs until the end of last year could be sold off again by the following month. Since CFD trades executed by domestic individual and institutional investors are processed through foreign securities firms, they are reflected as foreign investor demand. Therefore, this sell-off is expected to ease the burden on foreign investor demand.

Researcher Hainhwan from KB Securities explained, "The sharp foreign buying at the end of last year can be attributed to factors such as the strong Korean won and the attractiveness of the Korean stock market, but the buying to avoid taxes through CFDs can also be considered one of the causes." He added, "Conversely, the sharp foreign selling at the beginning of this year can be attributed not only to macroeconomic factors like rising interest rates but also to sell-offs aimed at liquidating CFDs ahead of the capital gains tax imposition."

Looking ahead, the foreign selling trend that continued until March is expected to ease. This is because the selling through CFDs, which is reflected as foreign demand, is likely to have subsided to some extent. Previously, foreign investors net sold a total of 7.5822 trillion KRW in the KOSPI market alone until March this year. This amount is more than seven times the net buying of 1.0295 trillion KRW during the previous three months (October to December 2020). Researcher Ha stated, "The overall 'selling pressure' in the Korean stock market could weaken," and added, "Expectations for relief from supply and demand pressure on stocks that have experienced selling pressure through CFDs may also increase."

In particular, stocks that foreign investors (foreign securities firms corresponding to CFD trading securities firms) net bought at the end of last year but net sold at the beginning of this year are estimated to have been influenced by CFD demand. For these stocks, selling pressure is expected to ease going forward. Notably, these stocks significantly outperformed the KOSPI and KOSDAQ indices in November and December 2020, when CFD funds were flowing in, but underperformed the market by a large margin in January, immediately after the tax issue ended. In February and March, ahead of the capital gains tax imposition on CFDs, their performance was roughly in line with the market. Researcher Ha predicted, "Therefore, from this month, when the CFD demand issue for these stocks is resolved, 'normalization of supply and demand' is highly likely to occur."

This content was produced with the assistance of AI translation services.