The First President After the "10 Million Donghak Ants Era"... Will He Overcome the Excessive Discount on the Korean Stock Market? (Comprehensive)

[Asia Economy Reporter Lee Seon-ae] How far will the stock market rally under the 'Yoon Suk-yeol administration' extend? Can it overcome the Korea discount (undervaluation of the Korean stock market) and reach the uncharted KOSPI 4000 mark? As a new government set to lead South Korea for the next five years emerges, investors in the capital market are increasingly optimistic. If the domestic stock market, currently weighed down by various external adversities, overcomes these challenges, it is expected to enter a bullish phase supported by the new government's economic stimulus measures and capital market pledges. This optimism stems from the president-elect’s campaign promises, which include abolishing capital gains tax on stocks, improving the short-selling system, strengthening requirements for physical division, and institutionalizing shareholder protection measures?all aimed at revitalizing the capital market and protecting individual investors. However, due to external factors such as interest rate hikes, inflation, and the Russia-Ukraine conflict, the immediate 'honeymoon effect' (stock market boost) following the new government’s inauguration is expected to be limited.

◆Tax Benefits and Leveling the Playing Field= According to the financial investment industry on the 9th, the president-elect Yoon Suk-yeol’s key capital market pledges include ▲abolishing capital gains tax on stocks ▲granting existing shareholders preemptive rights when new businesses are spun off and listed ▲establishing a dedicated short-selling surveillance team ▲introducing a short-selling circuit breaker ▲restricting unlimited insider share sales ▲revising delisting criteria, all aimed at ensuring fairness, transparency, revitalization of the capital market, and protection of individual investors.

Individual investors and securities firms expect that abolishing capital gains tax will resolve the 'Korea discount' and trigger a bullish market. Jeong Ui-jeong, representative of the Korea Stock Investors Union (HanTuYeon), an individual investor group, said, "Individual investors may think it’s not a problem to impose capital gains tax since they earn less than 50 million won, but the reality is different. The market movers are the big players, and if they exit the stock market, it could lead to a prolonged downturn. However, abolishing capital gains tax will make trading freer and revitalize the capital market."

The so-called 'trickle-down effect' theory suggests that if big players can freely enter and exit the stock market without tax concerns and make profits, the overall market will rise, ultimately benefiting retail investors as well. Securities experts generally agree that abolishing capital gains tax will be a positive factor for the domestic stock market. However, since this requires legal amendments, bipartisan agreement is necessary. Opposition citing tax cuts for the wealthy is significant, making parliamentary approval uncertain.

Regarding short-selling, there is a strong will to improve the system to correct the uneven playing field that disadvantages individual investors compared to foreigners and institutions. Instead of completely banning short-selling, the president-elect plans to establish a dedicated short-selling surveillance team and introduce a 'short-selling circuit breaker' that temporarily bans short-selling during sharp price drops. The collateral ratio for individual investors is also planned to be lowered from the current 140% to a more reasonable level compared to institutions and foreigners (5%).

◆Protecting Individual Investors, Strict Punishment for Crimes, Inclusion in Developed Market Index= As the first president-elect since the '10 million Donghak ants era' (massive retail investor participation), many protective measures for individual investors have drawn attention. The president-elect conveyed intentions to strictly limit the listing of spin-off subsidiaries after physical division, which has been a hot-button issue in the stock market, and to revise regulations to grant preemptive rights to parent company shareholders when new businesses are spun off and separately listed, focusing on preventing small shareholder damage. To create a transparent and fair market system, the criteria for stock delisting will be revised, and a phased management system for the delisting process will be expanded.

Penalties for unfair practices in the capital market are also expected to be strengthened. Campaign pledges include enhanced pre- and post-monitoring and punishment of unfair stock market practices, and reforming investigation and punishment of securities crimes to increase the effectiveness of sanctions.

Researcher Park So-yeon of Shin Young Securities said, "The lack of individual investor protection systems has been cited as a main cause of the Korea discount. If a compensation system for stock value decline due to new business spin-offs is legalized, it is expected that the undervalued parent companies will be re-evaluated, and improving individual investor protection during corporate splits and IPOs will attract additional funds to the Korean stock market."

Inclusion in the Morgan Stanley Capital International (MSCI) Developed Market Index is also anticipated. The MSCI Developed Market Index, published by the US financial firm Morgan Stanley Capital International, serves as a global benchmark for funds and is considered a long-standing goal for the Korean stock market. Since being classified as an emerging market in 1992, Korea has remained in the MSCI Emerging Markets Index for 30 years. The new government is expected to review inclusion in the MSCI Developed Market Index, which has been stagnant for seven years, to gain fair valuation for the undervalued Korean stock market. However, the pace of progress remains to be seen.

◆Limited Honeymoon Rally Due to External Adversities= The immediate honeymoon effect is expected to be limited. With the ongoing Russia-Ukraine war and soaring prices fueling recession concerns, negative factors outweigh positive ones. Nevertheless, on the day, the KOSPI opened at 2660.86, up 1.47%, initially showing a rise of over 2%, seemingly welcoming President-elect Yoon Suk-yeol. Researcher Park Seung-young of Hanwha Investment & Securities emphasized, "It is unrealistic to expect a major market shift after the presidential election. The stock market will follow its existing trajectory, and the election should be used as a milestone, not a turning point."

Historical cases also show that the stock market often performed well after elections, but the impact of global economic conditions and domestic and international market environments was greater than expectations for the new government.

Since the 12th presidential election in 1981, the KOSPI rose within one year after eight elections except for two cases. When President Roh Tae-woo was elected in 1987, the KOSPI rose 91.0% one year after the election. After President Kim Young-sam’s election, it rose 30.8%, and during Presidents Kim Dae-jung (25.4%), Roh Moo-hyun (14.4%), and Moon Jae-in (6.6%), the KOSPI also increased. Conversely, during Presidents Lee Myung-bak and Park Geun-hye’s terms, the KOSPI fell 36.6% and 0.9%, respectively, one year after the election.

Narrowing the scope to post-2000, when foreign influence on the stock market grew, the market generally underperformed after presidential inaugurations. After President Roh Moo-hyun’s election, the KOSPI fell 10% after one month and 20% after three months. For President Lee Myung-bak, it was -7% and -13%; for Park Geun-hye, 0% and -2%; and for Moon Jae-in, 3% and 4%, respectively.

President Roh Tae-woo, who had the highest one-year post-election KOSPI gain, took office during the latter part of the 'three lows boom' (low oil prices, low interest rates, low dollar), while President Lee Myung-bak, who had the largest decline, started his term amid the full impact of the global financial crisis. Researcher Byun Jun-ho of Heungkuk Securities analyzed, "Past stock market rises after presidential inaugurations were more influenced by favorable global economic conditions or stock market environments than by expectations for new policies."

Regarding the KOSDAQ market, there was no honeymoon effect from the new government. Among five cases including the 1997 presidential election, the KOSDAQ index rose only twice one year after the election. Even then, during the Park Geun-hye administration, the one-year increase was only 0.2%, making the Moon Jae-in administration the only one with a notable rise.

The new government’s proactive fiscal policies are positive factors, and an upward trend is expected after overcoming external adversities. There is also analysis that the stock market tends to rise in the second year of a new administration. Based on averages from the 13th to 18th administrations, the stock market rose 23.18% in the first year, when expectations for economic policies were high, and showed the largest increase of 26.18% in the second year, when the cabinet was completed and the government actively pursued economic policies. It declined in the third (-1.70%) and fourth (-0.78%) years due to growing disappointment with the government, and rose slightly by 0.97% in the fifth year as expectations for the next administration increased.

Researcher Kim Sung-geun of Korea Investment & Securities emphasized, "While first-year returns are volatile regardless of conservative or progressive administrations, the stock market generally responds positively in the second year when the cabinet is fully formed and the government can implement policies stably."

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