Record $259 bn yet to find investment targets in South Korea

South Koreans parked a record 350 trillion won ($259 billion) in cash-equivalents such as money market funds (MMFs) as they failed to find investment targets in the domestic stock and property markets amid uncertainties in interest rate cuts and government policies.

The total balance of MMFs that invest in short-term debt securities such as treasury bonds, cash management accounts (CMAs) that act as combined savings and checking accounts providing interest and having investment options, and investor deposits have grown by 48 trillion won this year to an all-time high of 349.9 trillion won as of May 7, according to the Korea Financial Investment Association. The combined balance eased slightly to 344.5 trillion won as of May 13, the association’s data showed.

This comes as Korea’s institutional and retail investors dumped nearly 20 trillion won in domestic stocks so far this year, as hopes waned for government measures to push up corporate value and abolish investment gains taxes, financial market industry sources said. Uncertainties over interest rate cuts also kept investors from seeking alternative assets such as real estate, they added.

“Distrust of the value-up program, which encourages listed companies to implement shareholder-friendly policies, contributed to the selling spree,” said the head of a foreign investment bank's research unit. 

Earlier this year, Korean President Yoon Suk Yeol pledged to bolster the stock market with a government-led policy, the so-called corporate value-up program. Yoon also said the country plans to scrap capital gains taxes on financial investments to revitalize the lackluster domestic financial market and help individual investors grow their assets.

DISBELIEF

Korean institutional and individual investors have sold a net 10.3 trillion won and a net 8.3 trillion won in shares, respectively, so far this year as of May 14, according to the Korea Exchange.

Financial institutions mainly dumped semiconductor shares and stocks with low price-earnings ratios (PER). They unloaded 4.6 trillion won worth of the world’s largest memory chipmaker Samsung Electronics Co., 1.2 trillion won of its smaller rival SK Hynix Inc., 415 billion won of Kia Corp. and 279 billion won of Samsung C&T Corp.

Retail investors unloaded 3.9 trillion won worth of Hyundai Motor Co., 904 billion won of Samsung C&T, 674 billion won of Kia, 615 billion won of KB Financial Group, 434 billion won of Hana Financial Group and 406 billion won of Shinhan Financial Group.

Most of those stocks have risen 10%-30% since the country announced the value-up scheme. The sell-off indicated investors focused on profit-taking from their gains instead of further buying.

UNCERTAINTIES

On May 2, the authorities unveiled some program details including a recommendation that listed companies set up and announce plans to boost their enterprise value through regulatory filings. The government is mulling cuts in corporate taxes and dividend income taxes for companies with larger dividends, a move that requires legal amendment.

Lawmakers may not approve it, however, due to objections by the opposition parties, which control the majority of parliament.

It is also unclear whether the government will abolish capital gains taxes, set to be reintroduced in 2025.

The country planned to impose a tax rate of 20%-25% on investors who reap capital gains of more than 50 million won in a year from investments in financial products such as stocks, bonds, funds and derivatives. The taxes were supposed to be implemented in 2023 but were postponed until 2025.

Earlier this year Yoon announced that his administration would abolish the taxes, but the main opposition Democratic Party, which won a landslide victory in the latest general election, urged the government to implement the rule as scheduled.

“Once the capital gains taxes are implemented, funds of some 150 trillion won will leave domestic stock markets,” said the Korea Corporate Governance Forum.

Those uncertainties further deteriorated investor sentiment, which has already been soured by expectations that the US Federal Reserve and the Bank of Korea aren't likely to cut interest rates anytime soon.

Write to Ik-Hwan Kim, Hyun-Ju Jang and Jeong-Cheol Bae at lovepen@hankyung.com
 
Jongwoo Cheon edited this article.