South Korean Stocks Fall Amid US Tariff Fears And Short-Selling Ban Lift

South Korean stocks experienced a significant drop on Monday, driven by growing investor unease over the potential impact of looming US tariffs. This decline came on the heels of a 17-month-long ban on short selling that was lifted on the same day. The benchmark Kospi Index fell by 3%, continuing the downward trend from last week, as markets prepare for US President Donald Trump’s anticipated tariffs, set to take effect on April 2.

Investor sentiment was further weighed down by concerns over Trump’s threats of “secondary tariffs” targeting Russian oil, contingent on the outcome of peace talks with Ukraine. With these developments, all sectors saw losses, with electric-vehicle supply chain stocks, previously targeted by short sellers, performing particularly poorly. The Kosdaq Index, which includes many small-cap companies involved in battery-materials supply, saw its year-to-date gains wiped out.

The MSCI Asia Pacific Index also dropped more than 2%, with Japan leading regional declines, following a Friday selloff in US equities. The fallout from Trump’s tariff news contributed to the broad market weakness.

The lifting of the short-selling ban on Monday allowed hedge funds and other investors to sell borrowed shares across the 2,800 companies listed on the Seoul Stock Exchange. Although the move has raised concerns about near-term market volatility, many market analysts believe the long-term benefits of the resumed trading practice will outweigh these concerns.

Mixo Das, head of Korea & Taiwan equity strategy at JPMorgan Chase & Co., stated that Monday’s market activity was likely influenced by the US market’s performance and the tariff news over the weekend, adding that the return of short selling was not necessarily a negative development.

The ban’s end is expected to enhance overall market liquidity and strengthen South Korea’s position in its bid to be upgraded from emerging-market status to developed-market status in MSCI Inc.’s equity indices. MSCI has emphasized the importance of improving access for foreign investors, which could help Korea’s market appeal.

While the Kospi has been one of Asia’s top-performing indices this year, foreign investors have largely stayed out of the rally. Since August, global funds have pulled approximately $20 billion from Korean stocks, in part due to political instability caused by a brief martial law decree.

In 2023, the South Korean government enacted the short-selling ban, citing concerns over illegal trading practices, particularly naked short selling. Regulators have since taken action against global banks involved in such practices. Despite the ban’s lift, naked short selling, which involves selling shares without borrowing them, remains illegal. An electronic system designed to detect such trades was activated on Monday.

According to officials, 21 institutions, including major players like Morgan Stanley, JPMorgan, and Goldman Sachs, have signed on to the new system, which will monitor short-selling transactions and report violations to the Korea Exchange.

Homin Lee, senior macro strategist at Lombard Odier in Singapore, noted that the end of the short-selling ban is unlikely to immediately boost market conditions, as institutional investors will likely approach the new system with caution. Foreign funds sold a total of 1.8 trillion won ($1.2 billion) worth of Kospi and Kosdaq stocks on Monday.

Despite this, Lee remains optimistic about the longer-term implications, suggesting that the lifting of the ban will gradually improve liquidity, particularly in the small-cap segment, making the market more accessible to global investors.