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Concerns over Politically Themed Stocks Ahead of Korea’s 21st General Election
Publication date Feb. 04, 2020
Summary
A list of stocks that abruptly surged on the first trading day of 2020 show worrying signs of the recurring “politically themed stock phenomenon” as the general elections draw nearer. In every major political event including elections, prices of so-called politically themed stocks drastically move up and down due to their alleged connection to promising politicians or election candidates, regardless of the stocks’ fundamental value. To prevent the recurring phenomenon and consequent damages to investors, it is required for the related firms to disclose information in a more active and preemptive manner, and for investors to remain cautious. Meanwhile, the regulatory authorities should be prepared to deal with the issue after fully considering the nature of the general elections that involve a more number of candidates scattered across relatively small electoral districts than the presidential election. A more fundamental fix to the phenomenon, however, would be to shift away from politics-business collusion and to achieve improvements in market structures.
Ahead of Korea’s 21st parliamentary elections on April 15, 2020, Korea’s stock market is again showing signs of the so-called “politically themed stock” phenomenon, referring to an extreme rally in the theme stocks that are believed to have some connections with promising election candidates. This article tries to explore what characterizes the undesirable phenomenon that occurs before every major election, and how market participants should react to that.1)
Stocks rallying on the first day of trading in 2020
While the KOSPI started the year of 2020 by posting a 1% decline from the year-end close, four stocks in the KOSPI and KOSDAQ closed hitting the upper price limit. Three stocks among the four and another stock whose daily return on the same day ranked 6th at 23.66% were classified as politically themed by major media, citing their special relationship with promising politicians.2)
Indeed, the four stocks3) in common exhibit typical characteristics of theme stocks in many ways, e.g., their price soaring abruptly at political news, aggressive buying by retail investors, a drastic increase in trading, etc. Without any news on their fundamental valuation, media attention on a certain politician alone triggered the prices to soar 30% to 51.5% for one month between Dec. 2, 2019 and Jan. 2, 2020.4) In particular, the surge on Jan. 2, 2020 was mostly led by retail investors5) with the trading volume exploding to 9.5 to 39.2 times6) that of a normal trading day.
1) For details, refer to “Politically-themed Stocks in the Presidential Election: Characteristics and Implications” (Nam, Gilnam, 2017, Issue Paper 17-04, Korea Capital Market Institute) that provides detailed analyses on the phenomenon during 16th through 19th presidential elections in Korea.
2) Extreme price swings in theme stocks and upcoming elections: Don?셳 even look at them, Joongang Daily, Jan. 5, 2020; Theme stocks rallying again with elections just 100 days away, edaily, Jan. 6, 2020.
3) For convenience, I label them stock A, B, C, and D in this article.
4) The monthly average return between Dec. 2, 2019 and Jan. 2, 2020 stood at 30.9% (stock A), 30% (stock B), 41.8% (stock C), and 51.5% (stock D), far exceeding 4% of the KOSPI and 6.2% of the KOSDAQ index.
5) Retail investors accounted for 94% (stock A), 94% (stock B), 96% (stock C), and 99% (stock D) of the buying on Jan. 2, 2020 when the four stocks surged.
6) Trading of the four theme stocks exploded on Jan. 2, 2020, recording 32.4 times (stock A), 39.2 times (stock B), 9.5 times (stock C), and 15.1 times (stock D), compared to the average 52-week trading volume.
7) This refers to the period between the National Assembly’s impeachment voting on Dec. 9, 2016 and the presidential election on May 9, 2017.
8) This is based on Nam (2017).
9) As of Jan. 14, 2020
Stocks rallying on the first day of trading in 2020
While the KOSPI started the year of 2020 by posting a 1% decline from the year-end close, four stocks in the KOSPI and KOSDAQ closed hitting the upper price limit. Three stocks among the four and another stock whose daily return on the same day ranked 6th at 23.66% were classified as politically themed by major media, citing their special relationship with promising politicians.2)
Indeed, the four stocks3) in common exhibit typical characteristics of theme stocks in many ways, e.g., their price soaring abruptly at political news, aggressive buying by retail investors, a drastic increase in trading, etc. Without any news on their fundamental valuation, media attention on a certain politician alone triggered the prices to soar 30% to 51.5% for one month between Dec. 2, 2019 and Jan. 2, 2020.4) In particular, the surge on Jan. 2, 2020 was mostly led by retail investors5) with the trading volume exploding to 9.5 to 39.2 times6) that of a normal trading day.
What’s noteworthy is that three out of the four stocks were also labeled as politically-themed during the campaigns for the 19th presidential election in 2017. Between early 2017 and the end of Mar. 2017, the prices of stock A, B, and C had soared 55%, 107%, and 173%, respectively, before they plunged altogether shortly after. The fall became as drastic as 55.8%, 60.8%, and 61.7% on the day after the election, May 10, 2017, as compared to the close at the end of Mar. 2017. Simply put, most of the stocks that recently rallied had been also theme stocks, undergoing extreme price swings three years ago. Their prices had skyrocketed during the campaign period before plummeting when the election ended.
Although it’s hard to conclude that the stock market would just repeat the past pattern again this time, the abrupt price surges in the theme stocks are far from the fundamental corporate value. Hence, the prices are likely to fall back before or after the election day. An analysis on a total of 70 theme stocks from the 16th to 19th presidential elections reveals that not only stocks linked to the defeated candidate, but also those related to the president-elect saw their prices going down right after the polling day. Such a tendency is what investors should be wary of.
More effort needed for active clarification
On top of the caution required for retail investors, the firms related to theme stocks should act more aggressively and preemptively to clarify uncertainties around their business, which could help prevent the undesirable phenomenon from recurring. In general, those firms tend to be passive, unveiling an inquiry disclosure only upon request of the Korea Exchange, while often just sitting still even when their stock prices rise outrageously. This is what actually happened during the past presidential election period. Firms allegedly related to presidential candidates posted inquiry disclosures one after another only after they were formally requested by the KRX.
Instead of waiting for a KRX request for an inquiry disclosure, it’s possible for those firms to act preemptively to curb speculations. If they actively clarify rumors about alleged political connections, that could provide investors meaningful and helpful information. During the 2017 presidential election campaign period,7) a total of 16 firms posted disclosure in a preemptive manner to clarify 18 rumors about their alleged connections to then presidential candidates.
However, given that the number of theme stocks during that period reached 49 when including the top three presidential candidates only,8) the clarification by only 16 firms seems insufficient by any measure. And the lack of active clarification is still relevant today because no firm among those related to theme stocks has disclosed any clarification about their political connection yet despite the recent price surge.9)
Better market fundamentals, no politics-business collusion
What’s necessary on top of firms’ effort for active disclosure would be the regulatory authorities’ firm determination for market monitoring and a crackdown on unfair trading. During the 19th presidential election, the regulatory authorities did effectively rein in the theme stock issue, which led to some meaningful outcomes. However, the general elections, as compared to the presidential election, involves much more candidates in many electoral districts. That could add totally different aspects and dimensions to the issue as well as unfair trading practices, all of which requires cautious approach.
Regardless of how hard we emphasize the importance of investors, listed companies, and regulatory authorities being actively engaged, it’s far from a complete solution to the phenomenon of theme stocks. Because of the phenomenon’s underdeveloped aspect, a feasible solution can never be found if Korea’s stock market remains status quo. Towards a fundamental fix, Korea should overcome its old politics-business collusion, and achieve market improvements so that the market is led by investors capable of assessing fundamental values of the stocks in which they invest.
On top of the caution required for retail investors, the firms related to theme stocks should act more aggressively and preemptively to clarify uncertainties around their business, which could help prevent the undesirable phenomenon from recurring. In general, those firms tend to be passive, unveiling an inquiry disclosure only upon request of the Korea Exchange, while often just sitting still even when their stock prices rise outrageously. This is what actually happened during the past presidential election period. Firms allegedly related to presidential candidates posted inquiry disclosures one after another only after they were formally requested by the KRX.
Instead of waiting for a KRX request for an inquiry disclosure, it’s possible for those firms to act preemptively to curb speculations. If they actively clarify rumors about alleged political connections, that could provide investors meaningful and helpful information. During the 2017 presidential election campaign period,7) a total of 16 firms posted disclosure in a preemptive manner to clarify 18 rumors about their alleged connections to then presidential candidates.
However, given that the number of theme stocks during that period reached 49 when including the top three presidential candidates only,8) the clarification by only 16 firms seems insufficient by any measure. And the lack of active clarification is still relevant today because no firm among those related to theme stocks has disclosed any clarification about their political connection yet despite the recent price surge.9)
Better market fundamentals, no politics-business collusion
What’s necessary on top of firms’ effort for active disclosure would be the regulatory authorities’ firm determination for market monitoring and a crackdown on unfair trading. During the 19th presidential election, the regulatory authorities did effectively rein in the theme stock issue, which led to some meaningful outcomes. However, the general elections, as compared to the presidential election, involves much more candidates in many electoral districts. That could add totally different aspects and dimensions to the issue as well as unfair trading practices, all of which requires cautious approach.
Regardless of how hard we emphasize the importance of investors, listed companies, and regulatory authorities being actively engaged, it’s far from a complete solution to the phenomenon of theme stocks. Because of the phenomenon’s underdeveloped aspect, a feasible solution can never be found if Korea’s stock market remains status quo. Towards a fundamental fix, Korea should overcome its old politics-business collusion, and achieve market improvements so that the market is led by investors capable of assessing fundamental values of the stocks in which they invest.
1) For details, refer to “Politically-themed Stocks in the Presidential Election: Characteristics and Implications” (Nam, Gilnam, 2017, Issue Paper 17-04, Korea Capital Market Institute) that provides detailed analyses on the phenomenon during 16th through 19th presidential elections in Korea.
2) Extreme price swings in theme stocks and upcoming elections: Don?셳 even look at them, Joongang Daily, Jan. 5, 2020; Theme stocks rallying again with elections just 100 days away, edaily, Jan. 6, 2020.
3) For convenience, I label them stock A, B, C, and D in this article.
4) The monthly average return between Dec. 2, 2019 and Jan. 2, 2020 stood at 30.9% (stock A), 30% (stock B), 41.8% (stock C), and 51.5% (stock D), far exceeding 4% of the KOSPI and 6.2% of the KOSDAQ index.
5) Retail investors accounted for 94% (stock A), 94% (stock B), 96% (stock C), and 99% (stock D) of the buying on Jan. 2, 2020 when the four stocks surged.
6) Trading of the four theme stocks exploded on Jan. 2, 2020, recording 32.4 times (stock A), 39.2 times (stock B), 9.5 times (stock C), and 15.1 times (stock D), compared to the average 52-week trading volume.
7) This refers to the period between the National Assembly’s impeachment voting on Dec. 9, 2016 and the presidential election on May 9, 2017.
8) This is based on Nam (2017).
9) As of Jan. 14, 2020