[In-Depth Review] The 20th Presidential Election and Political Theme Stocks

Senior Research Fellow Hwang Se-woon, Korea Capital Market Institute

The curtain has risen on the 20th presidential election. Since the preliminary candidate registration began on July 12, candidates will engage in a fierce presidential race until March 9 of next year. It is predicted that more candidates will appear in this election than in any previous one. Since the election is to choose the person who will be responsible for South Korea's governance for the next five years, having many candidates is not necessarily a bad thing. However, every time I look at the growing list of preliminary candidates day by day, my heart somehow feels heavier.

There is a place that becomes as busy as the political arena when an election approaches: the stock market. During election season, the stock market suffers from the sudden surge of political theme stocks that appear like mushrooms after rain. The more candidates there are, the more political theme stocks will flood the market, and if the gap in support rates among candidates is not large, political theme stocks will shake the market even more aggressively.

Many individual investors who entered the stock market after March last year are currently active. These newly entered individual investors witnessed a rise of over 100% during about one year, so their expectations for returns are very high. However, it seems difficult to achieve returns that satisfy these heightened expectations this year. In such a situation, investors find it hard to resist the speculative temptation from political theme stocks. This is why an unprecedented appearance of political theme stocks is expected in the 20th presidential election.

Most political theme stocks fail to maintain their elevated prices and eventually collapse. Political theme stocks rarely start from reasonable expectations of improved performance. Despite almost no possibility of benefiting from policies, their stock prices rise for hard-to-understand reasons such as academic or regional ties. When evaluated from a long-term investment perspective, such price movements only increase stock price volatility and do not reflect the intrinsic value of the company, making it difficult to make decisive investment judgments. However, if one is fixated on short-term investment perspectives, the possibility of the stock price rising tomorrow or a week later becomes more important than fundamentals. Even if the company is risky and hard to guarantee for a year ahead, if a temporary distortion in supply and demand causes a price increase, investors are willing to take that risk. This behavior is closer to a game of hot potato speculation than investment.

To escape the harms of political theme stocks, investors need to make investment decisions from a long-term perspective and reasonably adjust their expected returns. Instead of focusing on a week or a month later, they should find companies that can generate proper returns even three or five years later. To do so, it is necessary to focus on the company's fundamentals. Efforts to set reasonable target returns considering market conditions are also important. Although stocks generally provide higher returns than savings or deposits, it is rare to achieve returns exceeding 20% in a year. Years with high returns like last year should be considered exceptional cases.

The higher the expected returns, the more likely investors are to fall into risky stocks and tend to go all-in on specific stocks. Setting target returns at a consistently achievable level and adhering to basic investment principles can lead to successful investment. Unless you are a master investor, swinging hard does not guarantee a home run. It only increases the chance of striking out. Remember that by consistently aiming for singles, sometimes home runs will come.