[Inside Chodong] Political Theme Stocks Plunge Again This Year

Hwacheon Machinery Plunges 30% Within Three Days After Election
Theme Stocks Can't Be Curbed by Regulation Alone
Continuous Investor Education Is Essential

The stock price of Hwacheon Machinery fell by 30% just three days after the end of the '22nd National Assembly Election.' During the same period, the stock prices of Daesang Holdings preferred shares and Deoksung preferred shares also dropped by more than 20%. Theme stocks, which had been named as major political figures' related stocks ahead of the general election, plummeted all at once after the election ended.

In the domestic stock market, political theme stocks mainly surged ahead of presidential elections. Ahead of the '17th Presidential Election' held on December 19, 2007, stocks related to the Grand Canal project soared. Ewha Construction, which mainly builds national infrastructure, saw its stock price rise nearly 30 times during 2007. The rapidly rising stock price then fell by nearly 80% within 11 trading days. Although many investors who mistakenly stepped into political theme stocks ended up bankrupt, 'retail investors' have not been able to escape the sweet temptation of political theme stocks.

This is why a big gamble takes place every five years. Ahead of the presidential election, the stock price volatility of political figures' related stocks increased. Connections were made by tracing even distant relatives of politicians, causing stock prices to repeatedly surge and plunge. Most recently, ahead of the '20th Presidential Election,' stock prices surged because the largest shareholder was said to be from the 'Papyong Yoon clan.'

According to an analysis by the Korea Capital Market Institute on political theme stocks of candidates with high poll ratings during the 20th presidential election phase, most of the relationships between presidential candidates and corporate executives were 'vague connections' unrelated directly to the company's business, such as mutual acquaintances (44%), private ties with executives (18%), and school ties (16%).

Looking at past cases, the volatility of political theme stocks ahead of general elections was relatively smaller than that of presidential elections. However, in this general election, Wider Planet attracted investors' attention by hitting the upper price limit for seven consecutive trading days. Since the end of last year, the volatility of political theme stocks increased, and retail investors aiming for high short-term returns selected investment targets by looking at the political pages rather than the economic pages of major daily newspapers. With Jo Guk, leader of the Jo Guk Innovation Party, taking center stage, theme stocks like Hwacheon Machinery surged.

It is not difficult to find theme stocks that surge overnight ahead of major political events such as presidential and general elections. Some theme stocks rise 30% in a single day, and others double within a week. This stimulates the desire to record high short-term returns. However, most investors who touch political theme stocks end up recording losses.

Although regulatory authorities strengthen monitoring every election season to reduce damage caused by unfair trading, there is still a long way to go. Even when listed companies respond to inquiry disclosures stating that they have no business relationship with major politicians, stock price volatility often does not decrease. Even with active responses from authorities, as long as limitations exist in the domestic stock market, the phenomenon of political theme stocks is unlikely to be eradicated. Experts urge that the system should be improved so that the practice of collusion between politics and business is eliminated and investors with the ability to evaluate the intrinsic value of companies lead the market. This is also not an easy solution. Ultimately, it is important to instill the perception that investing in blue-chip stocks with improving performance can yield profits. Without continuous investor education, theme stocks will inevitably appear, and innocent victims will continue to emerge. If the government's value-up program achieves results, expectations for sound investment are expected to increase. However, if the momentum of the value-up program weakens due to political logic, opportunities for re-evaluation of blue-chip stocks may be missed.