[Opinion] Political Theme Stocks? You Might as Well Invest in Coins...

Professor Seong Hee-hwal, Professor at Inha University School of Law

The greatest comedy in Korean society that occurs once every five years. It is the story of political (presidential election) theme stocks linked by extremely thin ties, thinner than a mosquito’s hind leg. In the first half of this year, the top two stocks with the highest price increases in our stock market were political theme stocks connected to presidential candidates, with some stocks rising from around 600 won to 6,000 won, a tenfold increase. Since the 17th presidential election, the political theme stock wave has intensified, with over 100 stocks each time rising anywhere from double to more than 20 times, only to plummet sharply and return to their original levels, repeating this pattern.

In the stock market, classifying theme stocks helps investors quickly grasp which stocks are affected by certain factors, making it a useful tool for investment. According to one securities platform, there are as many as 240 types of themes. Among these, some are later proven by actual performance, while many are not reflected in stock prices, but at least a minimum rational explanation is possible.

Political theme stocks are completely different from general theme stocks in that they have almost no rational basis. For example, a candidate and the largest shareholder might be university alumni, an outside director might be a classmate from the Judicial Research and Training Institute, the CEO might be from the same clan, or the management team might be from the same hometown, and so on. What impact could such archaic ties of academic, blood, or regional connections possibly have on a company’s performance? Moreover, these ties are as light as smoke. While in the U.S., certain stocks related to prominent candidates or parties occasionally stand out, this is always due to policies, never due to irrational ties like in Korea.

Political theme stocks are obviously irrational, so why do they rise so much? It is hard to see this as a naturally occurring phenomenon without deliberate intervention by manipulative forces. Recent investigations by authorities found price manipulation allegations in about one-third of political theme stocks. However, since many stocks have surged without obvious price manipulation, it appears that accumulated past experience has led ordinary investors to speculative herd trading based solely on previous experience, which is now the main driver.

Political theme stocks have certain characteristics. They move independently regardless of overall market conditions, rise and fall regardless of corporate performance, have much more short-term trading than general stocks, and their price volatility is more than three times that of the composite index, with repeated sharp rises and falls. Meanwhile, individual investors, who make up 65% of the entire market, account for an overwhelming 97% in theme stocks, and 73% of these individual investor accounts in theme stocks have incurred losses. In short, political theme stocks are a hell for retail investors, where only retail investors gather to repeatedly experience sharp price fluctuations through short-term trading, mostly resulting in losses.

This political theme stock phenomenon will harm the soundness and efficiency of the capital market in the short term, and in the long term, it will undermine trust in the capital market and destroy the foundation of a healthy investment culture. Furthermore, it could even lead to the external misconception that Korea is still a backward society rife with collusion between politics and business, so strong countermeasures are necessary.

With the presidential election phase approaching in six months, political theme stock speculation will become even more rampant than before. How should we respond? First, demands for inquiry disclosures on related companies should be strengthened, and voluntary explanatory disclosures should be encouraged. However, since the connections of theme stocks themselves are so unrealistic, the effect of explanations will not be significant. Therefore, frequently applying brakes on trading itself to prevent speculative overheating would be effective. For example, strengthening the market warning system for political theme stocks more than for general stocks, and more frequently employing brakes such as switching to single-price trading or suspending trading. Also, since criminal acts like price manipulation take a long time to punish, it is desirable to actively enforce market order disturbance acts that can be concluded with financial authorities’ fines for early detection and early punishment. Meanwhile, since major shareholders often sell large amounts of shares, considering that they are the biggest beneficiaries of theme stocks, a detailed investigation into their involvement in price manipulation is also necessary.

To an acquaintance who enthusiastically said, “Don’t talk about rationality in stock investment,” I seriously advised that it might be better to invest in coins instead. Although coins can disappear like a mirage overnight, I think coins, which have at least some chance of a jackpot, are more rational than political theme stocks, which have a predetermined end.

Professor Seong Hee-hwal, Professor at Inha University School of Law

This content was produced with the assistance of AI translation services.