[Opinion] To End the Recurring Political Theme Stocks Every Five Years

Nam Gil-nam, Director of Capital Markets Office, Korea Capital Market Institute

[Asia Economy Reporter Minji Lee] The 20th presidential election, which was as heated as ever, has now reached its final stage. However, the political theme stock frenzy, which boosts stock prices by emphasizing connections with leading candidates, has repeatedly occurred in this election as well. Compared to 2020, when stock price volatility was particularly high, the frequency of upper price limits in about 80 stocks mentioned as political theme stocks during the 20th presidential election increased by 54% in 2021, which stands in stark contrast to the 38% decrease in the frequency of upper price limits among general stocks during the same period.

The stocks mentioned as presidential election political theme stocks are mainly based on reasons such as acquaintances of the candidate serving as outside directors, or the candidate and the largest shareholder sharing the same bon-gwan (ancestral home), being alumni, or from the same hometown. Of course, some stocks cite policy relevance, expecting growth in business sectors overlapping with the candidate’s campaign promises, but analyzing the performance of political theme stocks during the 16th to 19th presidential elections shows that not only the losing candidates’ political theme stocks but also those of the winners experienced stock price declines immediately after election day, indicating that policy-related political theme stocks did not differ significantly from other political theme stocks.

Rather, political theme stocks commonly feature a high proportion of individual investors and small market capitalization. Although executives with various connections to politicians may exist among listed companies, including those with large market capitalizations, cases where large-cap stocks are mentioned as political theme stocks are very limited. In fact, among the political theme stocks of the 20th presidential election, there are almost no stocks included in the KOSPI200 or KOSDAQ150 indices.

Ultimately, to quell the recurring phenomenon of political theme stocks, it is necessary to address structural issues in the domestic stock market alongside protective measures for individual investors, who are the main traders.

First, continuous caution and education for individual investors, who constitute the majority of political theme stock investors, are needed. Financial authorities and the Korea Exchange have already issued investor caution and warning messages regarding political theme stocks, but with the recent increase in new media such as stock-related YouTube channels that exploit political theme stocks as sensational content, countermeasures against this are also necessary.

Second, market regulations need to be improved to prevent the spread of political theme stocks. For example, acts that deliberately reach the upper price limit to inflate expectations of further price increases can be prevented by widening the price limit range or abolishing it altogether, as in advanced markets. Additionally, artificially suppressing the inflow of short sellers as a counterbalance to rapid price increases may cause expectations of price declines to accumulate without being resolved in the market at the time, potentially leading to greater shocks during price downturns. Furthermore, to effectively crack down on unfair trading related to political theme stocks, various administrative sanctions, including fines, should be introduced.

Finally, for a fundamental solution, the influx of institutional investors and foreign investors should be expanded so that information traders who trade stocks based on information become the main players in the market. In the current situation where individual investors account for more than 80% of stock trading volume, it is difficult to prevent the behavioral biases of individual investors, who are prone to high volatility and sensational reporting, from spreading throughout the entire market. Structural reforms are needed to transform the domestic stock market into one centered on information traders.

Gilnam Nam, Director of the Capital Market Research Institute, Capital Market Division

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