Political stocks nosedive on news of crackdown

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Political stocks nosedive on news of crackdown


After the start of the election year brought heavy-duty activity in “politically themed” stocks, news that regulators would bypass usual procedures to directly report signs of stock manipulation to prosecutors caused them to plummet yesterday.

AhnLab, whose stock price has been tied to major shareholder Ahn Cheol-soo’s presidential campaign buzz for months and had jumped nearly six times since Aug. 1, dropped by 4.14 percent yesterday to 150,500 won ($129.73) at market close.

With sky-high turnover rates and lurching stock prices increasingly divorced from companies’ fundamentals, stocks even remotely associated with political figures have become outlets for speculation over the last six months due to the approach of both the April legislative elections and December presidential elections, as well as the ease of mobilizing retail investors’ transactions by spreading news or rumors via social media and the Web.

Although heated transactions and inflated prices showed no signs of abating despite growing warnings from both government officials and analysts, news reports of regulators’ intention to crack down on suspicious transactions concerning some 78 politically themed stocks snapped the upward streak of many of these stocks yesterday.


However, it remains to be seen whether financial authorities will be able to keep spiraling prices of these stocks under control as election dates near.

Stocks with purported ties to leading political figures plunged yesterday after financial authorities announced on Sunday they would strengthen their investigations into any unusual trading patterns for immediate reports to prosecutors.

These politically themed stocks, such as those of stationery manufacturer Barunson, data solutions provider BIT Computer and oxidized steel manufacturer EG, dropped by the daily trading limit of 15 percent.

This is due to regulators’ bringing out the big guns on cracking down on politically themed stock speculation.

Regulators such as the Financial Services Commission, Financial Supervisory Service and local bourse operator Korea Exchange said that the Securities & Futures Commission within the FSC will exercise its right to issue “emergency measures” concerning suspicious trading of politically themed stocks.

Issuing an emergency measure allows regulators to bypass the usual process of going through reviews by the KRX, the FSS and the Securities & Futures Commission before reporting suspicious trading patterns to prosecutors, allowing them to simply ascertain the outline of the case before reporting it.


They also said they would set up a special investigative unit within the FSS solely to track politically themed stock transactions for signs of stock manipulation or other illegal activity.

The tougher stance came from a seemingly unending spiral of speculation in politically themed stocks. According to the FSS, the 78 stocks under close review for being “politically charged” have seen their total market capitalization expand from roughly 5 trillion won in August to 11.7 trillion won at the start of January.

“There are forces at play that seek to exploit society’s increased sensitivity to political news before elections,” said an FSS official. “Stock prices are also lurching as it’s become easier than ever to spread rumors through Twitter or other social media.”

The ever-remote basis upon which stocks become politically themed had also been cause for alarm. Woosung Feed, which had seen its stock price jump by more than 40 percent in little more than a month as a politically charged stock, owes its jump to the fact that the company is owned by the in-laws of Shin Kyoung-min, a former MBC news anchor who is said to be Ahn’s friend.

Ever since the Constitutional Court partially ruled that social media can be used for political campaigns on Dec. 29 last year, even stocks related to social media such as SK Communications - operator of Web portal Nate and social media Web site Cyworld - are also being considered politically themed stocks as investors expect increasing use of social media.

The gap between stock value and company performance has gotten even wider. Clunet, a contents network consulting firm considered tied to Ahn, reported a third-quarter operating loss of 1.9 billion won, but its stock rose from 1,900 won on Sept. 30 to 5,390 won on Nov. 15.


Although such trading streaks seemed to have been snapped by regulators’ hardline stance yesterday, experts said that the long-term efficacy of authorities’ crackdowns is still too early to tell.

“I predict that politically themed stocks trading will be stalled with the recent measures,” said Jung Geun-hae, small-cap analyst at Woori Investment & Securities. “However, whether themed stocks will stay this way or blaze out of control again will depend on how tough the actual investigation is.”

The fact that politically themed stocks’ trading volume remained as high as ever was another sign that overheated trading might not be fully contained in time, with AhnLab, Agabang & Company and EG all ranking high on the list of largest trading volume on the Kosdaq yesterday.

Fundamentally, analysts said that the dearth of investment outlets in an anemic capital market with low interest rates and listless real estate sales could continue to fuel such speculative bets. “Investors are drawn to such bets as there’s an abundance of money but no growth momentum,” said Jung.

Experts warn that politically themed stocks can leave the hapless investor floundering.

By Lee Jung-yoon [joyce@joongang.co.kr]

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