SKorea’s Biggest Stock Mover: Its Next President

by Youkyung Lee
Friday Apr 20, 2012
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SEOUL, South Korea (AP) - Lee Hyun-chang rushed to sell all his shares in drug maker Wooridul Pharmaceutical after South Korea’s ruling conservative party scored an upset win in last week’s parliamentary elections. The college student was part of a stampede that sent the stock plunging 15 percent.

To anyone outside a subset of South Korea’s amateur stock trading scene, the link between the obscure pharmaceutical company and South Korea’s political elite would be mysterious. But it was simple for the 25-year-old Lee. He’s convinced Wooridul is allied with opposition politicians and would only prosper if South Koreans elect their candidate president in December elections.

Lee’s tenuous evidence: the opposition’s presidential hopeful had once been the chief of staff to a former South Korean president who underwent surgery at Wooridul Spine Hospital, a sister company to Wooridul Pharmaceutical. According to stock traders’ lore, that president, the late Roh Moo-hyun, was also once a lawyer for the hospital in the 1990s.

For Lee, selling Wooridul shares was a no-brainer. The opposition’s poor showing in the parliamentary elections suggested its candidate would also face defeat in the presidential poll. There would be no political favors for Wooridul.

Speculating on the outcome of elections is nothing new for investors but in South Korea it is a window into a society that can seem opaque to the West. The high importance placed on personal ties and kinship is reflected in the conspiracy-level convictions of Lee and others that rest on vague connections. And even as their theories seem far-fetched, they’re also a nod to the deep links between politicians and business.

South Koreans remember that generous government support was behind the 1970s rise of the chaebol - family-controlled industrial conglomerates that still dominate the economy. Some chaebol families and many of South Korea’s presidents, past and present, are linked by marriages and school networks. How much those relationships benefited chaebol families is still widely debated but there was a clear pattern of the fortunes of chaebols rising and falling in tandem with a change of president, said Jun Sung-In, an economics professor at Hongik University.

The pervasiveness of broadband and mobile Internet in South Korea adds another twist, enabling the wildfire spread of rumors and instant buy and sell clicks. Nearly 75 percent of trading on the KOSDAQ market for smaller companies was carried out on home trading systems in 2011, according to Korea Exchange. Stock trading through mobile devices accounted for 9 percent.

"Combined with South Korea’s political situation - when someone rises to political power, people in the person’s circle are expected to receive benefits - and Koreans who tend to invest in the short term," home trading systems have contributed to a more volatile market during the election year, said Ha Eun-soo, a senior official at the Financial Supervisory Service.

April 12, the day after the parliamentary elections, wasn’t just a bad day for Wooridul Pharmaceutical shares. Other "Moon theme" stocks, a reference to the opposition’s putative presidential candidate, Moon Jae-in, were also punished.

Having a chief executive who went to the same high school as Moon or a long-ago business deal with a former employer of Moon were all reason enough for a listed company to be labeled a Moon stock.

Kwak Kwang-chul, a 39-year-old office worker, said he regarded stationery maker Barunson Co. as a Moon stock because the firm had "used the legal office where Moon Jae-in used to work."

Any link was denied by a Barunson official who said a brief visit to the legal firm a decade ago may have turned into an unstoppable rumor.

"It was more than 10 years ago that we made a consultation with Moon’s previous legal firm but we never pursued a lawsuit with it," said the official who requested anonymity because he was not authorized to speak to press. "Even if we deny any links with Moon Jae-in, markets consider it a matter of fact."

South Korea’s Yonhap News Agency said in a recent report there are around 80 companies on the main KOSPI and KOSDAQ stock markets that are linked with presidential hopefuls.

The typical investor in politics stocks follows the words of the candidates religiously but pays little attention to what are considered reasonable indications of a company’s value, such as cashflow.

Politics, a combination of superstition, a guessing game of psychology and lessons from their past experiences guide their investment decisions. Being the first to intuit which stocks will become seen as linked to presidential hopefuls is one way to strike the jackpot.

Lee, the student, said his profit of 1.5 million won ($1,314) from his Wooridul shares was a return of 20 percent on his original investment. He missed out in February when its share price quadrupled in just 20 days, but he began buying the coveted stock in March when the first round of rumors about Moon’s presidential ambitions began abating.

April 12 was a particularly good day for stocks linked with other presidential hopefuls - Park Geun-hye, a top ruling party official and Ahn Cheol-soo, founder of South Korea’s largest anti-virus software maker, AhnLab Inc.

Lee said he got a 60 percent return on the 10 million won he invested in Park related shares in February.

EG Corp., an iron oxide maker that has Park’s brother as its largest shareholder, jumped by the daily limit of 15 percent for two straight days after the parliamentary elections.

So did Agabang & Company, a maker of toddler’s clothing. But the rationale for its dramatic rise was a little more plausible than for many other stocks perceived to have links to politicians. Park has often said her policies will boost South Korea’s feeble birth rate if elected president.

Shares of AhnLab, founded by Ahn, closed at 119,000 won on Thursday, up nearly six times the price a year earlier.

Ahn, who own 37.1 percent of AhnLab, has not confirmed whether he will run for president but if he does, polls show that he would be one of the strongest contenders.

The 80 companies linked to politics are just a fraction of the more than 1,800 companies listed on South Korea’s stock markets. But this year they have accounted for 10 percent of daily trading, local media reports have said.

Officials at the South Korean bourse operator and the financial watchdog said they cannot confirm the figures because they do not make an official list of stocks linked to political figures.

"Park-themed stocks will outperform for a while, so my portfolio will mostly compose of Park stocks and I will diversify some in Moon-related stocks," said Kwak, a father of two.

Copyright Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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