Sunny Electronics Corp. (004770) shares jumped 1,000 percent this year, leading a surge in trading of South Korean small-cap stocks amid speculation the country’s next president will help smaller enterprises.
Trading volume for companies outside the top 300 is the heaviest in at least 12 years as candidates pledge stricter regulation of big businesses like the Samsung and Hyundai groups and greater support for small and medium-sized firms. The only explanation for the out-sized gains by Sunny, which has posted losses since 2010, are bets it may somehow benefit from possible ties to one of the front runners, said Choi Sang Hoon, an investor relations official at the company.
“Some companies are just soaring based on groundless reasons that somehow connect them to the candidates,” said Heo Pil Seok, chief executive officer at Midas International Asset Management Ltd., which oversees $5 billion. “There’s no way that a specific company will get special perks if a politician close to it becomes president.”
Choi said Sunny’s vice president, Song Tae Jong, previously worked for Ahnlab Inc. (053800), the antivirus software maker founded by independent candidate Ahn Cheol Soo. He declined to comment on whether there were any continuing ties between Song and Ahn. Yu Min Yeong, a spokesman for Ahn, who is running second in polls for the Dec. 19 election, said there are no longer any links between the two men.
The Kospi Small-Cap Index has climbed 8.7 percent since Aug. 20, when Park Geun Hye, who leads in opinion polls, reiterated a pledge to bolster small and medium-sized businesses that create jobs.
The Kospi Large Cap Index of the nation’s 100 biggest companies, which includes Samsung Electronics Co. (005930) and Hyundai Motor Co., gained 1.9 percent in that time.
The small-cap gauge is made up of 464 companies that fall outside the 300 biggest listed businesses, based on market capitalization. Nexen Corp., a manufacturer of tires and rubber inner tubes, was the top-ranked member of the index based on closing prices Oct. 2, with a market value of about $350 million. Korean markets were closed for a holiday yesterday.
Shares of Sunny, which is based in the southern city of Chungju and makes components used in computers and mobile phones, soared to 4,405 won on Oct. 2 from 397 won at the end of last year. The stock, which is the best performer this year in both the benchmark Kospi index and the small-cap gauge, has fallen from its Aug. 24 record high of 10,550 won.
“Whoever becomes the next president, there should be more policy consideration for smaller firms to seek growth and I think that’s helping investors to look for good small stocks, boosting overall trades,” Han Byung Hwa, an analyst at Hyundai Securities Co., said by phone. “Investors are willing to take a little bit more risk amid this low-growth environment globally.”
Small-cap stocks also benefited as central banks from Europe, the U.S. and Japan unveiled stimulus programs in September. South Korea’s finance ministry on Sept. 10 announced 5.9 trillion won of spending and tax cuts, adding to 8.5 trillion won of support measures announced in June that included assistance for small businesses and low-income earners. The Bank of Korea on Sept. 13 said it would boost its special loan program for small businesses.
Ahn, the ruling New Frontier Party’s Park and the main opposition party’s Moon Jae In have all pledged to lend a hand to small business as they campaign to succeed President Lee Myung Bak.
Lee’s approval ratings have more than halved since he took office in 2008 amid mounting discontent for failing to deliver on election promises to boost economic growth. South Korea’s economy, Asia’s fourth largest, expanded 2.3 percent in the second quarter from a year earlier, the slowest pace in almost three years.
The sister-in-law of Park served as a non-executive director at Shinwoo Co., a leather-products maker that has rallied 117 percent in the last 12 months. Seok Min Cheol, an investor relations representative for the company, denied on Sept. 21 that an affiliation with Park was the cause of the rally. Seok said the company hadn’t identified any reason for the gains. Shinwoo reported a loss for 2011.
Ahnlab shares have advanced 33 percent since Oct. 27 last year, when an independent backed by Ahn defeated the ruling party to become Seoul mayor. Ahnlab has posted annual profits since 2003.
“The rabid trading of ‘candidate-themed’ stocks stems from South Korea’s unique cultural obsession with connections,” wrote Kang Joon Man, a professor at Chonbuk National University, in a book published in July entitled “Ahn Cheol Soo’s Power.” “True social corruption, not just political corruption, is trying to reap profit off of groundless rumors that a company official ‘has ties to’ a politician or a presidential candidate.”
In a book released in July, Ahn advocated limiting the grip of the nation’s biggest conglomerates on the economy, likening family-run groups to “zoos” that stifle smaller enterprises.
Moon, from the opposition Democratic United Party, on Sept. 16 said he would introduce a special law limiting specific industries for small businesses and micro enterprises to protect them from being overrun by conglomerates.
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