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The case for World Cup-themed investing

27 June 2014

On a certain level, it makes sense. If you love football, why not put  this passion – and consequent  deep, specialist knowledge of the subject – to a good use, by basing an investment strategy on the World Cup?

It beats trying to keep an eye on the global market demand for pork bellies, after all. And the business trips are ever so much more interesting.

The problem is that myriad other factors, largely economic and political, normally will also affect the types of investments that might logically be included in any World Cup portfolio.

This means that whether one is looking to invest in individual teams, infrastructure in the country where the games are due to be held, or corporate brands associated with the games – such as satellite broadcasters, pub companies or officially-licenced sporting goods manufacturers – the most likely “World Cup effect” will not be an easy one to parse.
And this in turn, say experts, makes it difficult if not impossible to create a World Cup-themed investment strategy that really is an investment strategy, in which investors actually benefit from a play on the existence of the World Cup in some way, and not just some cynical marketing concept.

Many investment professionals share the view of ING Investment Management’s senior emerging market specialist, Maarten-Jan Bakkum, who told Global Index International  that it is “probably easier to make money from World Cups by placing bets than by investing in asset markets”.

“In an early stage, one could consider buying into [infrastructure] construction companies, to benefit from an increased building activity ahead of any World Cup,” Bakkum added.

However, he went on, “the chance of success of such a strategy decreases with the size of the country.
“The bigger the country, the smaller the impact of World Cup-related infrastructure on the economy and markets.”

Goldman’s annual contribution

Nevertheless, the passion of  football  aficionados for their “beautiful game” is such that those whose day job involves analysing investment opportunities seem unable to resist trying to figure out a way to profit from the World Cup.

Take Goldman Sachs, the New York-based investment bank. Every four years since 1998, it has published an elaborate treatise on the World Cup, timed to coincide with the tournament.

As a rule, of course, the US is not as football mad as some other countries, but  this particular project was led, at least until this year, by Jim O’Neill, the Manchester, England-born former chairman of Goldman Sachs Asset Management, and a well-known Manchester United fan.

Outside of football, O’Neill, who began his career at the investment bank as an economist, is famous for having coined the BRIC acronym.

In addition to examining the links between World Cup performance and equity markets, this year’s 67-page Goldman Sachs World Cup report also includes a model of the probability of success in a match between any two given teams, based on their track record and characteristics; a prediction that Brazil would beat Argentina 3-1 in the final round of the tournament; and a “World Cup Dream Team” complied, according to the bank, with help from its clients.

Overseeing the research in place of O’Neill this year were Dominic Wilson, Goldman Sachs’s chief markets economist, and Jan Hatzius, its chief economist.

As for whether the World Cup actually impacts  directly and measurably  on world stock markets, the Goldman Sachs report’s authors insist that “it does – at least for a brief period”.

“On average, the [market in the country that wins the Cup] outperforms the global market by 3.5% in the first month [afterwards] – a meaningful amount, although the outperformance fades significantly after three months,” they write. “But sentiment can only take you so far, in markets at least.

“The winning nation doesn’t tend to hold on to its gains and, on average, sees its stock market underperform by around 4% on average over the year following the final.

“The message seems to be: enjoy the gains while they last...”

The report’s authors go on to note that the pattern of outperformance by a country’s stock market following its team’s victory on the World Cup pitch “is fairly consistent over time”, with all the winning nations since 1974 “for which we have stock market data” having outperformed in the post-final month, with only one exception – “Brazil in 2002…[when] a deep recession and currency crisis overshadowed the impact of victory on the football field”.

Otherwise, “in the absence of a severe economic crisis, the [winning nation] tends to enjoy the spoils of success in the market for a brief period at least”.

Intriguingly (but not surprisingly, perhaps, to Global Index International’s clients), the latest Goldman Sachs analysis came up with a heavy bias in favour of Brazil winning the 2014 World Cup.
Not only does Brazil enjoy a home team advantage, it is also, after all, the Goldman researchers note, “the most successful team in football history”.

Nevertheless, many observers point out that even if the Brazilians walk away with the cup once again, the historic post-games “bounce” identified by Goldman Sachs might well not materialise this time.

They note that the country’s economy has been struggling recently, and that long after the games have ended and the football players, their entourages and fans have departed, Brazil will be struggling to cope with  a mountain of World Cup-infrastructure-related  debt to be paid off.

Theye also point to the continuing uncertainty over the direction the country is heading politically ahead of a general election in October, which might well see president Dilma Rousseff , who has been blamed for many of the recent economic problems, unseated.

Read and/or download the Goldman Sachs report.

US, China ‘starting to get it’

Offering up another take on football’s investment potential is Matthew Lynn, a seasoned financial columnist based in London. In a recent piece for  the Wall Street Journal’s MarketWatch news website, Lynn makes the case for what he calls “global mega-brands” benefitting in the future, as football finally emerges as the world’s “first global sport”.

According to Lynn, now that the US and China are at last beginning to embrace “soccer” (as he refers to the game, using the American-English house style of the Wall Street Journal), it is at last on its way to becoming “the world’s sport”, with implications that investors might well begin to consider now.

“Traditionally, soccer has been a terrible investment – even worse than movies or airlines,” Lynn notes, in his 11 June column.

“It has burned through fortunes on a colossal scale. Yet once it achieves global dominance, it may start to become genuinely valuable – and there are a clutch of quoted clubs and broadcasters that will stand to benefit from the emergence of the soccer economy.”

As the football industry becomes “globalised”, Lynn predicts that “a few huge brands will emerge”, in the footsteps of such teams as Manchester United, Real Madrid, Barcelona, Juventus and Bayern Munich, which are already there. Broadcast companies that control rights to the games are likely also to become more powerful.

Concludes Lynn: “One way or another, a lot more money is going to be made in soccer in the next decade. Most of it will go to the players – that is inevitable.

“But some will go to the investors – and just enough to make it worth a look.”

World Cup ‘among a handful of factors’

Canadian research analysts Jon and Don Vialoux, meanwhile, did  their own crunching of numbers to determine whether the World Cup affects equity markets, and concluded that it is “among  a handful of factors” that can.

Writing in the Toronto Globe & Mail, they observe that trading volumes on global stock exchanges (perhaps not surprisingly) tend to drop during the competition, as footie-mad traders and other investors desert their desks.

With fewer investors buying shares, the exchange volumes drop, and volatility, as measured by the VIX index, rises.
“Data for the past 81 years shows that during World Cup years, the Dow Jones Industrial Average declined an average of 2% from the second week of June to the end of June, followed by a recovery of most of the decline by mid-July,” the Vialouxes continue.

However, the activity noted on equity market indices during these times “can also be partially attributed to other recurring events” that normally coincide with the World Cup.

For example, “World Cup competitions are held during US mid-term election years, when political rhetoric in the US begins to ramp up”, the Vialouxes write, citing a recent weekend “when several political attack ads appeared on [US] television for the first time”.

Also coming into play during the World Cup period, and potentially muddying the water for those trying to find a World Cup influence, is market anticipation of the pending release of second quarter results, the Vialouxes point out.

They note that a  two-week “quiet period” for guidance from most major companies occurs in the second half of June, while a period of anticipation ahead of second quarter results also occurs around this time, from the last two trading days in June until five market days following U.S. Independence Day on July 4”.

In the end, the Vialouxes say, the preferred World Cup strategy for most investors  should simply be “to relax on the sidelines and enjoy the games”.