The World Cup and Economics 2014
The World Cup and Equity Markets
There is no doubt that the World Cup captures huge attention and, with it, generates a massive amount of passion. But does it have any impact on stock markets?
Our overall conclusion is that it does – at least for a brief period. Looking at history, there is a clear pattern of outperformance by the winning team in the weeks after the World Cup final. On average, the victor outperforms the global market by 3.5% in the first month – a meaningful amount, although the outperformance fades significantly after three months. 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 pattern of outperformance following victory at the World cup is fairly consistent over time. All the winners since 1974 (for which we have stock market data) have outperformed in the post-final month, with only one exception – Brazil in 2002! However, in this particular case, macro events (a deep recession and currency crisis) overshadowed the impact of victory on the football field. The economic crisis was sufficient to drive the equity market down by 19% relative to the World index in the month after the final and this followed an underperformance of 13% over the previous months. But this does not mean that Brazil hasn’t seen reflected in its market the post-final feel-good factor that tends to be more typical after a World Cup victory. It outperformed the MSCI World index by 21% in just one month after its win in 1994; on that occasion, the bull market continued and the stock market outperformed by 38% over just three months despite a staggering 39% outperformance in the year leading up to the games.
So, in the absence of a severe economic crisis, the winner tends to enjoy the spoils of success in the market for a brief period at least.
But what about the runner-up? Of course, the fans are always disappointed at losing at the last hurdle and, interestingly, the stock market doesn’t tend to react well either. In contrast to the initial post-match rally that the winners tend to enjoy, the runners-up seem to experience a post-final bout of the blues. The average relative outperformance of the runner-up is 2.0% over the first month. However, the average here is misleading as it is heavily skewed by Argentina in 1990, which enjoyed a 33% outperformance in the month after the final (that said, this bounce should be considered in context, since it followed a collapse in its stock market and currency that had reduced the value of Argentine equities by over 90% in US$ terms between October 1988 and early 1990). Aside from this episode, 7 of the 9 other runners-up underperformed over the first month with an average underperformance of 1.4%. Interestingly, the poor performance doesn’t stop there. Most of the World Cup runners-up have seen their stock markets continue to underperform, with an average relative fall of 5.6% over the first three months.
What about the host nation? The focus on the host tends to bring with it both pride and confidence. As with the winner, there also tends to be a positive impact that lasts for a few weeks. In every case, the host country has enjoyed an outperformance of its stock market in the month after the event. The average outperformance is 2.7%, although this tends to fade fairly quickly, with nearly half underperforming over three months. Being both the host nation and winning is the ultimate goal: but while the performance tends to be very positive for a month, there is no consistent pattern of ongoing outperformance, at least in the stock market – although there are too few examples to read much into the results.
While there is no obvious trend of outperformance by the winners in the run up to the final it is, nonetheless, interesting to compare recent stock market performance for the countries tipped to do best in the competition. Italy had enjoyed one of the best stock market performances YTD following a rapid recovery in fortunes last year, but recent weakness has pared back its relative gains to around 7% in Dollar terms. Elsewhere among the favourites, there has also been good performance in Spain, which has outperformed the World index by around 6% in Dollar terms YTD. Argentina has also outperformed, albeit modestly, while Germany’s stock market has underperformed relative to the World index. Still, fans shouldn’t read too much into recent stock market performance as an indicator of outcomes in the tournament. After all, the Brazilian market had underperformed by nearly 20% in the month before its victory in 2002!
Peter Oppenheimer and Portfolio Strategy Team
Peter Oppenheimer - Goldman Sachs International
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