MORNING BID – The Beautiful Game, and Less Beautiful Markets

June 10, 2014

In two days the World Cup will open in Brazil, with the home country generally believed to be the favorite once again. There are others better placed to look at the odds for every country, though at least this year will avoid the spectacle of seeing thousands of Brazilians hang around after their team has been vanquished (the Brazilians tend to book hotels through the end, assuming they’ll be there in the final – hence lots of them out all night in Berlin in 2006 when it was Italy and France going for the cup). For the short-term investing crowd, there’s some reason to bet on the winner too – Goldman Sachs, in a report so detailed it makes us wonder about their obsessiveness with the game – points out that the winners tend to outperform in the stock market after the 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,” they wrote in a 67-page bit on the World Cup and economics. “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.” Host nations also tend to see outperformance too – about 2.7 percent for the month following, though, again, the glow of hosting a whole load of 1-0 matches tends to fade over time, leaving investors with other things on their minds, like fundamentals, and maybe all the debt the host took on to build a truckload of stadiums.

A man walks near the construction site for the light-rail that was planned to be ready in time for the 2014 World Cup, in Fortaleza. REUTERS/Davi Pinheiro/Files

A man walks near the construction site for the light-rail that was planned to be ready in time for the 2014 World Cup, in Fortaleza. REUTERS/Davi Pinheiro/Files

The problem for the Brazilians at this time is the country’s weak growth: between 2011-2014 the country’s average real annual growth is about 2 percent, with inflation of about 6 percent. Brazil has elections coming, so that positive glow may fade shortly after the cup ends and investors look to the possible re-election of President Dilma Rousseff in October. Her polling figures have been fading, which has helped the equity market, but Goldman notes that the country has challenges that would stymie the best goalkeeper: the need to disinflate the economy, improve domestic investment sentiment and do a lot of structural reforms. The country has not gotten the infrastructure that it was promised in time for the World Cup while building a whole load of stadiums for the FIFA tournament. Brazil’s best efforts will be watched, especially as Rio de Janeiro hosts the Summer Olympics in 2016.

As for the United States, this nation is once again trapped in the so-called Group of Death in its first bracket, along with powerful opponents Portugal, Germany, and Ghana, not a patsy among them. Reuters Americas markets chief Dan Burns crunched a bit of numbers just to show that all three have had better performing bond markets of late when compared with the U.S. Yields in Germany have been sharply falling, and currently yield about 1.25 percentage points less than Treasuries. Portugal, meanwhile, sports the smallest differential between its 10-year note than the U.S. 10-year in four years, and they’re up more than 4.4 percent this year, compared with a 3.3 percent move by the United States. Lastly, the West African nation of Ghana has a spread of about 540 basis points, according to JP Morgan data – tightest it’s been to developed sovereign nations since January.

So think about that while you’re waiting for somebody to score a goal, at some point.

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