Looking for an overseas market to make a short-term buck? Goldman Sachs’ recent wide-ranging report on the economics of the FIFA World Cup points in an unexpected direction: Brazil and Argentina.
Using economic data about the host and competitor countries from seven tournaments over four decades, Goldman analysts found a number of trends that adventurous investors should heed. First, that winning the cup provides a short-term bump in the champion nation’s stock markets; and second, that it doesn’t last.
Analysts found that World Cup victors’ stock markets outperformed the global market by 3.5% in the month following a tournament triumph (see graph). But they show average 4% underperformance by stock markets in winning nations in the year following the final. The message, according to the report, is to “enjoy the gains while they last.”
Brazil is suffering from low growth and an overvalued currency. Protests during the test-run FIFA Confederations Cup last year highlighted popular discontent with the cost of staging the World Cup, which has grown to an estimated US $11.3 billion in infrastructure spending. Argentina is in even poorer shape, with stagnant growth and high inflation. The Canadian Trade Commissioner Service describes Brazil as “South America’s economic powerhouse,” but rivalry in several key export industries and allegations last year that the Communications Security Establishment Canada (CSIS) spied on the Brazilian Ministry of Mines and Energy have put a damper on economic relations.
Brazil and Argentina, despite their poor economic track record in recent years, are most likely to be the beneficiaries of a World Cup boost, according to the Goldman. And the bank has even crunched the numbers on which team they believe has the best chances—they give Brazil a 48.5% chance of winning it all on home soil, with Argentina a distant second at 14.1%, based on historical match outcomes.
As it turns out, second place really is the first loser in this case: Goldman’s analysis shows an average 1.4% underperformance by the stock market in runner-up nations in seven of nine cases since 1974. So if Brazil or Argentina fall short at the final hurdle, expect to take a slight hit.
The verdict is less clear on whether it pays to host the World Cup. Goldman finds a 2.7% market increase for the month following the tournament. But a 2009 study by economists at the University of Hamburg found little to no economic gains from World Cup hosting in tourism, employment and income. Coupled with the Brazilian economy’s weak fundamentals, a safer bet might be Germany, which places third on Goldman’s win probability chart at 11.4% and is expected to achieve solid growth of 2% this year.
Goldman isn’t the only outfit offering World Cup predictions, of course, so you may want to shop around to find that winning investment choice. Sports betting website bet365.com is offering 3 to 1 odds on Brazil, 4 to 1 on Argentina, and 6 to 1 for Germany. As of press time, no clear animal successor had emerged to Paul the Octopus, the German crustacean who correctly picked Spain to win the tournament in 2010.