And Then There Were Four… What’s at Stake

Posted: Jul 08 2014

The World Cup is a massive event. Roughly 46% of the global population watched the 2010 World Cup in South Africa and though still TBD, 2014 World Cup viewership totals are expected to surpass 2010 figures by a substantial amount. Said in other terms, close to 4 billion people will have watched the 2014 World Cup.

And though World Cup fever has substantially subsided in the U.S. after the American national team’s heartbreaking loss to Belgium, the implications and effects of the World Cup are still very much felt, and will continue to be felt, in the U.S. and elsewhere, particularly with respect to how the global equity markets will react to the outcome of the tournament.

Yes, that’s correct. More than bragging rights are up for grabs in the final weeks of the tournament. There is quite a bit at stake.

This week, we’ll examine how markets react in the winning team’s home country. We’ll also profile the economies of the final two teams. Finally, we’ll discuss who will benefit more from bringing home the cup and why.

But as promised, we’ll start with how markets react in winning nations.

In the past, there has been a demonstrated, meaningful impact of market outperformance in those nations that win the World Cup. In fact, on average, winning nations outperform the global market by 3.5% in the first month. However, these nations cannot sustain these short term gains and on average stock market performance in these nations is relatively weak over the year, underperforming the global market by ~4% over the year following the final. 

Given the high concentration of winners and finalists in Europe and South America, one might suspect that these gains are fairly meaningless and/or products of regional economic strength, growth, etc. Thus, the following statistic is precisely more interesting as a result: runner-up nations underperform over the first month by an average of 1.4%, relative to the global market. Thus, in 2010, for instance, the two finalists, Spain and the Netherlands, each experienced markedly different economic effects as a result of the outcome of the World Cup. Spain, the victorious nation, saw a 5.7% gain across its market while the Netherlands experienced a 0.5% loss across its market. These results, while not necessarily conclusive, mitigate some of critics’ claims about regional economic trends at these times.

Interestingly, there have been some exceptions to this rule. With respect to the “winning nations see gains” trend, Brazil in 2002, is a notable exception to the rule. However, in this particular case, a deep recession and currency crisis in the nation were just too much to overcome and erased any impact the World Cup victory may have brought the nation. In fact, the Brazilian markets dropped by 19% relative to the world index in the month after the final.

The exhibit below includes some more detailed information and as always, it’s important to remember that correlation doesn’t imply causation. This unfortunately may be one of those instances in which we fall subject to this rule. Nonetheless, one thing is for sure: if the past is any indication of the future, when Argentina, Brazil, Germany, and the Netherlands take the field, more than just the World Cup trophy is at stake.

 

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