“Pele believes 2014 World Cup will boost Brazil’s economy”[i] beamed the Sky Sports caption from the heady days of November 2013.
In the article that follows, one of the country’s most famous sons and three-times football World Cup winner goes on to outline his hopes for Latin America’s largest economy, and his belief that the then-forthcoming duo of major sporting events (the 2014 World Cup, and the 2016 Olympics) meant it was “the moment to really show the country and to make promotion and to grow as a country”.
Fast-forward to the middle of August 2016, and the proverbial Greatest Show on Earth is in full swing. By the end of the middle weekend of the XXXI Modern Olympiad, as a Brit, it was hard for me not to feel a tinge of pride at the collective achievements of Team GB. Hopes had been high for the team from the previous host nation, but by any measure Britain’s Olympians were delivering on their promise – big time.
Nobody likes a party-pooper. Disregarding for a moment the warm and fuzzy feelings the winning of medals can induce, as a fund manager I continue to believe firmly in the value of a healthy dose of cynicism to temper unbridled optimism and hyperbole.
THE MIRACLE OF HINDSIGHT
Astonishing quantities of ink have been spilled on the topic of whether or not the awarding of the Olympic Games to a host nation really does lead to meaningful and enduring benefits. The Rio Games have been no exception, and a delve into the news archive shows that Pele certainly wasn’t the only commentator offering up enthusiastic views on what a great fillip for Brazil’s economy the World Cup and the Games could turn out to be.
But as the Rio Games draw to a close, we have the great benefit of hindsight. Of course, this was something Pele lacked when commenting on the potential impact of both the Games and the football World Cup back in 2013. Nobody is suggesting that the granddaddy of Brazilian football was ever going to be taken seriously as an economic forecaster, but his comments nevertheless serve to highlight the inherent flaw of attempting to predict the outcomes and impacts of future macro-economic or political events.
Although it may be some time before the true social and economic effects of the Rio Games are fully understood, what we do already know is that Brazil’s equity market doesn’t exactly paint a rosy picture. Over the 2,499 days from 2nd October 2009 – when it was announced that Rio had won its bid to become the host city – until the opening ceremony of the Games on 5th August 2016, Brazil’s main Bovespa stock market index lost 47.4% in US dollar terms. This represents a 136.5% underperformance by the Brazilian equity market versus the MSCI World Index. Meanwhile, Brazil’s currency, the real, fell by 44% versus the US dollar over the same time period.
In the case of Brazil, retrospect tells us that there are some clear reasons for such weak performances: political turmoil, a series of scandals involving high-ranking officials, and a slump in demand for the country’s key commodity exports have all taken their toll on the equity market and the currency.
But setting aside the details of the reasons for these falls, the point nevertheless stands that a decision to increase equity allocations to Brazil following the announcements of Rio’s successful bids to host a series of global sporting events would clearly have been a poor one that no level of infrastructure spending or increased tourism could ever offset.
Put another way, hindsight shows us that basing an investment decision in whole or in part on a hypothesis about the likely economic and market impact of the Rio Games would have been deeply flawed.
Brazil is not alone. Over the 2,549 days from the bid win on 23rd September 1993 to the opening ceremony of the millennial Olympics on 15th September 2000 in Sydney, Australian equities (as measured by the benchmark S&P/ASX 200 Index) rose 49.6% in US dollar terms, underperforming the MSCI World index by 101%.
Examining the history of equity market performance for Olympic host nations over the last five Games, it quickly becomes clear that there is no discernible pattern, as the following table shows:
The relationship between equity market performance and the long-term economic impact (positive or negative) of hosting the Games is similarly devoid of any clear pattern. While the Greek equity market enjoyed strong outperformance of the MSCI World Index in the period between Athens’s bid win and the opening ceremony, the huge cost to the Greek economy is now widely considered to have played an important contributory role in the country’s present economic crisis.
FACTS, FACTS, FACTS
As investors, we have long maintained that reliably and consistently forecasting the outcomes of macroeconomic events and – by extension – their likely impact on equity markets is essentially impossible. Trying to predict the economic and market effects of the Olympic Games is in many respects no different from trying to predict the economic and market effects of any other macro-economic or political event.
What we do know, however, is that equity markets themselves contain a huge amount of potentially valuable information which, with interpretation, can tell us a great deal; the signals are there if you know where and how to look for them.
As we build our portfolios, the appeal of realised data – facts, as they might alternatively be called – remains enduring. We attach such great importance to statistical indicators such as changes in analyst sentiment, hard evidence of the impact of effective management teams and the emergence of potentially stable trends precisely because by doing so we negate the need to forecast the un-forecastable.
The Olympic Games are a marvellous spectacle, and a spectacularly poor indicator of equity market performance. We should enjoy them for what they are, rather than trying to construct investment portfolios in the misguided belief that it is possible to interpret how they might influence the fortunes of stock markets.