World Cup Plays with the Economy

The largest sporting event in the world is taking place right now.  It’s the World Cup, and it’s the grand stage of soccer – or as the rest of the English speaking world calls it, football.  It’s an event that takes place every four years, and this year it’s being hosted in Brazil, a country that holds the most World Cup titles in history at five.  Italy is next in line with four titles.  And, Spain is the returning champion from 2010.  But as I write this, the Spaniards have already been eliminated from advancing to the next round.

USA has already won their first game – taking down Ghana with last minute heroics from a young, relatively unknown squad coached by German national team legend, Jürgen Klinsmann.  This victory was rather sweet because it was Ghana that eliminated the US from the World Cup in 2010 – hosted by South Africa. 

My family and I are currently traveling in Guatemala, and experiencing the World Cup tournament in another country is an experience of its own.  Guatemala has never qualified for the World Cup in its 84-year history.  Yet, you would never know it walking the streets of Antigua.  There is so much excitement around town.   As we pass by restaurants, barber shops, markets, and other businesses, the World Cup is infectious. All the businesses are filled with people huddled around the tiniest TV waiting for the next goal.  Guatemalans wear jerseys from other countries, boasting the names of players that live in a place they have never set foot.  Countries that once waged war, and lives were lost, are exchanging jerseys at the end of games as a traditional form of respect. For one month out of every four years, the world is in harmony.

Clearly, with so much of the world attracted to this event, it’s interesting to see what impact this tournament has on the world economy and, particularly, the countries involved.  The event has drawn so much attention that since 1998 Goldman Sachs has produced a World Cup Economics report on the tournament.  If you’d like to read the full report, you can find it here.  The report is a wonderful companion to have printed and close by to read about each country during the World Cup.  It’s an unusual mix of economics and soccer.  Goldman Sachs creates a statistical model that predicts the winner of the tournament.  This complex mathematical model, complete with regression analysis, creates a distribution of outcomes for every single game of the tournament.  Spoiler alert: this year Goldman Sachs has predicted that host country Brazil will beat Argentina in the final by a score of 3 -1. 

Personally, I don’t put a lot of confidence in this model.  It’s all quantitative and doesn’t factor in the emotion and charisma that builds as the tournament goes on.  As the countries are eliminated in the knock-out stage, the world is more united in the eventual finalist countries.   These two countries proverbially draw a line in the sand.  Everyone has a winner in mind and a country’s team to cheer for…..even if it’s not their own.  Last time, there was no underdog.  Spain and Holland were both seeking their first World Cup title after many years of disappointment.

What interests me most in this Goldman Sachs report is the effect the World Cup has had on the equity markets – specifically for the winning countries.  As one might expect, the World Cup has shown an impact on the stock market, but it is rather short lived.  Looking at history, there is a clear pattern of outperformance by the winning team in the weeks after the World Cup final. As the report points out, “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.”

Interestingly, the 32 countries in the World Cup represent over half of the world’s economic output at 55%.  This is weighted heavily on the US, which represents almost 20% of the world’s total output.   The smallest economy is that of Bosnia and Herzegovina, which accounts for 0.4% of the global total.  

If the economy were an indication of the strength of each country’s team, US would be heavily favored.  However, that is not the case.  Some of the strongest teams in the World Cup have the weakest economies.  About a quarter of the Spanish labor force is unemployed.  Inflation in Argentina last year was 28% and is expected to be another 38% this year.  Brazil, the host nation that stands to benefit from the World Cup as well as the Summer Olympics in 2016, is full of deceptive corruption and substandard public infrastructure.  This has all led to a recession that the country’s people have protested very aggressively.

Iran is another interesting country participating in the World Cup.  Right now, the country is so heavily sanctioned because of their response to their nuclear program, it has ultimately affected their funding for their national soccer team.  Although not a favorite to advance to the next stage, they have had difficulty getting to Brazil and adequately preparing for the tournament.  The president of the country’s soccer federation went so far as to discourage the players from swapping jerseys with opposing players at the end of the game due to lack of supply.  If Iran makes the finals, we may see a game of shirts and skins!

Cris Cabanillas is a principal and financial advisor of Monterey Private Wealth.  He is an Accredited Investment Fiduciary® and CERTIFIED FINANCIAL PLANNER™ practitioner.