13 Jul 2010, Richard Jory, Structured Products
In 1998, England lost a football match to Argentina in the World Cup. In the three days that followed, hospital admissions for heart attacks rose by 25%. In a different study, the same researchers discovered that the stock prices of publicly traded European football teams tend to go up when the teams win a lot, and fall when they lose – regardless of revenues and profits. In a 2007 paper titled ‘Sports Sentiment and Stock Returns’, Alex Edmans, Diego Garcia and Øyvind Norli found that on the first trading day after a nation’s team is eliminated from the World Cup, its national stock index on average performs 0.49% worse than it would otherwise, all other conditions being the same.
It is a common belief that the tournament has a positive effect on economic growth in both the host nation and that of the champions, and subsequently boosts stockmarket performance in those countries. It is argued that for the host country, the World Cup represents a real catalyst for job creation thanks to the requirements laid down by football’s world governing body the Federation Internationale de Football Association (Fifa) for transport, telecommunications and infrastructure.
Research from Société Générale (SG) released just ahead of the 2010 World Cup endorsed the view that host countries were more positively affected than winners. The bank finds that the World Cup has a positive effect on the host country’s gross domestic product (GDP), and consequently on its stockmarket performance. “But we conclude that a general link cannot be drawn between winning the World Cup and stockmarket performance,” states the research report. “In only two cases, in 1974 and 1994, did the World Cup winners outperform the rest of the world in the year following the competition. In the first instance, Germany (1974) was both the winner and the host country. In the second, Brazil (1994) was experiencing an impressive economic performance after the 1992 recession. Therefore we recommend going long the South African stock market relative to those countries which we believe have a high probability of making it into the semi-finals. In particular, according to our pair-trade cointegration model, the best risk-reward combination would be long South Africa and short Brazil, or, alternatively, long South Africa and short Argentina.
Not everyone agrees, however. Don Egginton, head of long-term analysis and modelling at Daiwa, took the figures and came to the opposite conclusion. “Excluding [the] outlier (Uruguay in 1930), [the data suggests] that the World Cup actually depresses GDP growth in the year it is held, with GDP recovering by about 1% in the following year,” says Egginton.
“More fundamentally, however, the differences in the GDP growth rates across the years are statistically indistinguishable whether or not Uruguay’s 1930 tournament is included. And even examining those countries that have held the tournament more than once fails to uncover any pattern in GDP performance.
“So, despite being the ‘world’s most widely viewed sporting event’, the evidence suggests that the World Cup’s impact on the host country’s economy is too small to override other economic forces at work. As such, while South Africa is likely to reap plenty of publicity over the coming month, the evidence from previous tournaments suggests that this one will do nothing to boost growth, and hence nothing to tackle the enormous social problems that continue to confront the country.”
Many financial institutions produced copious research based on the question of which team would win the tournament. Before it opened, Standard & Poor’s (S&P) reached a somewhat unusal conclusion.
The index provider used data from the S&P Global BMI Index charting equity performance from January to May 2010 to simulate an ‘Equity World Cup’ that compares the relative performance of equity markets in the qualifying countries. Ghana, unfancied in footballing terms, was crowned the winner of this particular exercise. “Football fans don’t need to panic at the results of the Equity World Cup, but S&P’s project will be of real interest to the investor community,” says Marius Baumann, senior director for custom indexes, Europe, the Middle East and Africa at S&P.
With hindsight, this was not the most outlandish conclusion from the coterie of dedicated research. “Ultimately, our quant model indicates Brazil as being the strongest team taking part in the tournament,” stated JP Morgan in its weighty World Cup research document. “However, due to the fixture schedule, our model predicts the following final outcome: third, Netherlands; second, Spain; and World Cup winners, England.
“Our goal is indeed to highlight potential World Cup winners by applying quantitative/mathematical methodology traditionally used with balance sheet, valuations and consensus information to data from the football world. To do so, we focus on data including probabilities to win from a range of bookmakers and exchanges, official Fifa World Rankings, results from previous World Cup tournaments and qualifying competitions, etc,” continued the report.
“Whilst this report should be taken with a pinch of salt, we find it an interesting exercise and an ideal opportunity to lightheartedly present some simple quantitative techniques within an easy to understand and topical framework.
“Whilst our model points towards Brazil as being the strongest team to take part in the World Cup, our ‘World Cup Wall Chart’ indicates that thanks to the actual fixtures determined by the schedule, we believe England will be the winner of the 2010 World Cup.
“We also highlight that the three favourites according to both our model and market prices (Brazil, Spain and England) offer a combined probability of 52.5% of winning the World Cup (as per prices on 30 April).” While all English hearts would have warmed to that conclusion, without believing for a minute that England would progress so far, the statistics seemed to divorce themselves from reality entirely when used to prove that England has the best penalties record of any qualifying country.
Goldman Sachs was equally bullish about England’s prospects in another research report compiled by Jim O’Neil, the bank’s most famous football fan and its chief strategist. O’Neil predicted that England would reach the semi-finals, along with Argentina, Brazil and Spain. “Some may, like us, regard this as logical,” says O’Neil. “On the other hand, it only includes one of the ‘special’ trio-with both Italy and Germany missing out. This last happened in 1998 when France beat Croatia and Brazil knocked out the Netherlands. But, remember, we got three of those right.” As England fell by the wayside early on, fortunately O’Neil had the foresight to conclude: “As we showed in 2002, occasionally we don’t get it right!”
The end products
The first mention of structured products linked to football came in 2003, when this magazine reported on Fifa’s launch of a catastrophe-linked bond to protect itself against financial losses that would result should the 2006 World Cup in Germany be cancelled.
Investors in the $260 million bond – dubbed, niftily, the 2006 Fifa World Cup Cancellation Bond – took on the risk for a variety of reasons, except for specified triggers that include war and boycott. Fifa claimed it was the first bond to transfer sporting-event risk.
Home to a both a hugely successful structured products market and football team, Germany’s series of structures were put together to – let’s be honest – offer retail investors the chance to take a punt on a collection of football matches.
The same World Cup saw JP Morgan and SG each launch a structured product linked to a basket of companies most likely to benefit from the World Cup. The first was SG’s Football 2006 warrant, which appeared in February 2006 and provided investors with exposure to domestic German consumption, sportswear sales, official sponsorship or advertising campaigns based around the event.
The nine stocks were: Accor, Continental, Nestlé, Adidas-Salomon, Danone, Pinault-Printemps-Redoute, Beiersdorf, Heineken and Puma.
The warrant was listed on the London Stock Exchange (LSE) with a minimum investment limit of £1,020 and returns were limited to twice the performance of the stocks although a stop-loss was triggered if the value of the basket fell by 30% or more.
Around the same time, JP Morgan launched a two-year, capital-protected note in 2006 that allowed investors to participate in the performance of eight of the World Cup’s 15 official sponsors. The wager was that the sponsors would perform better on the stock market than their non-sponsoring sector rivals.
Adidas-Salomon and Continental were also in the stock basket, along with Anheuser-Busch, Coca-Cola, McDonald’s, Deutsche Telekom, Fuji Photo Film and Yahoo.
The notes were capped at 12% at the end of the first year and 24% at the end of the second. The minimum investment was €1,000 and the product was sold to retail investors in Austria and Germany.
A plethora of products followed. One month later, DWS Investments, a subsidiary of Deutsche Bank, introduced the rarely seen Himalaya payoff to create Performance Sieger 2014, an eight-year, capital-protected football-linked fund based on a basket of three shares from each of the countries participating in the World Cup.
Spain’s Banco Sabadell followed in April with a three-month deposit-based product linked to the performance of the 20 teams in Spain’s La Liga, with 32 variants attaching them to the teams that had qualified for the World Cup. The product paid out 10% if your team won the tournament, 5% if it was runner-up and 0.1% otherwise. A version of the same product issued earlier in the year raised €50 million.
Not to be left out, Swiss investors were offered equity yield notes created by Nomura and distributed by Credit Suisse. A local lottery expert accused the banks of offering a product that is tantamount to gambling, a practice forbidden by private institutions in Switzerland. A bonus payment was on offer related to the performance of the Swiss national football team, proving surely that this one really was a gamble.
The Nomura reverse convertible was based on a basket of stocks that included five of the World Cup sponsors. This time, Deutsche Telekom and McDonald’s were in there with Philips Electronics, Proctor & Gamble and Toshiba.
There was even a product sold to investors in Northern Ireland in 2006, based on a basket representing selected nations in the World Cup, previous winners and hosts. The bonus was a holiday to the country that won the tournament.
Even more obscure was the structured product offered in November 2005 by Birmingham Midshires Building Society to fans of Wolverhampton Wanderers FC in the UK. Promotion to the Premiership boosted capital returns by 1% and added bonuses included tickets for a private box or a signed team shirt and football.
A similar product in Germany paid a guaranteed annual return of 1.5% plus a 0.5% bonus if the national team won a match in the Fifa Confederations Cup. If a German player was the tournament’s top scorer, investors got another 1%.
2010 World Cup plays
In preparation for the 2010 World Cup, more structured products have emerged. SG recreated its sponsor stock basket, which has a structured product linked to it. Heineken, Carlsberg, Whitbread, Morrisons, Tescos and Sainsburys are included and backtesting says the fund would have outperformed the DJ Stoxx 600 by 13.6% during the past four World Cups.
On June 9, 2010, the French bank launched a tracker indexed on a basket of European shares deemed sensitive to the World Cup, by analysts who identified 16 European shares that have historically outperformed, or at least been in line with, the DJ Stoxx 600 Index during a World Cup. Based on the previous four World Cup tournaments, the simulated performance of the SG Football 2010 basket has an average performance of 19.05%, according to the bank.
Nationwide also jumped on the bandwagon, and further endorsed its financial sponsorship of the English football team with the offer of a four-year Football Bond through which “you could win the football trip of a lifetime”. Subscribe before May 31 2010 and you qualified for a competition in which the winner would get return flights from the UK to South Africa, luxury accommodation and all main meals. The potential rate of 4.65% gross pa included a fixed bonus of 0.5% that would be paid from 14 May 2011 until maturity should England win the World Cup.
Then there is an exchange-traded fund (ETF) based on platinum, courtesy of ETF Securities. The fund is no normal metals ETF as it plays on the potential inability of Eskom to keep South Africa’s platinum producers in power at the same time as promising an uninterrupted power supply for the stadiums, broadcasting centres, base camps, and hotels, restaurants and other service industries related to the World Cup. Seventy-five percent of the world’s platinum is produced in South Africa, so keep your eyes open, or at least buy a torch: load shedding might lead to price spikes.
Returning to the research cited at the top of this article, there is a twist. When the very clever Dutchmen who conducted their investigation in 2002 concluded that the shares of publicly listed European football teams rise when they win, they had not considered an important piece of intelligence from Eric Dunning, a professor of sociology at Leicester University.
Dunning concluded that manufacturing productivity across England rose in each town and city when its local football team won, with one exception. Unfortunately, that city was Liverpool, home to the most successful football team in Europe throughout the late 1970s and early 1980s.
The story just goes to show that it’s all very well applying logic to the beautiful game in the hunt for returns, but many investors might spend their time more profitably by finding a way of capping their exposure to emotion during the next tournament.