Football World Cup victors dribble past world markets but only for a while

Sees Brazil as clear favourites to win the cup, followed by Argentina and Germany

The football World Cup captures the world’s attention, but what about equity markets? Is there a connection? Yes, according to Goldman Sachs.

In a recent report ‘The World Cup and Economics 2014’, it suggests there is a clear pattern of outperformance by the winning team in the weeks after the World Cup final. Besides, it predicts Brazil, Germany, Argentina and Spain will reach semi-finals, and Brazil will beat Argentina in the final this time.

"On average, the victor outperforms the global market by 3.5 per cent in the first month — a meaningful amount, although the outperformance fades significantly after three months," the report says.

It adds: "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 four per cent on average over the year following the final."

BEAUTIFUL GAME, SHORT STREAK

• 3.5%
  The margin by which a FIFA World Cup victor nation’s stock market outperforms the global market in the first month on average
• 3 MONTHS
  The period after  which outperformance fades a lot
• 4%
  The margin by which the nation’s stock market underperforms on average over the year after the final

The report suggests the pattern of outperformance following victory at the World Cup is fairly consistent. All the winners since 1974 have outperformed in the post-final month. Notably, Brazil was the only exception in 2002.

However, in this particular case, macro events — a deep recession and currency crisis — overshadowed the impact of victory on the football field.

The economic crisis was sufficient to drive the equity market down by 19 per cent relative to the MSCI World index in the month after the final and this followed an underperformance of 13 per cent over the previous months.

However, this does not mean Brazil hasn't seen reflected in its market the post-final feel-good factor that tends to be more typical after a World Cup victory. It outperformed the MSCI World index by 21 per cent in just one month after its win in 1994. On that occasion, the bull market continued and the stock market outperformed by 38 per cent over just three months despite a massive 39 per cent outperformance in the year leading up to the games.