Who are the Economic and Financial Winners of the World Cup?

Rinoy Pazhayamkottil, Strategic Consultant, Global Strategic Consulting also contributed to this story.

The FIFA World Cup 2018 is underway and sports fans around the world will be watching the spectacle over the next few weeks. While most fans are interested in seeing who will triumph in the most prestigious cup in the sports world, this article is not about football, but rather the event itself. As with any major sporting event, some stand to make a lot of money while others will lose it. Let’s look at some of the economic and financial factors related to this event to analyze the impact of the FIFA World Cup.

Promised Economic Benefits

In December 2010, the FIFA committee announced that the 2018 FIFA World Cup would be hosted by Russia. Russia outbid Portugal/Spain, Belgium/Netherlands and England to win this honor, but why are these countries competing so hard to host this event? The answer is that they are looking for the economic boost that typically comes with hosting this global sporting event. Winning the bid to host the World Cup assures these countries benefits such as increased urban and regional development, economic growth, declining unemployment rates, and infrastructural upgrades, to name a few. In fact, the sport's global governing body FIFA has promoted hosting the event as a path to economic growth, awarding the last three competitions to emerging countries. But is economic growth a given? Let’s take a look at the host countries of the last two World Cups: South Africa (2010) and Brazil (2014).

South Africa saw a boost in GDP growth leading up to the 2010 World Cup, but this may have been the growth recovery following the 2008-2009 global financial crisis (GFC). Economic growth since 2010 has averaged below the growth rates seen in 2004-2007 preceding the GFC. At the same time, the unemployment rate rose above 25% leading up to the tournament, and in the subsequent years has averaged 25.6%.

In Brazil’s case, the timing of the World Cup could not have been worse, taking place amid significant political turmoil and just after the country entered a deep recession. Real GDP growth was positive in the last half of 2014, but the economy contracted throughout 2015 and 2016. The unemployment rate at the time of the World Cup registered 6.8% and even fell slightly in the months following the World Cup. However, unemployment has soared since early 2015, and the jobless rate is currently 12.9%.

Are Corporate Sponsors the Real Winners?

If the host countries are not benefiting from the World Cup, who are the real winners of the FIFA World Cup? We set out to explore whether the companies who sponsor the World Cup are the ones who reap the benefits.

We wanted to develop a football index that would include companies most likely to benefit from the World Cup. In creating our index, we first needed to define the scope of data points that we would take into consideration. Since the FIFA World Cup only takes place every four years, we decided to also include the UEFA European Championships, which take place on a four-year cycle, evenly distributed between the FIFA World Cup events. This allowed us to define a two-year geographic focus on the host countries of each of those global events. We focused our back-testing analysis on the period between June 2007 (one-year pre-European cup) and June 2018 (current World Cup), which includes the following events: European Cup 2008 (Austria and Switzerland), World Cup 2010 (South Africa), European Cup 2012 (Poland and Ukraine), World Cup 2014 (Brazil), European Cup 2016 (France), and World Cup 2018 (Russia).

We then defined our universe of companies. We specified our multi-factor model based on geographic revenue, revenue by income segment, and the direct sponsorship involvement of companies. In our model, the key sectors that would benefit from these global sporting events would be the companies whose revenue was directly affected by the event itself, either because of geography or association to the sport. 

Using FactSet’s RBICS industry classifications, we identified the following sectors as sources of potential outperformance: Online Casinos (Sports Betting); Beer, Wine and Spirits Retail, Sports Teams and Entertainment; Athletic Footwear Production; Breweries; TV Producers; and Hospitality Providers. We also included the direct sponsors of the World Cup and European Cup that would benefit the most from having access to the largest advertising platform of the world to promote their products and services. 

We then used the geographic revenue exposure to the countries hosting the World Cup or European Cup, with a relative overweighting of the World Cup, due to its significantly larger audience and target groups. We shifted the geographic focus one year before and one year after the event in a particular host country, based on the assumption that country-specific revenues associated with the tournament would occur primarily within this two-year window.

We created a composite index from our factors, consisting of the first two fractiles of each of the absolute rankings of each factor, and combined it with 25% of the MSCI AC World. We added the MSCI AC World exposure in order to create a global market index, which would be less volatile and have a broader exposure to sectors that would not be included in our multi-factor model. The constituents were market cap weighted to give greater weight to large blue-chip companies and reduce some of the potential volatility of smaller companies.

Top 30 holdings of the portfolio according to active weight

 
Our new index is heavily overweight in the Consumer Discretionary and Consumer Staples sectors compared to our benchmark. This is expected, since our RBICS sectors were focused on the retail market, with large weights for brands that directly sponsor the FIFA World Cup and UEFA European Championship, like Coca Cola and McDonalds. Note that these large multinationals do not appear in our active weights listed above because their weights in our composite index are largely based on their weights in the MSCI AC World, our “fixed” index. 

Top Five Active Weights by RBICS Sector

It was also not a surprise to see an increased exposure to Russia for the latest portfolio composition compared to the MSCI AC World.

Geographic Exposure of Our World Cup Fund

Is Football a Winning Investment Strategy?

Now the million dollar question. Does creating an elaborate focus on these factors actually create additional value or does it harm the performance of the index performance relative to the benchmark? The results for of our football index were positive. As shown in the chart below, our model index outperforms the MSCI AC World by 33.8% over the timeframe of our analysis (2007-2018).

Breaking down performance by sector, we see that consumer discretionary and consumer staples are among the strongest performing. The solid growth of these two sectors helped to reduce downside movements in volatile markets, and the heavy tilt towards them in our sample portfolio drove outperformance and resulted in a significant allocation effect vs. the benchmark. 

The reduced volatility of our portfolio, especially in 2008-2009, helped to limit losses and created an active return vs. the benchmark. In addition to the price return generated, consumer staples are also a stable source of dividend income, fueling the overall performance of the fund. In creating a fund with a short-term focus on the FIFA World Cup and UEFA European Championships, we developed a fund that is actually less volatile than one of the broadest market benchmarks available.

This exercise indicates that there is a viable case for investing in major sports events by identifying the companies that stand to benefit. Our conceptual World Cup Fund connects the key benefits of those events into an investable universe that has the potential to outperform.