World Cup has striking effect on activity in financial markets
In sport and in trade, it is all about winning and losing – and financial investments are affected by both
Messi business: Lionel Messi of Argentina celebrates scoring his team’s winner against Iran. Academic studies have shown that there is a big difference between wins and losses, with the latter followed by an increase in heart attacks, crimes and suicides. Photograph: Ronald Martinez/Getty Images
More than three billion people across the globe are expected to tune into the World Cup. With roughly half of the world’s population following the event, might football fever even influence the international investment community?
Probably. The World Cup has been found to have all kinds of effects on financial markets, with events on the pitch shaping the moods of those in the trading pits.
Trading volumes plummetDuring the last World Cup in 2010, the number of trades made when the national team was playing fell by 45 per cent, according to an ECB study of 15 international stock exchanges. An additional 5 per cent drop in trading activity was recorded when a goal was scored.
Trading fell 38 per cent in European countries and 43 per cent in the US, but it was in football-mad South America where the biggest effect was seen. Trading fell by 75 per cent in Brazil when its national team was playing and by 79 per cent in Argentina. In Chile, trading all but ceased, falling an incredible 99 per cent during matches involving the national team. Chileans were even likely to focus on the pitch rather than the pit during matches involving other countries, when trading fell by 79 per cent.
Winner’s honeymoon bounceThe World Cup-winning country typically sees its stock index outperform global indices by 3.5 per cent over the following month, according to a recent Goldman Sachs report. Since 1974, the winners have outperformed on all but one occasion, recession woes plaguing Brazilian indices in 2002.
However, the boost is a short-lived affair, fading “significantly” after three months. In fact, the winning country actually underperforms by 4 per cent over the following year, according to the report.
Losers lose in the marketsGoldman’s report found seven of the last nine losing World Cup finalists suffer a “post-final bout of the blues”, underperforming by 5.6 per cent over the following three months.
Another study, Sports Sentiment and Stock Returns, which examined 1,100 football matches and stock returns in 39 countries, found a loss in the elimination stage leads to the national market falling by 0.5 per cent the next day.
It’s not that losing has especially damaging economic consequences, say researchers; it simply influences investor mood. That’s why the loss effect is stronger in the World Cup than the European Championships, and is more obvious after important games and among smaller stocks, especially in football-mad countries like Argentina, Brazil, England, France, Germany, Italy, and Spain. A similar one-day effect can be found after cricket, rugby, and basketball losses, the study found.
US returns sufferStock returns suffer during World Cups, and not just in losing countries or in football-mad nations. A 2010 study by Israeli researchers found that, on average, the US stock market falls 2.6 per cent, with below-par returns in 14 of the previous 15 World Cups.
This may seem peculiar, given that, till now, the US has not exactly obsessed with “soccer”. However, around one-third of transactions in US exchanges are made by international investors. With each round of the World Cup, the number of losing countries increases, “until eventually there is only one winning country and dozens of losing countries”.
Although each game will have a smaller impact on the US market than on individual local markets, the US market is affected by many more games.
Traders might profit by predicting who will lose in individual games and then betting against that country’s market, but it is not easy to make accurate predictions. In contrast, betting against US markets offers a “free lunch” to traders as it doesn’t depend on the games’ results, with the effect increasing as the month-long tournament progresses.
With viewing data showing that the US’s first game at this World Cup was watched by more people on TV than the final round of the US Open Golf, the final game of ice hockey’s Stanley Cup and even the concluding game of the NBA finals, it will be interesting to see if the effect is exacerbated in the US this year.
Losing patterns may changeThis free lunch may not last forever, the same researchers suggested in a follow-up study in 2013. Their original study was widely publicised in advance of the 2010 World Cup, with much discussion arising as to how to exploit it.
Consequently, although abnormal trading patterns persisted in 2010, market behaviour was different to previous tournaments – the window period in which to exploit it was shorter. They predict that, in 2014, sophisticated investors will buy in the event of irrational market declines.
“The expected disappearance of the World Cup anomaly by no means implies that the sentiment effect will disappear”, the authors concluded, “but rather that transactions made by sophisticated investors will eventually remove the anomaly from the stock market”.
Individual stocks remain vulnerableInvestors may wise up to World Cup anomalies, but another study of the 2010 World Cup shows they still exist. It analysed trading patterns in semiconductor giant STMicroelectronics, which is traded on stock exchanges in Italy and France.
Normally, the company’s market capitalisation will be identical on both exchanges. However, this was not the case during France’s 2-1 defeat to South Africa in its final group stage match in 2010. On the French exchange, STMicroelectronics shares dropped following each of South Africa’s goals, but no such move occurred in Italy.
Similarly, when Italy lost against Slovakia two days later, STMicroelectronics shares fell on the Milan exchange, but not in Paris. The probability of underpricing increases as matches unfold and the elimination of the team becomes more likely, the authors found.
The title of the study sums it up nicely: It Hurts (Stock Prices) When Your Team is About to Lose a Soccer Match.
Football and fanaticismIf national teams’ results influence national stock markets, it’s hardly surprising that events on the pitch influence the performance of football clubs trading on stock exchanges. A recent paper confirmed the “significant link”, having analysed stock returns and results in league matches of 13 clubs from six different European countries.
Less obvious is the finding that national indices can be moved by the results of individual clubs. One study found the Turkish market was influenced by important wins for Istanbul club Besiktas. Another, entitled Soccer, Stock Returns and Fanaticism, assessed the effect on the Turkish market of major wins for Besiktas and fellow Istanbul clubs Fenerbahce and Galatasaray. The effect “increases with the fanaticism of the teams’ supporters”, the study found.
Loss aversionMost market anomalies pertain to the effects of World Cup losses. That’s because most studies find that, although losses move markets, indices are not boosted to any great degree by wins for national teams. For example, the aforementioned UK study, Sports Sentiment and Stock Returns, found that while losses in international football, cricket, rugby and basketball games moved indices, there was “no evidence of a corresponding effect after wins for any of the sports that we study”.
Why? Academic literature shows there is a big difference in fans’ reaction following wins and losses. Losses are followed by an increase in heart attacks, crimes and suicides, but sporting wins do not catalyse mood improvements of a similar magnitude. Similarly, behavioural economists have shown the pain of a euro lost is roughly two-to-three times as great as the joy of a euro gained.
The same process is at work in the reaction of investors to World Cup wins and losses. Moods move markets, and moods are much more influenced by losses than wins.