Could the London stock market be the best bet for investors over the next 12 months? A report by Goldman Sachs shows that after each of the past six Summer Olympic Games, the host country's stock markets outperformed the benchmark MSCI World index by 12% to 26% for the year. That comes out to an average of 1% to 2% per month.
The equity markets in Australia after the 2000 Sydney games and China following the 2008 Beijing games beat the global index by the widest margins, while the Spanish market came out ahead by only 1% a month on average following the 1992 Barcelona Olympics. Based on these findings, it isn't inconceivable that the London Stock Exchange's benchmark FTSE 100 index, which dropped 5% over the past year, will generate a higher return than most of the world's other leading indexes over the 12-month period following the games kicking off on Friday.
Goldman Sachs set out to determine if there is any correlation between hosting the games and the returns generated by the host country's stock markets during four different time frames: The first three days following the host city announcement, the six or seven years between the announcement and the opening ceremony, the two-week period of the games themselves, and the year following their conclusion.
For the first three of these time frames, the host country's stock markets produced varying results against the world index. The announcement that Athens had been awarded the 2004 Olympics, for example, drove its stock market 8% higher than the world benchmark over the following days, but the choice of Beijing in 2001 seemingly had the opposite effect: Chinese indexes lost 6% against the rest of the world in the next three days.
No benefit from Olympic building
From the time a city is awarded the games until they begin, vast sums are generally invested in building facilities and infrastructure to accommodate them.
In preparation for the Barcelona Olympics, for example, enormous investments were made in upgrading the city's transportation infrastructure, which boosted the local economy and has continued to serve residents and tourists ever since. Huge projects were also undertaken ahead of the Athens games, including a spanking new international airport.
According to the report by Goldman Sachs, an estimated $9.4 billion was invested in facilities to house the London games, with the British government chipping in an additional $10.2 billion for transport and infrastructure projects - around 0.8% of the national gross domestic product. In smaller countries, like Greece and Australia, investments for hosting the games involved a larger share of GDP and had a heavier impact.
But the study didn't find that such investments had any consistent effect on the host countries' stock exchanges during the preparation stage. Spanish and Australian indexes lagged behind the global market in the years leading up to the games, while those in the United States, Greece, South Korea and China yielded stronger returns.
Nor was any obvious pattern seen during the two-week period in which the games took place. The U.S. and Australian markets outdid the world index during the 1996 Atlanta games and 2000 Sydney Olympics, respectively, while in the other four countries examined, the local market fell short or just kept pace.
Libor scandal will likely matter more
Only for the 12-month period following the games did the local stock markets reliably outperform the MSCI index, regardless of the country's size or level of development. Goldman Sachs ventured that this consistent effect might be due to a boost in the media profile of the host country, or to a sense of relief by local investors at having the games behind them.
But a sample of just six Olympiads can hardly support jumping to sweeping conclusions. Besides, the impact also depends on the host country's ability to continue utilizing the infrastructure built for the games.
Greece, for example, used its Olympics to borrow enormous sums, and many of the investments it made were disproportionately large for its economy - all of which contributed to its current debt crisis. Investments made for the Sydney games, in contrast, were better utilized to develop the city in the years that followed.
Moreover, outperforming the MSCI doesn't guarantee a profit. The Beijing Olympics in August 2008, for instance, took place on the brink of the global financial crisis and attendant stock market crash, so investments made in the Chinese market that August still suffered heavy losses in the following months. Similarly, the games in Sydney were held just as the dot-com bubble was about to burst. And the London games are being held in the midst of tremendous jitters over the fate of the world economy, and of Europe's economy in particular.
It can therefore be assumed that recent revelations about the Libor rate manipulation by British banks will overshadow the Olympic celebrations for some time to come on the London Stock Exchange.
