Brazil faces real financial pressure by hosting the 2014 World Cup and then the 2016 Olympics in Rio. While the economy is likely to see a brief surge of activity, especially in the airline and hospitality sectors, these trends are temporary and negligible compared to the longer lasting debt associated with hosting such events. Infrastructure developments, like the $270 million stadium in the Amazon jungle, reinforce the protestors message that “We Don’t Need the World Cup. We Need Money for Hospitals and Education.”
The author makes an interesting observation that a “well run World Cup” could improve the countries reputation and trigger structural reforms, but I question whether this form of reputation management is worth the $11 billion already spent on the event.
Will Brazil’s World Cup Pay Off For Investors?
Tonight, the FIFA World Cup will finally get underway when Brazil kick off against Croatia in the Arena Corinthians in São Paulo. But what will the tournament’s impact be on Brazil’s economy and stock market?
If you take your cues from local sentiment, the answer appears to be profoundly negative. Events like the World Cup and the Olympics tend to be a drain for host countries at the best of times, due to their profound cost, and these are far from the best of times: Brazilians have been protesting the lavish expenditure on the World Cup for years now, and continue to do so on the eve of the opening match.
Euler Hermes, the trade credit insurance business, says in a new report that the World Cup and the Olympics (following in Rio in 2016) will between them add 0.2 percentage points to GDP growth in 2014 – making a 1.8% full-year total – while at the same time contribute half a percentage point to inflation, bringing it to 6.3%. One, it argues, cancels out the other, and while job creation is usually cited as a positive outcome of these events, it doesn’t last for long. In World Cups and Olympics alike, costs are always, always, always underestimated, increasing public debt; and in Brazil’s case the cost have spiralled even more than is commonplace, coupled with rumoured corruption, in a country that was beset by poverty in the first place. Brazil’s GDP growth, when last reported, ducked expectations, growing just 0.2% quarter on quarter in the first three months of this year, and 1.9% year on year.
But what of the infrastructure gains, people say? There are some, for sure, but the biggest outcome of events like these is vast stadia that become white elephants. As John Oliver pointed out in his brilliant skewering of FIFA, the body in charge of World Cups, the stadium in Manaus – a city in the Amazon so remote that it cannot be reached by car – will cost $270 million, yet will be used for only four matches in the tournament, and then does not even have a local team to use it afterwards. Brazil is believed to have spent $11 billion getting ready for the World Cup.
How about Brazilian stocks, though? At the time of writing, Brazil’s Bovespa index is up 7% so far this year, and up 10.71% in the last 12 months – but it’s down 9.76% over the last three years and is considerably below the level it stood at in early 2012. The market lost 24% over the course of 2013, so this year’s performance is in some sense just a recovery of some lost ground.
Individual stocks, however, can benefit from a tournament like this. Fund manager Bradesco Asset Management highlights companies related to entertainment and hospitality. Those might include breweries such as Ambev, although that has been hit by an increase in beverage taxes. Airlines will benefit – such as Gol, the second-biggest in Brazil – but only for a month or so. Retailer Lojas Americanas and payments group Cielo have also been mentioned as potential winners. For those who don’t like stocks, Brazilian government bonds offer 6 to 7%, though obviously a yield like that is partly a reflection of considerable risk.
Instead, the bigger influence of the World Cup on Brazilian markets will be what it says about Brazil, and in particular its government. A well-run tournament will perhaps surprise those who doubt Brazilian efficiency, and improve momentum; more importantly, it may just have an impact on the country’s election in October. A feelgood factor in Brazil will help President Dilma Rousseff if, as expected, she seeks re-election; a negative tournament, whether in terms of national sentiment towards it or even the performance of the national team, may count against her.
Euler Hermes argues that the biggest impact will be if the World Cup, by highlighting social unhappiness with Brazil’s economy, triggers lasting structural change. “Deep structural reforms could thus be the real mega event for the Brazilian economy in 2014,” it says. And if that’s true, long term, that should be good for investors.
author: Chris Wright