With 15 days [8] until the Olympics, we introduce the first in a five-part series of market-and-economy related discussions centered on that glorious event. As global equities exhibit their own 'Citius, Altius, Fortius', Goldman looks at the impact of the Olympics on stock markets. They note that, aside from the benefit of raising the international profile of the host country as both a tourism and investment destination, the announcement of a winning Olympic bid means major investment in infrastructure, including stadiums, accommodation and transport to prepare for the Games. Interestingly, all recent Olympic hosts have outperformed the MSCI World index in the 12 months following the Olympics. This is true of recent hosts regardless of the size of the economy or state of development, suggesting either the local market is boosted by the international profile of the Games, or is perhaps relieved to have the Games behind them. Given the below-average performance in the UK since the Olympic announcement, UK investors may hope for a continuation of this trend, looking forward to a positive year in equities following the London 2012 Games.
Francesco Garzarelli and George Cole, Goldman Sachs: Impact of Olympics on Stock Markets
Hosting the Olympics results in a number of economic effects that could have an impact on stock markets. Aside from the benefit of raising the international profile of the host country as both a tourism and investment destination, the announcement of a winning Olympic bid means major investment in infrastructure, including stadiums, accommodation and transport to prepare for the Games. For example, as part of the 2012 Games, the London Olympic Delivery Authority has awarded $9.4bn in contracts to business, and the government has invested an additional $10.2bn in transport and infrastructure projects, representing around 0.8% of UK GDP. This investment offers potential benefits for local business, in particular for sectors such as construction and engineering.
How might this be reflected in markets? If markets were forward-looking, we would expect the benefits of the Olympics to be priced into local equity markets at the time of the announcement, since the approximate magnitude of required investment would be known in advance. Various studies have examined the impact of the Olympic host announcement on stock prices, with mixed conclusions. In particular, Dick and Wang (2008) find evidence that, on average, host stock markets are positively affected by Olympic host announcements. However, Liu (2011) finds little clear evidence that the Chinese stock market was affected (positively or negatively) by either the 2000 host announcement, when Beijing was considered a favorite to win before ultimately losing the bid to Sydney, and the 2008 announcement, when Beijing was awarded the Games.
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To visualise the impact of the Olympic host announcement, we chart returns following the last eight Olympics host city announcements, including London and Rio De Janeiro (chart above). We calculate stock index returns above the benchmark MSCI World index for the winning country over a three-day window following the announcement.
While there is variation among the host nation stock markets, all but China and the UK have positive returns in the three days following the announcement. The Greek stock market stands out as the top performer: it outperformed the benchmark by almost 8% after the 1997 announcement for the 2004 Games. For London, the day following the announcement in 2005 was the July 7 bombing, causing the FTSE to fall 1.3%, before rebounding. The chart above also shows returns above benchmark during the two weeks of the Games, albeit with no obvious pattern. China’s winning bid announcement coincided with turbulent markets in the midst of the global downturn in July 2001, while the Olympics in August 2008 took place on the brink of the financial crisis.
To see the longer-term impact of the Olympics, we measure the performance of the host stock market against a world benchmark over the six to seven years between announcement and the opening ceremony of the Games, as well as the returns in the year following the Olympics (chart below). The equity markets in China, Korea, the US and Greece outperformed leading up to the Olympics, whereas those in Spain, Australia, and the UK underperformed. The latter three stock markets each suffered from headwinds in the global cycle leading up to the 1992, 2000 and 2012 Olympics.
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Interestingly, all recent Olympic hosts have outperformed the MSCI World index in the 12 months following the Olympics. This is true of recent hosts regardless of the size of the economy or state of development, suggesting either the local market is boosted by the international profile of the Games, or is perhaps relieved to have the Games behind them. Given the below-average performance in the UK since the Olympic announcement, UK investors may hope for a continuation of this trend, looking forward to a positive year in equities following the London 2012 Games.