The Review and Outlook
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Even though Brazil is hosting the World Cup, it is England that could be the real winner – financially at least. David Madden looks at the different sectors that could benefit from football’s biggest tournament.
While Brazil’s financial benefits to hosting the 2014 World Cup are hotly contested, England could be said to have the away advantage. At the very least the government doesn’t have to spend a fortune on new infrastructures, but there are a host of other areas of the economy that are likely to receive a boost by the event.
UK-based airlines will benefit significantly during June and July. England fans are already leaving for Brazil in their droves; British Airways has put on additional flights to accommodate them and, though the airline may charge a premium in relation to easyJet and Ryanair, the low-cost carriers will miss out as they don’t offer long-haul flights to South America at all. Football fans who can’t afford the trip to Brazil are unlikely to take a holiday elsewhere during the month-long competition, hitting the low-cost airlines a second time. BA on the other hand will be thankful for its merger with Iberia Airlines, which was principally to take advantage of its routes to Latin America, and with Spain and Portugal also in the World Cup, football fans from three countries could help BA owner IAG to reach its share price target of 450p.
While it might seem obvious that sports retailers like Sports Direct and JD Sports are likely to see an increase in revenue, the 2010 World Cup in South Africa proved problematic for both companies. England’s early exit caught Sports Direct on the hop, as the retailer found itself in possession of too many England jerseys, hats and paraphernalia. Four years later one would hope that the company has learned its lesson; this remains to be seen. At JD Sports, last month CEO Barry Brown made a sudden exit after 30 years at the company, and the change in management at JD Sports could make Sports Direct the more attractive of the two.
As the excitement heats up ahead of tonight’s game between Brazil and Croatia, so does the UK’s weather; a factor accepted to have a positive effect on UK retail sales. Though Marks & Spencer has recently reported its third consecutive drop in annual profits, the clothing department could be in for sunnier times ahead as warmer weather coupled with a strong performance from England could drive the share price towards 500p. Not all the services companies welcome clear skies, though; apparently sausage roll-maker Greggs falls out of favour when temperatures hit the twenties. Well would you want a Steak Bake in this weather?
The further England gets in the competition, the better it will be for the likes of Mitchells & Butlers and JD Wetherspoon, but either way it is a win-win for the drinks industry. Cheap and cheerful Wetherspoons may not be a dedicated sports bar, but it is in a better position to take advantage of World Cup fever as it is more pub-focused. The company’s share price has more than doubled in the past two years, where Mitchells & Butlers' has lagged in comparison.
Historically, the host nation and the winning nation enjoy a stock market rally during the World Cup and the months preceding the event; certainly the South African index, the JSE Top-40, is up 97% since 2010, though stimulus packages from central banks and a commodities boom are likely to have assisted the growth. It isn’t all positive, however. South African construction companies Murray & Roberts and Aveng enjoyed gains on the run up to the tournament four years ago as they were awarded government contracts leading up to the event, but today stocks are down 37% and 40% respectively. I also suspect that, as with South Africa, Brazil will wind up with a number of state-of-the-art art stadiums which it will struggle to fill when all the excitement is over.
As Brazil is tipped to be the favourite to win this could be a double header for the country’s economy. Already, the Brazilian equity market benchmark the Ibovespa has gained 15% since its low in mid-march as interest-rate hikes have propped up the country’s currency – the real – and the stock market. The Federal government is hoping that the World Cup factor will pick up where monetary policy left off, and with a national election in October it hopes to ride the tournament’s wave all the way back into office.
The runner-up nation is also said to enjoy a bit of equity-market euphoria during and after the tournament, even though the benefits are marginal compared to the champions. I invite you to debate England’s potential for reaping such benefits.