According to experts, humiliation of the host nation of the World Cup is to affect not only stock trades, but also might have a more lasting impact on the economy and political life of the country.
On July 8, Brazil lost to Germany in the semifinals, 7-1. It is a sort of a national tragedy for Brazilians hosting the tournament first time since 1950. Back then, the team was hot favorite to win, but the final match was to produce a great upset with a 2-1 loss to Uruguay. Now the football-mad nation remains stunned after the most humiliating defeat in its sporting history.
UBS analyst Geoffrey Dennis specializing in Brazil since 1990 thinks that the failure could hurt the mood of local investors and consumers.
“It is such a humiliating defeat that you wonder whether it will have a negative impact on Brazilians’ psyche,” he said. “It’s going to confirm to the people that ‘Look, our economy is struggling, we cannot get any growth, now we don’t even have a decent football team either.’”
The Sao Paulo Stock Exchange, the largest stock market in Latin America, is closed today for a regional holiday devoted to the anti-government uprising in 1924. So the reaction of Brazil’s stock market will be seen tomorrow. It is needless to say that the relationship between failures of national football teams and the country’s stock indices has been proven many times by different researchers.
In 2007 Alex Edmans, a professor of finance at London Business School, together with co-authors Diego Garcia and Oyvind Norli investigated the correlation between international football matches and stock returns. The results showed that being eliminated from the World Cup leads to the national market falling by 0.5 percent on the next day. The effect is stronger in the countries with long football tradition (Brazil, Argentina, Spain, Italy, England, Germany, and France) where people got used to waiting for the victories only.
According to the hypothesis of other researchers Kaplansky and Levy, as long as all the countries except for one lose the World Cup, the cumulative effect of the defeats could be seen at the global level. In their work done in 2008, they researched the correlation between this event and the U.S. stock market performance as its size could be taken as the equivalent of the global market. So Kaplansky and Levy findings showed that U.S. equities declined by an average of 2.5% in the month of the World Cup compared with an average growth of 1.2% in other months.
“Our research shows the market is affected by psychology and emotion rather than fundamentals," Edmans said in a BBC interview.
“Brazil so much invested – in all senses of the word – in World Cup success,” the Guardian says. The country spent $11 billion getting ready for the World Cup. Yet, the football-crazy country with all its affection to football witnessed large-scale protests and clashes with the police during the preparations. Now the epic defeat might add fuel to the fire.
“The football fiasco brings down the chances of Dilma Rousseff to win the presidential election in October,” Bloomberg says. During her ruling, Brazil’s growth slowed down to 2%, the lowest level since 1990. At the same time, inflation rose beyond 6.5%, the upper threshold set by the government.
German football fans are celebrating. What’s more, their economy is doing well. The DAX Index German trading on the Frankfurt Stock Exchange has grown 0.14% compared with zero or negative dynamics of the Europe’s major indices FTSE 100, CAC 40 and SMI.
