The World Cup Will Not Drive Brazil's Growth
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Despite a disappointing year for Brazilian stocks, bulls on Brazilian growth abound. Since the 1970s, bulls have pointed to breakout years, a growing middle class, and a young and increasingly educated population as reasons to invest in the country. In the past two years, commentators blithely toss out the 2014 World Cup and the 2016 Olympics as reasons in and of themselves to invest in Brazil, or as drivers of growth. I show that international games are not surefire investment opportunities and that Brazilian bulls should instead look to long-term public policy projects.
More Pomp, Less Profit
The World Cup and the Olympics are not surefire money makers. Trading Floor’s Matt Bolduc notes that hosts spend billions on improvements over several years, usually amounting to less than one percent of GDP each year. Even in the best of cases, tourist dollars during events are temporary windfalls amounting to 1-2% of GDP. Despite the rhetoric from sports bureaucracies and local governments, international games guarantee debt while offering the possibility of highly variable gains. Analysts looking at past hosts find mixed results: Germany’s economy registered a tiny blip from the 2006 World Cup while in 1998 France received a much needed boost from hosting. Likewise, the Chinese government used the Beijing Olympics to ramp up durable infrastructure projects in one of the world’s densest cities, while the Athens Olympics seemed to just add to existing debt in exchange for superficial improvements. A University of Hamburg study and the authors of Soccernomics found that the surest and most important effects of hosting were actually boosts in consumer confidence and international reputation -- not sectoral or GDP growth.
Stock indexes in Olympics and World Cup host countries tend to perform better than global indexes the year after hosting, most likely due to a mix of diffuse benefits, like more cash in the economy and happy consumers. But before you run out and buy shares of a country ETF like iShares MSCI Brazil (NYSEMKT: EWZ), carefully consider two things: first, the Brazilian stock index and the ETFs tracking it are most likely overvalued, and most of the cash from the Olympics will go to privately held companies.
Brazilian stocks had a bubble year in 2010, when investors thought that 7% growth might be sustainable. Stocks have since tumbled, but not to bargain levels. After disappointing 2% GDP growth in 2011 and 1% for much of 2012, falling revenues for natural resources, and big fines for some of its biggest companies, Brazil’s Bovespa still trades at a PE of roughly 19. A PE of 19 is reasonable for a maturing technology or consumer goods company, but surprising for an index dominated by natural resource, telecommunications, and banking companies, many of which have had low earnings growth, litigation battles, and downwards guidance on low future demand.
A lot of money moves around the World Cup and the Olympics, but directly benefiting as an individual investor is tricky. Most of Brazil’s hotels and restaurants are privately held, as is Odebrecht, the main construction company. Airline Gol (NYSE: GOL) is publicly held, but its shares dipped into penny stock territory this year and the company has been reliably losing money every quarter. Telecommunications could get a boost from the games, but this summer the central government slapped the sector with fines, sales bans, and orders for expensive upgrades. Companhia de Bebidas das Americas (NYSE: ABV) is eyeing a blockbuster year in 2014 after a recent decision to let fans drink beer in stadiums at the 2014 World Cup and the 2013 Confederations Cup. ABV already makes 7 out of every 10 beers sold in Brazil, as well as popular soft drinks, and has seen revenue grow a decent 10% over the past five years. While ABV is well-placed to profit from the World Cup and most likely the Olympics, its unexciting revenue growth and one future great year may not justify its current PE of 28.
Long Term Policy a Bigger Boost than Games
Countries can use international games to boost their reputation, consumer confidence, and infrastructure and that is clearly what the Brazilian government intends. However, long term gains do not come from new stadium construction. The biggest punch – and promise -- comes from President Rousseff’s fifteen year, $500 billion infrastructure improvement plan. The plan alone would invest 1% of Brazil’s GDP each year in infrastructure improvements, considerably more than World Cup and Olympics spending. While the infrastructure projects are clearly related to hosting, they go far beyond the games, to cities and ports well off the World Cup map. The improvements could lower the infamous “Brazil cost” of bad transportation infrastructure, slow bureaucracy, and general inefficiency, making Brazil’s core industries more competitive. President Rousseff’s plan is ambitious and international observers praise it as necessary for future growth and overdue, much like her interest rate cuts and corruption prosecutions. These long-term, technocratic public policy advances are what should be driving Brazilian bulls, not the games.
Hosting the World Cup and the Olympics is no surefire boost to the Brazilian economy, and buying Brazilian stocks ahead of the games is definitely not a sure way to make money as an investor. Past hosts always took on debt and diverted tax dollars to prepare for games and some saw a one year boost in stock markets and GDP. Brazil could gain a lot from a reputational and consumer boost, but costs are already running over. Instead of the games, bulls should look at the viability of long-term policy projects to increase efficiency in Brazil’s core industries and companies. Instead of rushing into index funds or sectors linked to tourism, individual investors should assess if new policy projects will make domestically strong companies globally competitive in the long term.
CallaMarie has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!