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Do investors in the Olympics ever win?

The games are great for national pride, but may not be a golden investing opportunity.

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With the upcoming 2014 Winter Olympics in Sochi, Russia and 2016 Summer Olympics in Brazil (as well as 2014 World Cup), now may be the right time to consider the implications of the world's biggest global sporting events for investors. To prepare for these events, Brazil and Russia are spending billions to modernize infrastructure, build stadiums, increase commerce, and promote tourism. To the casual observer, such activity might seem fit for economic expansion and strong investment performance.

However, history suggests the opposite: Mega-sporting events usually leave the host nation with budget overruns and massive debt, and event-driven investment strategies have rarely succeeded.

Here, we look at the fiscal failures of past Olympics and examine preparations in Russia and Brazil, which have been fraught with budget problems, protests, and possible corruption.

If there was any time to invest, it may have passed.

The majority of Olympic host nations have not experienced sustained growth in GDP (gross domestic product). As shown by this sampling of 10 Olympics held between 1964 and 2008, the host nations’ GDP generally rose before the Games, started to fade as the Games began, and then tapered off considerably afterward (see the chart below).

In addition to the historical lack of GDP contribution, investors should consider the weak financial results of many recent Olympics (all figures in U.S. dollars):

  • Montreal, 1976: Worker strikes, mismanagement, and huge cost overruns left the city with $1.5 billion of debt that took 30 years to erase.1
  • Barcelona, 1992: The Barcelona Olympics left the central Spanish government $4 billion in debt, and the city and provincial governments an additional $2.1 billion in the red.2
  • Nagano, 1998: The full cost of the Nagano Olympics will never be known, because the documents accounting for money spent on the Olympic bid were burnt on the orders of Nagano’s Olympic Committee vice-secretary general. Yet it is clear it went vastly over budget and, as a result, Nagano fell into recession.3
  • Sydney, 2000: The Australian state auditor estimated the Games’ true long-term debt was $2.2 billion.4 Pre-Olympics, Australian officials estimated that tourism would quadruple after the Games, but there was no boost at all.5
  • Athens, 2004: The Athens Olympics vastly exceeded its $4.6 billion budget. Many believe the real accrued debt of roughly $15 billion contributed to Greece’s present financial crisis.6

While a very small number of Olympics were considered “profitable”— such as the 1984 Los Angeles Games, which leveraged existing pro and college stadiums to avoid huge construction costs—some industry watchers disagree with the claim that they are indeed profitable.

“There has never been an Olympic Games that has made a profit,” says Robert Barney, director of the International Centre for Olympic Studies at the University of Western Ontario and coauthor of Selling the Five Rings: The International Olympic Committee and the Rise of Olympic Commercialism. “Fold in all the costs and revenues,” he says, “including federal allotments, municipal allotments, provincial or state allotments, it’s always been that a debt has to be paid somewhere.”7

Beware the hype

As history has shown, financial projections for mega-sporting events consistently fall short of expectations. Why? Because many believe—and research confirms—that the projections themselves are overstated. Case in point: An analysis of the Sydney Olympics’ impact on GDP illustrates the gap between hype and reality, evidenced by the considerable gulf between pre-Olympics estimates of economic benefits compared with post-Olympic studies (see the chart right).

Present day: Preparations troubled in Brazil and Russia

Protests in Brazil

According to a recent study by the University of São Paulo, Brazil will spend roughly $18 billion on infrastructure ahead of the 2014 World Cup, $14 billion of which will come directly out of Brazilian taxpayers’ pockets. Expected outlays devoted to the 2016 Olympics are likely to be an additional $15 billion, for a combined total of $33 billion.8 If the Brazil Olympics do go over budget, it would be the second-most expensive Games ever (see the chart below, right).

Scores of Brazilians have taken to the streets to protest these high costs. The initial demonstrations were in response to a proposed rate increase for bus and metro fares, but the dissent quickly spread to include excessive spending on stadiums, corruption, and poor public services. Matheus Bizarria, an NGO Action Aid worker, said Brazilians have reached the limit of their tolerance. “It’s totally connected to the mega-events,” Bizarria said. “People have had enough.”9

Corruption in Russia

In 2007, Russia estimated it would cost $12 billion to host the Sochi Games. That estimate is now $51 billion, which would make it the most expensive Olympics ever. Why has the estimate quadrupled? Corruption, according to a prominent former Russian deputy prime minister, who claims Russian officials and businessmen have stolen $30 billion during the years leading up to the Games.10

Potential investment themes in Brazil and Russia

Brazil: In a recent national poll, 48% of Brazilians who responded said poor health care was Brazil’s biggest problem (see the chart right), followed by education (13%) and corruption (11%). After a decade of relatively healthy economic growth, taxpayer and government spending on health care and education should rise. Services aimed at retraining workers, as well as private-sector primary and secondary education, should also capture a larger percentage of Brazilian household expenditures. Meanwhile, protests about the rising cost of already-substandard public transportation will likely command increased government-budget priority in years to come.

A recent World Bank study conducted a comparative analysis of Brazilian exports. The study found that “low productivity gains in recent years have become a central issue for the low trade competitiveness exhibited by the Brazilian economy” and that “improvements in the efficiency of service sectors are central to improving the productivity of all other economic sectors.”

The study also shows the cost of doing business in Brazil—both in terms of labor costs and logistics—has risen in recent years. This is due to a lack of training in its workforce and a lack of investment in the types of infrastructure the country needs in order to accommodate economic growth.

We believe Brazil needs a better trade and transport infrastructure to facilitate productivity gains that will deliver lasting benefits. Stock-specific opportunities in private health care, education, logistics, and the transportation-manufacturing industries (e.g., trucks and buses) are just a few of the long-term ideas that could prove rewarding to investors, long after the streets are swept clean of closing-ceremony confetti.

Russia: Despite being similarly challenged with a heavy resource-based economy, productivity in Russia has actually been superior to Brazil’s (see the chart right). Russia’s demographic and labor force characteristics—being older, yet more highly skilled and educated—are different from Brazil’s, so policies focused on enhancing Russian infrastructure, services, and capital markets should bolster the nation’s productivity growth in the future.

We would expect growth in the private health care, consumer, and financial sectors to deliver superior returns to investors relative to the heavily cyclical, highly regulated, and commodity-price dependent materials (steel, mining) and energy sectors in the country. Specifically, Russia would benefit more from new firms delivering health care services, akin to Russia’s successful homegrown supermarket sector, than showcasing another sports complex.

Investing implications

Investors need to be careful about investing in a country solely based on the hope that Olympic-related spending will lead to overall economic and stock market gains. While the Olympics draw a lot of attention to and boost national pride of the host country, investors should stay focused on underlying economic factors. These include labor market characteristics and manufacturing competitiveness. While spending on infrastructure can give a short-term boost to GDP in the host country, the large debt overhang used to fund this spending can end up creating a drag on future economic growth. Even the Olympics cannot alter a country’s economic long-term competitiveness.

Historically, mega-events like the Olympics and World Cup have not offered meaningful economic benefits, and investors should be wary of expecting any such benefits. It is seldom possible to exploit event-driven opportunities of this nature because they often fail to transform the long-term, underlying productivity challenges many emerging-market countries face— from education levels to infrastructure. Instead, better understanding where supply/demand imbalances may exist in the services sector and where policy responses may positively remedy those imbalances may offer more potentially rewarding opportunities.

Learn more

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1. CNN Money, “Do the Olympics Cost Too Much for Host Cities?” July 30, 2012.
2. International Monetary Fund, “Is it Worth it?” March 2010.
3. Yahoo! Finance, “Olympic Cities Booms and Busts,” July 6, 2012.
4. The New York Times, “Do Olympic Host Cities Ever Win?” Oct. 2, 2009.
5. The Globe and Mail, “The Olympian Task of Sidestepping Olympics Pitfalls,” Sep. 6, 2012.
6. CNBC, “Olympic Cities: Booms and Busts,” Jan. 12, 2012.
7. NPR, “Olympic Caveats: Host Cities Risk Debt, Scandal,” Oct. 1, 2009.
8. TradingFloor.com, “The Economic Impact of Brazil’s 2014 World Cup and 2016 Olympics,” Aug. 27, 2012.
9. The Guardian, “Brazil Erupts in Protest: More than a Million on the Streets,” June 21, 2013.
10. The Boston Globe, “Sochi Corruption May Reach $30 Billion,” May 31, 2013.
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