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For athletes of Olympic sports -- particularly track and field in my case -- the Olympics is the pinnacle of an athlete's career. The vast majority never have the opportunity to compete in the Olympics, but this same majority strive for that goal day after day and year after year. The prestige of the Olympic Games is unexplainable, but even those that have never participated understand the hard work and dedication it takes to represent one's country.

An infinite amount of literature has been written regarding the implications the Olympic Games has on the economy of the countries that host the games. Nevertheless nations hope to host the Olympics because it is a sign of power and wealth. On the one hand the Olympics allow a country to build and repair outdated and broken infrastructure. But, on the other hand, this comes at a cost. What is this cost and how can we use this to prepare for the future?

The approach I will take is different from previous literature because I will focus on the relationship between a country hosting the Olympic Games and suffering a recession or an economic slowdown shortly after. Furthermore, excluding the 2000 Sydney Olympic Games, there is a pattern of recession within five years of hosting the games; some sooner and few later than five years. Also, I will outline how major Olympic sponsors such as Coca-Cola (NYSE:KO), McDonald's (NYSE:MCD), Visa (NYSE:V), and General Electric (NYSE:GE) have prospered via this sponsorship.

The first event I will begin with is the 1992 Barcelona Olympic Games. Spain spent (pg.6) roughly $9.3 billion on the 1992 games. However, $8 billion of this spending was for infrastructure; which is theoretically used after the Olympics conclude. More importantly, Spain's economy was slowing leading up to the Olympics and the preparations for the games pushed the economy into a very brief recession in 1993. It is important to note Spain is the outlier of the five most recent Olympiads because Spain saw GDP increase very rapidly during the second half of the 1990s after the short recession in 1993.

Spain's GDP Rate

Year GDP Rate
1990 3.8%
1991 2.5%
1992 0.9%
1993 -1.0%
1994 2.4%
1995 5.0%

The next Olympic Games was hosted by Atlanta, Georgia in 1996. Atlanta spent (Table 3.2) roughly $1.2- $1.8 billion to host the games. The 1996 games preceded a strong economic period in the United States. From 1997-2000 America's GDP grew over 4% each year. Unfortunately this abruptly ended in 2001 which led to an eight month recession. It is important to note it took just under five years for America's economy to slip into a recession after the 1996 games.

United States GDP Rate

Year GDP

Rate

1995 2.5%
1996 3.7%
1997 4.5%
1998 4.4%
1999 4.8%
2000 4.1%
2001 1.1%
2002 1.8%

Australia hosted the 2000 Olympic Games at the port city Sydney. Australia spent roughly $AUS6.6 billion to host the games; which was more than double the planned costs. One would think Australia's economy would struggle after an event like this, but this was not the case. For the following year (2001) the country's GDP rate fell 0.7%, but this could have been due to macroeconomic issues; mainly the technology bubble. However Australia did not suffer any severe GDP weakness or recession until a decade later. Australia is an outlier to the overall thesis because, until recently, Australia was not tied to the world economy as closely as the rest of the world.

Australia's GDP Rate

Year GDP

Rate

2000 3.3%
2001 2.6%
2002 3.9%
2003 3.2%
2004 3.6%
2005 3.2%
2006 2.6%
2007 4.8%

The 2004 Olympic Games returned to Athens. Athens spent roughly 8.95 billion euros to get the city prepared for the Olympics; which doubled the original budget of 4.5 billion euros. If Greece were to host the Olympic Games in 2012 it would likely not happen since athletics (known as track and field in America) has been suspended until at least December 15th. Nevertheless prior to the Olympic Games Greece was thriving with a GDP rate near 6%. Unfortunately four years later the country began a recession that is still causing national and global economic problems. The 2004 Games were not the sole reason for Greece's collapse, but it did play a small part in the long term economic struggle of the country.

Greece's GDP Rate

Year GDP

Rate

2003 5.9%
2004 4.5%
2005 2.2%
2006 4.5%
2007 4.4%
2008 1.5%
2009 -2.3%
2010 -4.5%
2011 -3.0%*

(Key: *=Projected)

The 2008 Olympic Games were hosted by China. As anybody who watched the opening ceremony of the 2008 Beijing Games saw, it was clear the Chinese went above and beyond expectations; essentially setting the bar to a new unreachable level. China spent roughly $44-$46 billion to host the games. With that said, it is undeniable China was and still is a high growth country. With GDP levels remaining above 9%, it is difficult to bring the country down; but I will take my best shot. With China's housing market gradually collapsing similarly to the United States in 2007 and 2008, we should be expecting an economic downturn within the next 2-3 years in China; which would put the recession following the Olympic Games at 5-6 years.

As I digress, the collapse of China's housing market will slowly lead to a recession because for the majority of consumers their biggest investment is in their home. Therefore if housing prices collapse as we have seen in America, consumers will lose thousands upon thousands of dollars (Yuan in China). Obviously this will not be a good situation for China or the rest of the world for that matter. Nevertheless the important point to note is that an economic recession will occur roughly five years after China hosted the Olympic Games.

China's GDP Rate

Year GDP

Rate

2007 14.2%
2008 9.6%
2009 9.2%
2010 10.3%
2011 9.6%*

(Key: *= Projected)

With the macro view of the Olympic Games in perspective, we can now take a look at individual companies that are major sponsors of the Olympics. The longest ongoing sponsor of the Olympic Games, since 1928, is The Coca-Cola Company.

More importantly, Coca-Cola's stock follows a similar pattern every four years, excluding the 2008 games, which should be noted. This pattern consists of an upward movement in share price during the Olympics followed by a relatively significant drop in the share price several weeks after the games conclude. For instance in 1992, Coca-Cola's share price ran 11.4% during and shortly after the games, followed by an 18% plunge beginning about five weeks after the Olympics concluded.

Similarly in 1996 Coca-Cola's share price ran 11.9% during the Olympics and the two weeks proceeding the Olympics, followed by an 8.7% slide beginning eight weeks after the games ended. And in 2000 we saw this same pattern; a 19.3% run during the games, followed by a 7.3% slide beginning four days after the games ended. Again Coca-Cola's share price surged 6% during the Athens Games, soon followed by a 12.3% slide beginning almost two weeks after the games ended.

The exclusion I mentioned above was the Beijing Games. During the 2008 Olympics Coca-Cola's share price slid 6.7%. However this is expected because the United States economy was in a recession and it would have taken a miracle for public equities to hold their ground; but keep in miracles do happen.

Another Olympic sponsor since 1976 is McDonald's. McDonald's follows the same pattern as Coca-Cola; to an extent. Prior to and during the 1992 games McDonald's share price rose 5.5%, followed by a 6.4% slide beginning one week before the games ended. Similarly prior to and during the 1996 Olympics McDonald's share price ran 12.3%, to soon be hit with a 4.4% pullback beginning two days before the Olympics ended.

In 2000 investors saw McDonald's share price move 12% during the Olympic Games, and then fall 7.8% beginning two days after the games ended. Similarly in 2004 McDonald's stock price moved 6.3% during the Olympic Games, and then pulled back 1.3% beginning less than two weeks after the games ended. Lastly during the Beijing Games we saw McDonald's share price slide 9%. Again, this was due to economic problems in the United States.

A third major sponsor of the Olympic Games is Visa. However with regards to Visa we cannot look at the share price movement for the 1992-2004 Olympic Games because Visa joined the public equities market in March of 2008. Nevertheless it is simple to see the same Olympic trend that Coca-Cola and McDonald's follow by solely viewing the 2008 Olympic Games. Keep in mind Visa's IPO came during harsh economic times and the IPO was the largest in history. Therefore it was inevitable Visa's stock would slowly grind downwards.

With that said, during the 2008 Olympic Games investors saw Visa's share price perform relatively well. During the Olympics the share price increased 9.2%. Unfortunately, the same day the 2008 games ended Visa's share price began a 38.6% slide. This post Olympic slide was in line with the stock's trend line prior to the Olympics. Therefore it can be stated the Olympic Games helped Visa's stock during the Olympic Games.


(Click to enlarge)

The final sponsor I will detail is General Electric. General Electric first became an Olympic sponsor in January 2005; therefore I will not be able to analyze the Olympic Games prior to 2005. Nevertheless, General Electric follows the same pattern as Visa. The share price began to head downwards in October of 2007, but it was held up during the Olympic Games. The share price declined 1.7% during the 16 day Olympic Games. This is impressive considering the share price continued its momentous crash two weeks later. Therefore investors were rewarded by the Olympics because it gave them a chance to collect profits before the share price continued downwards in line with the broader indexes.


(Click to enlarge)

The most important trend that should be noticed is the fact that the Olympic Games have a tendency to help an economy and a sponsor's share price in the short term. This may be good for the present but it makes life more difficult for consumers and investors in the future. More importantly, what does this mean for the 2012 London Olympics? Currently the United Kingdom (UK) is on the verge of slipping into a recession. This does not bode well for the post Olympic economy; especially because the general trends are against the long term betterment of the UK.

The UK should be able to hold out of a recession for at least 12 months. It may not feel that way, but the country is slowly stagnating from their 2008-2009 recession. Furthermore, investors should be able to profit from sponsors of the Olympic Games knowing the respective stocks tend to outperform the broader index during the two week Olympic Games. And with the 2012 Olympic Games fast approaching, it may be close to the right time to begin setting up your portfolio to take advantage of this.

Lastly, does this mean countries should avoid hosting the Olympic Games knowing their futures may be put in peril? Of course not. Even though the hosting country will face negative economic consequences, the world needs sport. Sporting events not only bring the best competitive fire out of the athletes, but also the fans. Just take any major rivalry game in college football. With regards to track and field, the athletes are pushed to their limits during each and every race, throw, or jump.

This competitive atmosphere can be bridged over to the stock market as well. For instance, day traders compete against the broader market and other day traders to make a profit every minute, hour, or day. Without sporting events this type of competitiveness would be hard pressed to understand. Therefore, even though the Olympic Games can slow down a country's long term economic growth, the short term benefits as well as the nationalism that is stirred up is well worth the expenses.

Source: How to Position Your Portfolio For The Olympic Games