Investing as a football analogy
As the FIFA World Cup enters the quarter finals, we look at the economic fortunes of three countries involved in the tournament's biggest shock so far.
As the FIFA World Cup enters the quarter finals, we look at the economic fortunes of three countries involved in the tournament's biggest shock so far.
Though investing isn't a game, many die-hard FIFA Football World Cup fans would argue the same thing about their sport. Countless financial market theories draw comparisons between competitive sport, games and share market investing.
Perhaps one of the most famous is John Maynard Keynes' game theory approach to help understand price fluctuations in financial markets.
On more localised scale, Australian financial planner Claire Mackay, Acuity Wealth Management, compares successful portfolio construction strategies with building a sports team.
"Build a solid line of defence…think of your growth assets as your backs in rugby, or forwards in soccer," as your "flamboyant stars who may cost you a bit more but who you rely on to score points."
Defensive assets, on the other hand – cash, term deposits and fixed income investments – are also deployed. "They all deserve a position in your strategic portfolio," Mackay says.
She also considers the role of performance evaluation as an intrinsic part of both portfolio management and successful coaching. Using key milestones - such as the end of a financial year, or a crucial football match - to reflect on what worked and what didn’t is just as important as the initial decisions.
World cup teams, economies
No doubt the coach of Germany's national football squad, Joachim Low, has done plenty of reflection since his team shocked fans when it was bundled out in the first phase of FIFA 2018.
While the sporting team fell well short of expectations, Germany's economy has been the powerhouse of Europe for many years.
"There are recent signs, however, that the German economy may be running out of steam. Fourth quarter 2017 growth of 0.6 per cent was followed by growth of just 0.3 per cent in the first quarter of 2018," writes James Gard, Morningstar UK sub-editor.
Germany's downfall in the world cup played out in stage, first with defeat by Mexico, and then the ultimate humiliation by South Korea. This loss placed the team at the bottom of its group, and heading for the airport earlier than anyone could have anticipated.
Outside the sporting arena, Mexico's economic fundamentals are somewhat mediocre: "not great, but not bad either", according to Morningstar's international editor, Emma Wall. She notes inflation last December inflation "shot up to 6.77 per cent, but it is now a much more manageable 4.51 per cent.
"As a result, central banks raised interest rates, but the country is now back on track to hit inflation targets. Economic growth for the first three months of the year was meek at 1.1 per cent, with year on year growth of 1.3 per cent, the weakest since 2013.
"However, bond yields remain high, with the 10 year at 7.96 per cent - good news for income seekers, but generally yields that high come with a sustainability warning," Wall says.
US President Donald Trump's renegotiated North America Free Trade Agreement (NAFTA) played havoc with Mexico's peso, which dropped 15 per cent against the dollar in response.
"Though only about half of [its] exports actually go under NAFTA tariffs, and even if you were to draw from NAFTA, you would revert to a World Trade Organization tariffs which are not that much higher,” UK-based Alberto Boquin, of fund manager Brandywine Global, told Wall.
"So, it would definitely be a shock to the market. But Mexico would be able to survive."
The other character in this particular world cup drama, South Korea, accounts for 15 per cent of the MSCI Emerging Markets Index and 17.5 per cent of the MSCI Asia Pacific ex Japan Index. Its largest constituent, Samsung Electronics is the second largest firm in both indices, says Morningstar UK's David Brenchley.
"The Morningstar Korea Index is one of the best-performing year-to-date, up 2.34 per cent. The KOSPI Index is currently 38 per cent up from its early 2016 low.
"The economy continues to improve. It’s now the third-largest in South East Asia and in the three months to September 2017 its economy grew by 1.5 per cent, its best rate of growth since the second quarter of 2010."
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Glenn Freeman is a senior editor, Morningstar Australia.
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