Commentary: No Olympic glory for markets

(Elvis Picardo is an independent investment strategist located in Vancouver, Canada. The opinions expressed are his own.)

By Elvis Picardo

VANCOUVER (Reuters.com) -- The world's elite swimmers and athletes may be scaling new heights and breaking records by the dozen at the 2008 Beijing Olympics, but those inspiring performances have yet to make a dent in the impermeable bearishness that grips global markets.

In fact, I am hard-pressed to think of a time in recent years when the global economic environment has been so challenging in an Olympic Games year. Most of the major equity markets are in official bear territory, with declines of at least 20 percent from their highs set last year. The Dow Jones Industrial Average and S&P 500 are set to join that growing club, having tumbled 19 percent from their record highs reached in October 2007.

By and large, the Summer Olympics have escaped the financial debacles and major crises that have erupted over the past two decades - the 1987 market crash (a fading memory by the time the 1988 Seoul Olympics rolled around), the 1997 Asian crisis and 1998 Russian debt default/Long-Term Capital Management failure (which occurred well after the 1996 Atlanta Olympics), and the 2000-2002 global bear market. At the time of the Sydney Olympics in September 2000, global equity markets had stabilized after declines in the preceding six months (there was little hint about the equity rout that was to follow shortly thereafter and continue for the next two years).

So what effect do the Olympic Games have on markets and stocks? Cocktail chatter is generally centered around the impact of the Olympics on the local real estate market (based as I am in Vancouver, the site of the 2010 Winter Olympics, I can vouch for that first-hand).

In a 2001 report examining the impact of the Summer Olympics from 1988 to 2000 on four host cities, real estate services and investment management firm Jones Lang LaSalle noted that apart from generating short-term economic gains such as more jobs and greater revenues, other indirect effects attributed to the Games such as changes in the host city's urban form were far-reaching and longer lasting.

The impact on a host country's equity markets is another matter, and the evidence is inconclusive. I analyzed returns for the benchmark equity index of the host nation for the eight Summer Olympics preceding the 2008 event (excluding Russia, which did not have a tradable equity index in 1980), for the year in which the Games were held.

The average gain posted by the seven indices during their respective Olympic year was 16.7 percent. While that number may appear impressive on the surface, note that half the gains were due to the sizzling 73 percent appreciation in South Korea's Kospi index in 1988. Strip out that number, and the gains dwindle to 7.3 percent.

Apart from South Korea in 1988, sizeable gains were registered by the host nation's benchmark equity index in 2004 (Athens, Greece: +23.1 percent) and 1996 (Atlanta, USA: +20.3 percent). Single-digit gains were posted by the host nation's benchmark equity index in 1976 (Montreal, Canada: +6.1 percent), 1984 (Los Angeles, USA: +1.4 percent), and 2000 (Sydney, Australia: +2.8 percent).

Prior to this year, the only index of a host nation to have declined in an Olympic year since 1976 was Spain's IBEX-35 index, which lost 9.9 percent in 1988, when Barcelona hosted the Summer Olympics.

That decline pales when compared to the staggering 56.4 percent plunge that China's CSI-300 index has suffered this year. Investors hoping for a continuation of the recent equity boom in China's Olympic year have been utterly disappointed. The commencement of the Olympics has not stemmed the slide, with the index having dropped 14.4 percent since the opening ceremony of the Games on August 8. Unless the index has a stunning reversal in the last four months of 2008, the performance of the Chinese stock market this year may put to rest conjecture about the "Olympic effect" on a host nation's equity index once and for all.

How about the Olympic effect on individual stocks? Again, the evidence is inconclusive. Consider the recent performance of the 12 companies that are part of The Olympic Partner Programme (TOP). As a blurb on the International Olympic Committee's website states, TOP was created in 1985 and is the only sponsorship with exclusive worldwide marketing rights to both Summer and Winter Olympic Games.

The 12 companies include U.S. heavyweights Coca-Cola, General Electric, Johnson & Johnson, Kodak, McDonald's and Visa; Asian powerhouses Lenovo, Panasonic and Samsung; Europe's Atos Origin and Omega; and Canada's Manulife.

Excluding privately held Lenovo and Visa -- which had its IPO in March -- the average price change for these 10 companies so far this year is a decline of 3 percent; since Aug. 8, the average gain is 1 percent. By way of comparison, the S&P 500 has declined 5.2 percent year-to-date, and is up 1 percent since Aug. 8. The MSCI World Index is down 16.8 percent YTD and has declined 1.7 percent since Aug. 8.

It's difficult to ascertain if the barrage of advertising from the TOP companies during the Olympics has a discernible effect on their share prices. Since Aug. 8, most of these stocks have had marginal gains, while two have declined; the best performers have been Visa, up 7.8 percent and Omega Watches' parent company Swatch Group, up 4.2 percent.

Ironically enough, one of the companies to have received a boost from the Olympics is McDonald's, which reached a 43-year high last week after the company said same-store sales rose 8 percent in July, exceeding analysts' expectations. Sales in locales as far apart as Russia and Australia rose due to promotions tied to the Beijing Olympics. McDonald's has gained 38.4 percent this year, a performance that is second only to Visa's 70.3 percent advance among the TOP companies.

In general, though, individual stocks are subject to so many forces - the economy, the industry, competition, to name a few -- that the Olympics cannot exert much influence on them. The benefits of the Olympics are numerous - some tangible, many intangible -- but boosting stocks and equity indexes is not one of them.