Lies, damn lies, statistics and expectations

So the World Cup has finally kicked off in Brazil, with the opening games already seeing some controversy and upsets. The hosts won their first match 3-1 against Croatia, helped in no small way by a rather dubious penalty. The Dutch shocked everyone by annihilating the holders Spain 5-1 (could have been eight or nine), and England started off with a loss against Italy, but manager Roy Hodgson had so masterfully set expectations no one was clammering for sackings.

In the lead up to the tournament we saw the usual slew of econometric and analytical analysis brought to bear on predicting the eventual winner, with Goldman Sachs grabbing a fair few headlines by predicting that Brazil would be eventual winners. However, as their model includes the availability of arable land to be a determining factor I am not so sure I would go with their prediction (why are Canada and India not in the finals?).  Spurious correlations shows that correlation does not imply causation (otherwise we need to get kids pirating on the high seas in order to combat global warming). So, looking behind the numbers we must remember that it is critical in these matters to think about what is important. Since we have had FIFA world rankings the winner tends to come from the top teams going into the tournament and knowing that no European nation has won a World Cup held in South Americas I predict the final to be Argentina vs Germany, with Argentina picking up the trophy.

There has been talk about the potential impact of winning the World Cup on subsequent economic performance. As expected, economists are divided. The team behind ABN-Amro’s Soccernomics in 2006 saw a 0.7% boost to GDP post winning, while a study by economists at Belk College of Business saw that “the national team’s success might have a negative influence on GDP growth. Anecdotal evidence suggest that in many countries, especially where soccer is most popular, the World Cup finals is associated with considerable revelry and excitement, much of which might intentionally or unintentionally detract from otherwise productive activity”. Who says economists do not understand people?

What will probably determine how people feel about their teams’ success is expectation. Brazil is expected to do well, as are Spain, Argentina and Germany, whereas England, Holland, France and the USA are not expected to go beyond the last 16. We see this in the market where a company can report strong growth but as it is below market expectations they will be marked down. Similarly, a company can report a loss, but as it is less than what was feared the shares will be boosted. This is why Mr Hodgson was so canny in laying the groundwork for England, reducing expectations going into these finals.

Mr Carney plays a blinder

Another team leader setting market expectations recently was Mark Carney, Governor of the Bank of England. In his speech to the City Mr Carney warned that interest rates may have to rise sooner than expected. Most analysts had been pencilling in early 2015 as the start of a gradual ramp up of rates. Mr Carney’s comments are seen by many as an attempt to wrest the rate hike timeline back into policy maker’s hands and a potential shot across the bows of any London based property bubble.

Mr Carney is too keen a student of economic history to risk raising rates too early and derailing the UK’s growth prospects. With the continuing weakness in the Eurozone, the potential for some form of ECB led QE impacting on the £/€ exchange rate, and geopolitical concerns front-and-centre there is still too much uncertainty to be certain about the timing of any such rise.

However, with this heightened uncertainty still prevalent in the markets what investors want is the reassurance that someone is in charge. Mr Carney has positioned himself in such a way as to appear to be ahead of the curve in such matters. He is driving the conversation, setting the agenda and more importantly, creating the time and space needed to behave in the way he wants to, rather than being at the behest of events. Maybe Mr Carney and Mr Pirlo have more in common than one suspects.

Geopolitical unrest back to unsettle the markets

As noted in the recent EY CFO Capital Confidence Barometer increased geopolitical uncertainty is seen by 29% of respondents as the biggest risk to their growth over the next 12 months. It is worrying then to see the recent events in Iraq dominating headlines, with the resultant fears for stability in the region and the impact on oil benchmarks and the wider market. This, combined with the situation in Ukraine, territorial tensions in the Far East, the continuing concerns about North Korea and Iran, and increasing instability in North and West Africa are holding back any desire to commit to long term growth plans at many corporates.

M&A continuing to stutter

The upturn in Global M&A seen in March and April, with overall volumes up 8% and 10% respectively on 2013, failed to continue into May. While value was up significantly against May 2013 volumes dropped back to the 7% fall we have become used to. It is exactly the geopolitical and market concerns discussed above that are holding back the transaction activity we would anticipate at this point in the cycle. The M&A market is not bad at the moment, it is just not performing as would be expected.

What corporates want in order to commit to significant transactional activity is clarity on the near to mid-term, both in terms of monetary policy and political stability. They do not appear to have that clarity in sufficient amounts at the moment to really go for a sustained inorganic growth led strategy.


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