Fool's Gold

When Chinese stock markets soared into nosebleed territory, quadrupling in 2006-07, Chinese mom-and-pop investors tried to convince themselves they would be spared bloody noses because Beijing was hosting the 2008 Summer Olympics. Feel-good investor sentiment surrounding the August Games, the thinking went, would prop up overvalued stocks, allowing time for revenues of booming Chinese companies to grow into their inflated share prices. When markets were peaking last fall, some investors predicted that the government would tweak the economy to keep it roaring during the Olympics year, and that if all else failed, China's regulators would find ways to prop up a plummeting stock market, so that disgruntled Chinese would not spoil the festive sporting atmosphere by complaining about the loss of their life savings on CNN.

The awakening from these Beijing dreams was as rude as it gets. As of April 15, the Shanghai Composite Index has slumped 46% from its Oct. 16 peak. The global credit crunch, the staggering U.S. economy, and China's efforts to tame inflation and cool unsustainably fast economic growth teamed up to quash investor enthusiasm for China stocks, Olympics or no Olympics. But might there still be a lingering chance that the Games will give China's economy a shot of adrenaline and lift stocks later this year? Many investors have heard of the "January effect." Is there an "Olympics effect?"

The question is not as absurd as it may seem. Hosting the Olympics can boost the profits of host-city construction companies and tourism-related companies such as hoteliers. But is there a correlation between overall stock-market and economic performance and the Olympics? We decided to do a little historical research by examining stock-market indexes and GDP growth for the host nations for the past eight summer Olympics, excluding the stock market-less U.S.S.R. in 1980. What we discovered was interesting but inconclusive. On average, markets in host countries showed a 16.3% gain in their Olympics year. Out of the eight events surveyed, stocks rose in six countries; the best performer was South Korea, where the gain was 73%. But stocks fell in two countries: by 3.75% in the U.S. in 1984, the year of the Los Angeles Games, and by 10% in Spain in 1992, the Barcelona Games year.

This information isn't complete or compelling enough to make predictions. Indeed, after the tumble its markets have already taken, China seems almost certain to join the losers bracket. Slowing global economic growth will likely be an overall drag on profits through the end of the year at least, and the Olympics effect, if any, will be too small to matter. Our survey found that the host nations that appeared to benefit were smaller countries like South Korea where Olympics spending seemed to have a meaningful impact on overall economic activity. But China is the world's fourth largest economy. According to a 2007 report by Nomura Securities, China's Olympics outlays and tourism revenues will boost the GDP growth rate by a miniscule 0.25 percentage points in 2008. Moreover, Beijing, the host city where the impacts are strongest, plays a relatively small role in the national economy, contributing only 4.4% to GDP, according to a Credit Suisse study. Compare that with Seoul, host of South Korea's 1988 Games, which accounted for a whopping 27.7% of GDP.

It may not comfort those burned by China shares, but our survey showed that markets in seven out of the eight countries posted gains during the year after the Olympics. (The big loser was Germany, where stocks fell 26%, while South Korea gained less than 1%). "Hopefully at some point this year, there will be an upswing in the [China] markets," said Paul Cavey, a China analyst with Macquarie Research. "What's needed is only a turn in sentiment." But that's dependent upon factors such as an easing of China's inflation rate, not on China's success in track and field events. "It is a mistake to try to tie China's stock-market performance to the Olympics," says Donald Straszheim, chairman of the research firm Straszheim Global Advisors. So a few years from now, when punters are urging you to buy shares in the U.K. simply because London will be hosting the 2012 Summer Games, remind them what happened the last time investors tried to bet on gold, silver and bronze. The Olympics effect is mostly in your head.