Could you be an Olympic winner?
Now that the 2008 Beijing Olympics are behind us, all eyes are now focused on London 2012 and canny investors may find some interesting opportunities for profits in the build-up to the Games.
The modern Olympic Games date back 112 years, and while they are a celebration of the world’s finest sporting talent, history shows they also have a big impact on a country’s economy.
For example, South Korea’s economy grew 12% in the year of the 1988 Seoul Olympics. The most successful Olympics of modern times were the Barcelona Games in 1992, which marked the start of an economic and cultural renaissance for the Catalan capital. It created a windfall for the city and 296,640 new jobs in Spain as a whole, according to a report by Dr Adam Blake of Nottingham University Business School on the economic impact of the Olympics.
Turning to the effect that the Games might have on Britain, the benefits are less clear. Certainly, too many Olympic venues have turned into white elephants despite all the talk about their regenerative potential. Athens, Sydney, Barcelona and Beijing invested heavily in creating landmarks for their cities, but the first two stadiums are used infrequently, Barcelona’s venue is home to Espanyol, the city’s second football team, and time will tell if Beijing can make regular use of its new icon.
When the London bid to host the Games was unveiled, it was claimed the event would recoup the £2.4 billion cost of the event and make a £100 million profit. By 2012, there will be 10 train and tube lines at Stratford, the transport hub for the Olympics site, and the event is predicted to create at least 34,000 permanent jobs in the next seven years.
As a result, there are some definite positives for London following the Games. Tom Elliott, global strategist at JP Morgan Asset Management, adds: "There is the potential for long-term gains - even if only for Londoners rather than the average Brit - because transport is going to be improved, and this will benefit the capital for decades to come."
Bonanza or bust?
However, the Games are not always a bonanza for the host country as a whole. For example, the Montreal Games in 1976 were a financial disaster: costs spiralled to four times their original estimate, and Canada only finished paying back the debt three years ago after heavy borrowing.
"One of the lessons learnt from previous host cities is controlling the budget for the Games, as there are huge sums of money involved and overspending can be a big problem," says Julian Chillingworth, chief investment officer at Rathbones. "The margin for error is high, so the focus needs to be on long-term returns, rather than simply a short-term boost in that year."
Graham Spooner, senior analyst at The Share Centre, says: "The cost can be so much that it can bankrupt a city for a while - which of course we hope won’t happen, but there’s no guarantee."
Compared with previous host countries, however, London has the advantage of being easily accessible from vast number of countries, unlike Sydney and Los Angeles.
Chillingworth says: "Organisation is key leading up to the Games, as the infrastructure needs to be in place to get people in and out of the capital efficiently, as this has been a problem for other host cities."
This year’s Olympics offered a perfect illustration of the interplay between sport and a country’s growing strength. Staging the Games in Beijing was a potent symbol of China’s emergence as an economic power and its growing political influence.
Unfortunately, given the financial turmoil the UK faces, Darius McDermott of Chelsea Financial Services, says the UK is not in the same position.
"We’re on the verge of a domestic recession and some of the sectors which would have hoped to benefit from the Olympics are struggling in the current climate," he says. "With such a poor macro outlook for the UK over the next two years, it’s difficult to see any positive impact that the Olympics might have on the economy."
However, Philip Pearson of independent financial adviser P&P Invest, adds: "Although all may seem to be doom and gloom with the UK economy, this phase will eventually pass and economic conditions will improve - and this may well coincide with the next Olympics."
Certainly, tens of thousands of jobs will be created and, with it, associated investment opportunities, says Gavin Haynes, investments director from IFA Whitechurch Securities. Companies will benefit from this increased economic activity, which will be welcome during difficult times for the domestic economy.
"While there are no funds that specifically target the beneficiaries of the London Olympics, on an individual stock level, opportunities will arise," he says.
Pearson adds: "These include stocks in the media, leisure, advertising and property sectors, some of which are available now at a substantial discount to their historic values and offer the prospect of a recovery over the next four years as we move ahead to 2012."
The construction industry’s order book is being buttressed by the demands for stadiums, arenas and lodgings for the visiting athletes, as well as improved transport links and facilities, and those who win contracts should do well.
The Olympic Park will be in East London. The main above-ground project is the £250 million, 80,000-seater stadium in the Lower Lea Valley, along with an aquatic centre, velodrome, four Olympics arenas, a BMX Circuit and a hockey centre.
Haynes says: "The amount spent on the new Olympic complex will benefit the major building contractors, with leading names such as Balfour Beatty and McAlpine, who are leading the construction consortium building the stadium, all in the frame."
Housebuilders with strategic sites in the regeneration area should also see some lift, says Hunter, as the Olympic projects will go ahead regardless of the state of the wider economy. These include Berkeley, Crest Nicholson, Galliford Try and Telford.
Marshalls, which dominates the market for manufacturing paving stones, could see a significant increase in demand, says Spooner. "Investors may wish to seek out building suppliers who are set to gain, but they will need to sit down with their thinking cap before deciding which these might be."
McDermott adds: "An example is Aggreko, a supplier of mobile power generation that secured a contract to install temporary power for the Beijing Games. Most orders will be placed in the next couple of years. Aggreko only had confirmation that it was supplying the power for Beijing this year, but they should get London as well."
Severfield Rowen, which fabricates steel structures for civil engineering projects, also has a strong track record in stadiums, adds Julian Chillingworth, including Old Trafford, Bolton’s Reebok Stadium and Murrayfield. He also tips companies in the leisure and hospitality sectors such as Compass, the world’s biggest catering group, and Whitbread, the drinks giant.
Moving competitors, officials and spectators to and from events is going to be a big challenge. A great deal of investment into the creaking London transport system and the wider network will be needed.
One company that is benefiting is Bombadier, the Canadian world-leader in the design and manufacture of aircraft and trains. For example, it’s working with the Docklands Light Railway with its new fleet of trains.
On the road to profit?
Other companies with interests in transport are also set to gain. Airlines and airport operators are likely to be among the main beneficiaries, says Richard Hunter, head of UK equities at Hargreaves Lansdown.
BAA, which runs Stansted, Heathrow and Gatwick airports and also has interests in the Heathrow Express, is tipped to do well. Airlines that operate in the three key London airports - such as British Airways and Easyjet - should also profit. In addition, Avis, the car-hire company, could prosper from the extra tourists.
Nearer the time, travel companies such as Thomas Cook will benefit as tours are set up to the capital, adds Chillingworth. Spectators, officials and family and friends of the athletes will require accommodation in and around London, so hotel groups such as Hilton and Intercontinental are also set to gain.
The influx of people should also benefit restaurant chains and pub operators, among others. However, bear in mind that in Los Angeles and Tokyo tourism suffered in their Olympic years as visitors postponed trips because of fears of overcrowding and delays.
Advertising and media stocks like WPP Group, the world’s second-largest advertising and marketing company, are typical winners, and would have benefited whichever city won the bid to host the Games. Global companies are adept at using the popularity of international sport as a way of promoting their brands. Athletes are always surrounded by the logos of the Olympics sponsors: giant corporations such as Coca-Cola, Kodak, Panasonic, GE and Samsung.
Investors keen to profit from London’s Olympic success may buy individual stocks such as those mentioned above. However, with four years to go, it’s too early to expect an Olympic effect, says Chillingworth, but investors may reap rewards nearer the time.
Likewise, as the Olympics draws closer, it will interesting to watch how savvy UK fund managers reposition their portfolios to cash in on the big event.
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