Goldman Sachs Predicts Brazil Will Win 2014 FIFA World Cup

NEW YORK (TheStreet) - After crunching the numbers, economists at Goldman Sachs (GS) believe host nation Brazil is the odds-on favorite to win the 2014 FIFA World Cup.

Goldman's analysis also shows that if Brazil's star players Neymar, Dani Alves, Oscar and Hulk can pull off a World Cup win, there are strong odds stock markets in the country will outperform global indices in the month after a victory. A second place finish, however, should have investors running for the hills.

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After conducting a regression analysis on about 14,000 international football matches since 1960, and accounting for explanatory variables such as performance at previous World Cups and whether a country is playing at home, Goldman said in a Wednesday client note Brazil is the favorite to win the World Cup. Brazil is currently fourth in the Coca-Cola/FIFA World Rankings.

Goldman gives Brazil 3:1 odds of winning the World Cup and a 48.5% probability of victory. Argentina comes in with the second highest odds at 9:2 and a 14.1% probability of winning. Other teams with a chance include Germany with 11:2 odds or a 11.4% probability of winning, and Spain at 13:2 odds or a 9.8% probability of victory.

The lowest odds in this year's World Cup go to Costa Rica at 3000:1, or a 0% chance of victory. Other teams with a 0% probability of winning include Cameroon, Japan, Iran, Honduras, Ghana and Algeria.

The United States, captained by Seattle Sounders forward Clint Dempsey, is given 250:1 odds by Goldman Sachs, or a 0.5% probability of winning the World Cup. [TheStreet: "We like the sound of those odds!"]

The report, Goldman's fifth since the 1998 World Cup in France, was conducted by chief economist Jan Hatzius, U.S. economist Sven Jari Stehn, and Donnie Millar.

This year's report is Goldman's first without former asset management Chairman Jim O'Neill, who invented the bank's World Cup guide and also coined the phrase 'BRIC,' an acronym used by economists and investors to denote the world's four major emerging economies: Brazil, Russia, India and China.

Brazil Beats Argentina

Goldman predicts that Brazil, Germany, Argentina and Spain will reach the semifinals of the 2014 World Cup and that Brazil will beat Argentina by a score of 3-to-1 in the Cup final.

However, Goldman said on Wednesday it would update its model daily during the World Cup. It is also worth noting that Goldman incorrectly predicted Brazil would win the 2010 World Cup. Spain, the team Goldman gave the second highest odds, won.

Goldman's Dream Team

Clients of Goldman Sachs selected Brazil's Neymar, Lionel Messi of Argentina and Portuguese sensation Cristiano Ronaldo as the three best forwards in this year's World Cup.

The dream team, as voted by Goldman clients, also includes Eden Hazard of Belgium, Andres Iniesta of Spain, Franck Ribery of France, Dani Alves of Brazil, Sergio Ramos of Spain, Thiago Silva of Brazil and Philipp Lahm of Germany. German goaltender Manuel Neuer was voted as the top net minder by Goldman clients.

Trading on the World Cup

There may be a way to trade in stock markets based upon World Cup results. Generally, Goldman Sachs has found the winning nation outperforms global stock markets in the weeks after winning the World Cup. Meanwhile, runner-up the nation generally underperforms global indices in the weeks after a loss at the World Cup final.

Unfortunately for World Cup victors, outperformance usually tails off, Goldman said.

"Looking at history, there is a clear pattern of outperformance by the winning team in the weeks after the World Cup final. On average, the victor outperforms the global market by 3.5% in the first month - a meaningful amount, although the outperformance fades significantly after three months," Goldman noted.

In fact, all the winners of the World Cup since 1974 outperformed global markets in the post-final month, with the exception of Brazil in 2002, a World Cup win that came amid a currency and balance of payments crisis in the country.

"But sentiment can only take you so far," Goldman notes. The winning nation doesn't tend to hold on to its gains and, on average, sees its stock market underperform by around 4% on average over the year following the final.

"The message seems to be: enjoy the gains while they last...," Goldman concluded.

Seven of the last nine World Cup runners-up underperformed over the first month with an average underperformance of 1.4% and that the poor performance continued. Most of the World Cup runners-up have seen their stock markets continue to underperform, with an average relative fall of 5.6% over the first three months.

The Economics of Football

Economies and World Cup squads on the rise in 2014 include Colombia, Cote d'Ivoire, England, Germany, Italy, Korea, Mexico, Uruguay and the United States, economists in Goldman's global investment research division said in the 67-page report. 

Countries such as Brazil, Russia, Portugal, the Netherlands, Japan, France, Chile and Argentina face the prospect of worsening footballing and economic results this World Cup.

The World Cup kicks off on Thursday, June 12, when host-nation Brazil takes on Croatia in Sao Paulo. 

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-- Written by Antoine Gara in New York.

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