Melanie Kermadjian
Managing Analyst
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Japan: Escape Velocity Is At A Higher Altitude
In this report, we argue that the Bank of Japan is unlikely to hike interest rates this week, but the relative trajectory of bond yields in Japan is higher. This warrants an underweight position in JGBs and a leveraged bet on a higher yen. The positioning for equity investors is murkier, as progress on corporate reforms is necessary for a rerating in Japanese shares. That is not yet very clear. The bottom line is: Stay long the yen.
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Canada: A Macro Trade That Has Yet To Hit Capitulation
This Special Report argues that rate cuts will come sooner in Canada than the US and offers how investors can profit from this.
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What Is Sweden Telling Us About The Global Cycle?
In this joint Foreign Exchange Strategy and Global Investment Strategy Special Report, we assess economic activity in Sweden, a highly cyclical and trade-oriented economy, and its implications for the global growth outlook.
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The Case For Japan
In this special report, we discuss whether the economic conditions necessary for a stronger yen (and higher JGB yields) will materialize over the next 12-to-18 months.
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The Case For Japan
In this special report, we discuss whether the economic conditions necessary for a stronger yen (and higher JGB yields) will materialize over the next 12-to-18 months.
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Is Canada Headed For A Soft Landing?
In this Special Report, BCA’s Foreign Exchange Strategy and Global Fixed Income Strategy teams argue that as the lagged impact of higher interest rates hits the Canadian economy, what will initially appear as a potential hard landing will morph into a mild slowdown. During the process, Canadian government bonds will outperform, and the CAD will drop, setting the stage for a coiled-spring rebound.
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Updating The 2018 World Cup Forecasts
With the group stage of the 2018 FIFA World Cup in the books, it is time to assess the performance of our forecast and re-run the model for the playoff stage of the competition. As a reminder, our approach includes micro (player level) and macro (team level) factors to forecast game matches. For data, we relied on the database of player statistics used in Electronic Arts (EA) Sports FIFA computer simulation, eschewing the conventional wisdom of relying on overall team rankings. Because our report was penned in May, not all 32 teams had made official their final list of 23 players. We therefore relied on our own expertise (soccertise, if you will) to determine the most likely team composition for the tournament. We have since re-ran the group stage model with the rosters announced by all 32 team federations, with Chart 1 showing the difference in predicted results.1 Chart 1Probability Of Proceeding To The Knockout Stage To forecast match outcomes, we developed two separate models, one for the group stage and one for the knockout phase. In this report, we will only briefly touch on the composition of the two models and focus instead on their performance. Clients wishing to study our model in depth can read the original special report, The Most Important Of All Unimportant Forecasts: 2018 FIFA World Cup.2 Step One: The Group Stage Model Overall, our group stage model performed adequately. We forecast 60% of the total games correctly and got 14 out of the 16 teams passing to the next round right. In addition, we correctly ranked 12 of those teams according to their group seeding. If we average the model estimated probability of each team we said would make it to the knockout phase, we had a conviction of ~71% in our model. To simulate the group stage matches, we developed an Ordered Probit (OP) model estimated on past World Cup group stage games. Based on our sample of group-stage matches from the past three World Cups, we found that the best explanatory variables for this stage of the competition are: Team Average Player Rating Average Age - Forwards Average Number of Caps - Defenders Speed Positions Average Rating Our model had one major flaw, giving Germany the highest probability of passing to the next stage (Table 1). However, it picked up the weakness in Argentina by assigning them only the 10th highest ranking of proceeding to the next stage. Other notable successes were the strong performances of Belgium, England, Russia, Denmark, and Mexico. Group-by-group, we had an essentially flawless track record in groups A, B, C, E, and G. The decision to award Russia a "home advantage bonus" proved prescient. After all, history tells us that hosting the World Cup provides a clear advantage to almost any team (Table 2). We are also particularly proud of our correct forecast in Group E, the true "group of death." Our assessment of Switzerland's quality ultimately carried the day. Table 1Group Stage Ranking Table 2Home Advantage Is Real Our Group D forecast misfired by expecting Argentina to go through in first place. To the model's credit, it only gave Argentina 47% probability to beat Iceland, 49% to beat Nigeria, and a paltry 43% to defeat Croatia (Table 3). While we had Argentina going all the way to the quarterfinals, we did flag their weaknesses in our qualitative assessment, calling them the "greatest underperformer in the last three decades of international football."3 Ultimately, our model had Spain dispatching La Albiceleste easily, giving Argentina only 10% chance of an upset. Table 3Group D Summary Results There was no moral victory with our Group F forecast. We gave Mexico only a 21% probability of defeating Germany and an even lower 11% probability that South Korea would do the same (Table 4). We should have been more in tune with history, especially given that there appears to exist somewhat of a "winners' curse" when it comes to World Cup performance (Table 5). Table 4Group F Summary Results Table 5The World Cup 'Champions' Curse' What explains this curse? We suspect that World Cup winners hesitate to replace heroes from the previous campaign with fresh blood. In the case of Germany in 2018, the team left the 22-year old Manchester City phenom Leroy Sané off the team but stuck with the uninspiring Mesut Ozil and the mummified Sami Khedira. Because the World Cup is on a four-year cycle, nostalgia can be a fatal flaw. Germany stuck to much the same team while its peers refreshed their rosters with youth and in-form talent. In addition, a number of crucial players from Germany's 2014 victory retired or are no longer part of the national team, including Philipp Lahm, Bastian Schweinsteiger, Lukas Podolski, and Miroslav Klose Finally, our Group H forecast misfired as well (Table 6). However, we correctly flagged the group as essentially unforecastable. Picking Colombia to top the group was a good call, at the very least. Table 6Group H Summary Results Chart 2 shows the probabilities we assigned to each team to clear the knockout stage. Generally speaking, we are satisfied with the results. However, we do have to apologize to our Swedish clients, our model has clearly failed them by the greatest margins. Chart 2With Apologies To Our Swedish And Japanese Clients! Step Two: The Knockout Stage Model The knockout stage is somewhat easier to model given that the set of possible outcomes is reduced to only {loss; win}. This difference with the group stage is not only relevant for the math behind our model. It is also relevant for the strategy teams employ during the games. Therefore, we simulated this part of our analysis using a probit model estimated on a sample of only knockout stage games from the 2006, 2010, and 2014 World Cups. In this stage of the competition, we found the following factors to be the most important: Team Average Player Rating Club Level Synergy Player GINI Coefficient Average Rating - Midfielders Team Average Rating As with the group stage, the overall rating of the team - based on the average of individual rankings from the EA Sports database - is the most powerful explanatory variable. Despite the higher marginal effect of the rating variables in the knockout stage sample, the standard deviation and average of these variables are significantly smaller than in the group stage.4 In other words, the gap in player quality between teams in the group stage is often vast. However, the knockout stage culls the minnows, narrowing the gap in overall player quality between teams. At this stage of the competition, our model has to be supplemented with variables that test for teamwork and synergy. Club Level Synergy Teams with more players playing in the same club tend to perform better in the knockout stages. This is evident from all the World Cup winners in our sample.5 Given the limited practice time that national teams have ahead of the tournament, the year-round experience of playing with teammates in club competition can provide a huge advantage. Especially for football teams from countries with major leagues - such as Germany, Spain and Italy. Their players are more likely to cluster on the major clubs in those leagues, whereas players from smaller footballing nations have to ply their trade in dispersed leagues and teams across the globe. Great Man Theory (Player GINI Coefficient) Teams win games, but heroes win World Cups. To test whether superstars are relevant to winning games, we designed a player quality GINI measure. We find that teams with a higher GINI coefficient outperform those with a lower measure. It seems that having a superstar, or two or three, surrounded with role players is a superior strategy to having balanced talent across all positions. This variable only becomes significant in the knockout stages, where the overall talent level between teams narrows. While more skilled teams tend to be more balanced (Chart 3), once we normalize for skill, a higher GINI becomes a predictor of success. Chart 3The Great Man Theory At Play Average Rating - Midfielders Once we decompose the different positions in the field, we find that the midfield is more important to success than other positions in the knockout matches. Research has shown that midfielders, particularly those forming the "spine" of the team, are the most involved in a team's passing play, regardless of the tactics or strategy used.6 Precise and creative passing is key in knockout matches where tactically disciplined defenses are difficult to unlock. Defensive prowess in the midfield is also paramount to prevent the opposition from developing their attack.7 Lessons Learned From The Group Stage Have we learned anything thus far from group play that would make us modify our four predictive variables? Yes, two observations stick out as potentially dangerous to our assumptions. The Pressing Renaissance Liverpool manager Jürgen Klopp has internationalized Genenpressing -counter pressing - during his tenure at Anfield. When Klopp's team loses the ball, players immediately attack the space where the opponents have won possession, allowing the rest of the team to re-set the defense. But the point is not to just recover on defense, but rather to win the ball right after the team has lost it. This is when the opponent is at their most vulnerable as they are looking to pass and get out of their own defensive zone. Chart 4Is Tiki-Taka Dead? This frantic pace of football, which Klopp himself termed "Heavy Metal Football," requires fitness, discipline, and superior tactical awareness. It also requires defenders to play up the field, which opens them to counter attacks. The Genenpress is a perfect antidote to possession football. However, it is difficult for national football teams to replicate as it requires discipline that can only be achieved through meticulous training. Or, at least, that was the conventional view until this World Cup. In Russia, goals scored out of open play are considerably down (Chart 4), suggesting that possession football has seen a fall in its ROI. Small national teams, that in the past would have been content to sit back and absorb the pressure, are now zone pressing like the finely synchronized European clubs. Morocco, Iran, Iceland, and especially Mexico in its stunning victory over Germany all employed the press well enough to either stun opponents or threaten to do so. This augurs poor results for possession heavy teams in the knockout stage, particularly our favorite Spain. The Return Of The "Big 9" There was a time, not long ago, when football analysts thought that the hulking center-forward was extinct. Instead of big strikers, teams opted for either an extra midfielder or a winger-type forward like Spain's David Villa or Germany's Mario Götze, heroes of the past two World Cups. In 2018, this is not the case. With the proliferation of pressing, scoring from open play becomes more difficult, which means that both set pieces and long ball passes become more important, increasing the value of the big center-forward.8 Table 7 shows the top scorers through the group stages in 2014, Table 8 shows the data in 2018. What is striking is the 7-centimeter difference in the median height of the top-scorers in the group stages of the two competitions. Table 7Top Scorer 2018 By Height In The Group Stage Table 8Top Scorer 2014 By Height In The Group Stage Luckily for our top-pick Spain, it sports probably the most lumbering, hulking, mean, brute of a center-forward in modern football, Diego Costa of Atletico Madrid. As such, it may still have the requisite combination of strength and possession play to defeat Heavy Metal Football. In addition, its defenders are more than capable of skipping over the press by targeting Costa with long balls. Knockout Stage: Results Table 9 shows our model's forecast for the round of 16, while Chart 5 gives the conditional probability of advancing to the quarter-finals. Conditional probability takes into account the original probability of passing the group stage. Table 9The Magnificent Eight Chart 5Conditional Probability Of Passing To The Quarter-Final We fully agree with our model when it comes to the Spain-Russia matchup. The model is correctly dismissive of the hosts, who were "brought to earth" by their matchup against Uruguay. Russia's run of good fortune will run out against our favorite, Spain. The model is also correct to favor Croatia over Denmark. However, this represents a "trap" game for the Vatreni, who after dispatching Argentina 3-0 may be looking "beyond" Danes to the quarter-final matchup with Spain. Look for Denmark to "muddy" the game up and turn it into a classic UEFA heavyweight fight. We also have nothing to add to the England-Colombia matchup and agree that the former is favored to pass to the quarterfinals. The model may be overly dismissive of Mexico, however. Brazil has looked shaky in group games, so we would give Mexico more than 3% probability, especially given that El Tri will be buoyed by its surprisingly well represented fan base in Russia. We also think that the model is far too confident in Portugal's chances against Uruguay. Ronaldo's talent should be enough to push Portugal through, but 70% probability of a victory may be too high. The model is also far too pessimistic when it comes to the France-Argentina matchup. It is highly unlikely that Argentina will be able to squeak through against the extremely physical Les Bleus. The one matchup where we truly are torn is in the Sweden-Switzerland matchup. Our model is correct to be cautious, essentially styling the matchup a "too-close-to-call" affair, but still giving Sweden the nod. This is hard to justify after the inspired play of Switzerland against Brazil and Serbia. However, Sweden has the momentum, having defeated a fired-up Mexico 3-0 in a must-win game for El Tri. Switzerland, on the other hand, only managed a tie against Costa Rica. Quarter-Finals Making it into the quarter-finals of the World Cup is an extraordinary success reserved for only eight footballing nations. At this point, teams have played four intense and decisive games over three weeks. Fatigue sets in, especially given that the superstars are playing at the end of a grueling club season in what is normally their off-season. Our model bets strongly on Spain and England (Table 10), while Brazil and France are expected to have tight games against strong opponents. Belgium and Portugal are left to wonder what might have been, although for Belgium the pain will be greater. Not only will they yet again fail to meet expectations, but also they will waste the highest conditional probability of advancing to the next stage of the four teams that do not advance (Chart 6). Table 10The Final Four Chart 6Conditional Probability Of Passing To The Semi-Final France Vs. Portugal: Setting The Record Straight The loss to Portugal in the final of the 2016 Euro, on home soil no less, still stings for France. The loss was particularly painful given that Portugal's superstar, Real Madrid's Cristiano Ronaldo, had to leave the game due to an injury and spent the majority of the game hopping on one leg, yelling instructions to his teammates from the sidelines. Our model gives France a 56% probability of winning the game. The French team is superior in every facet of the game, other than in the speed positions (Diagram 1). France also sports the game's best defensive midfielder, Chelsea's N'Golo Kanté, to whom it will fall on to neutralize Portugal's Great Man. The duo of Kanté and Paul Pogba reminds us of the legendary Claude Makélélé and Patrick Vieira partnership that took France to the 2006 finals. French coach Didier Deschamps has also benefited from the overall improvement in the French Ligue 1, calling upon players that play together in the local league. We expect a tight match, with intense man-on-man coverage of Ronaldo. France will dominate the ball, slowly building chances against Portugal's defense. In 2016, a young and inexperienced French team wasted a plethora of chances against Portugal's version of the Maginot Line. Since then, superstars Ousmane Dembélé (F.C. Barcelona) and Kylian Mbappé (Paris Saint Germain) have joined the French rankes. We do not see history repeating itself. Brazil Vs. Belgium: Red Devils Don't Dance Samba Our model sees Brazil as the favorite against Belgium, but not by an extraordinary margin. As with the France-Portugal matchup, the underdog has a solid chance - in this case one-in-three - of winning the game. What makes Belgium so dangerous is their solid midfielder rating and the extremely physical Romelu Lukaku in the front. However, the two Brazilian center backs Thiago Silva and Miranda have been more than reassuring in the group stage and are more than capable of dealing with Lukaku or Hazard. The problem for the Red Devils is that they trail Brazil by a lot in the other facets of the game (Diagram 2). Its defense is particularly suspect. Diagram 1Les Bleus Vs. A Selecao Das Quinas Diagram 2A Selecao Vs. The Red Devils Spain Vs. Croatia: Winner Gets The Mediterranean Croatia has been a revelation at this year's tournament. Its high midfield line of Ivan Perišic (Inter Milan), Ivan Rakitic (F.C. Barcelona), Luka Modric (Real Madrid), and super-sub Mateo Kovacic (Real Madrid) may be one of the best mid-fields at the tournament. It wreaked havoc against Argentina, rendering Messi useless. Juventus forward Mario Mandzukic supplies the threat at the front and Inter defensive midfielder Marcelo Brozovic cleans up the mistakes at the back. Our model is overly dismissive of Croatia, giving Spain a ludicrous 93% to win the game. But just as the biggest threat to Croatia is overlooking the unassuming Danes in the round of 16, so too Spain may be in for a fight of its life against the stacked Vatreni. Croatia has a team with enough quality to match its 1998 fourth-place performance. We predict that, if these two teams really do meet in the quarter-finals, that it could be the match of the century. Ultimately, Spain comes on top on all the rating measures against Croatia (Diagram 3). We fear, however, that the gap is overstated. Croatia's starting 11 against Argentina sported seven players from Europe's top four-five clubs. This is more than enough to challenge Spain. Yes, Croatia's defense is shaky, but if it ends up dominating the midfield against Spain - we know, a sacrilegious thought! - its defenders may have a night off. Sweden Vs. England: Who Will Shock The World? This was not supposed to be England's year. The Lions are the youngest team (average age 26) and the least experienced (average caps 20). This was supposed to be the World Cup where England finally breaks out into the elite-eight and sets the stage for a 2022 campaign as a favorite. Instead, England will face off against Sweden, ranked 24 in the FIFA World Ranking. Our model gives England an 84% probability to defeat Sweden, even higher than the odds it assigns to its round-of-16 matchup against Colombia (68%), largely due to a considerable mismatch in quality (Diagram 4). Diagram 3La Furia Roja Vs. Vatreni Diagram 4Blagult Vs. The Three Lions Sweden is in much the same situation. Nobody expected Sweden to do much at this world cup, including our model. We originally assigned Sweden a solid 22.7% probability of getting out of its group (still behind Mexico at 62.4% and Germany at 91.4%). Once we updated our model with Sweden's final roster and updated player data, that probability collapsed to 10.9%! And yet, here is Sweden, in the quarter-finals with a chance to emerge as one of the four best footballing countries in the world. We are well aware of Sweden's extraordinary history. As with everything else - the economy, finance, culture, food, design, art, history, music - Sweden punches way above its weight. When it qualifies for the tournament, it almost always gets out of the group stage. It came second - at home - in 1958, fourth in 1938, and third in 1950 and 1994. The experienced Sweden will go into its matchup with England with nothing to lose. Whereas the weight of England's underwhelming track record - and the hysterics of its media - could be too much for the young Lions to bear. We would not bet on it, but Sweden could be the shock of this tournament.9 Semi-Finals Our model sees Spain as a lock for the finals, but throws its hands up for the Brazil-France matchup (Table 11). If we were to put money on either Brazil or France getting to the finals, it would be an obvious call. Brazil's conditional probability of getting to the big game is a solid 36% compared to just 11% for France (Chart 7). This is because Les Bleus have a terrifying road to the Finals, having to go through Portugal, Argentina, and Brazil. While Brazil is clearly the safer pick to get through to the finals, we still like France to win the game. Table 11And Then There Were Two Chart 7Conditional Probability Of Passing To The Final France Vs. Brazil: Painful Memories Of the remaining four teams, France is actually the most accomplished remaining club, having practically coasted to the finals of the Euro 2016. Brazil's latest title, meanwhile, is a distant 2007 Copa América victory. In terms of quality, the two teams are even on forwards. Brazil takes a big advantage in speed positions and defenders, but the two teams are essentially equal in the midfield (Diagram 5). The French squad also displays better results on the club synergy variable, the second-best reading for the teams in the knockout stage behind Spain. This is the result of improvements to its domestic league. Meanwhile, Brazil's top players continue to be dispersed across a number of different top clubs. In terms of momentum, France wins big. It survived a challenge from a tricky Australia and dangerous Peru. Its performances have not been pretty, but it has been clinical. Brazil, on the other hand, proved to be vulnerable against Switzerland, which stymied it with physical play. Newsflash: France is one of the most physical teams at the World Cup. Brazil will avenge its disastrous result from 2014 with a solid showing in Russia. Its pride will be reestablished and memories of the 7-1 drubbing softened. However, it will fail yet again against a European power. Spain Vs. England: Where Is Francis Drake When You Need Him?! Spain's superiority across the pitch makes it the overwhelming favorite against England (Diagram 6). To this we should add experience, both in age and in big-game performance. Diagram 5Les Bleus Vs. A Selecao Diagram 6La Furia Roja Vs. The Three Lions The revamped Spain is much better at scoring goals, which will be a problem for England's untested defense. In 2010, the year of Spain's last title, the team relied heavily on what made F.C. Barcelona unbeatable in Europe: heavy possession of the ball and gameplay built on crisp passes. This still holds true today, as tiki-taka has become part of Spain's footballing DNA. However, after underperforming in the 2014 World Cup and at the 2016 Euro, new coach Julen Lopetegui has slowly improved overall play. This has particularly involved raising the quality of the Spanish attack. As Spain discovered in the last two major competitions, it is not enough to have possession for 80% of the game if one cannot do anything with the ball. England's group stage games against Tunisia, Panama, and Belgium tell us absolutely nothing about its big-game performance. Judging by their effort, Tunisia and Panama may have been the two weakest teams at this World Cup. England's premier matchup against Belgium turned into a warmup, as both teams rested their starters. Its games against Colombia and Sweden would be tough, but nowhere near the type of a test that Spain will represent. As such, we see the Spanish Armada prevailing this time around. The Finals: Spain Vs. France BCA's Two-Step World Cup model predicts that, on July 15, 2018, the world will see Spain dispatch France in the finals of the world's sporting pilgrimage (Diagram 7). Our model gives Spain an 83% probability of beating France. It is undeniable that Spain has superior quality across the pitch save for in attack (Diagram 8). However, its midfield has not yet "clicked." Other than the play of Isco, the Spanish midfield has been underwhelming. If this continues into the knockout round, the team could be in trouble against physical France. Diagram 7The Road To Glory What of the game for third place? Surprisingly, it may be the game of the tournament!10 Sure, third place means little. However, this game will mean a lot for the young England. Brazil could overlook the game, despite its better quality (Diagram 9). For Brazil, yet another third-place matchup will be seen as a failure. But England will see in the game a launching pad for an exciting 2020 Euros and 2022 World Cup. Diagram 8La Furia Roja Vs. Les Bleus Diagram 9A Selecao Vs. The Three Lions Chart 8Conditional Probability Of Immortality How does our forecast compare with current betting odds? Chart 8 shows that our model gives Spain an extraordinarily high probability of winning the tournament. Spain has not shown the quality thus far that would justify such a high conviction level. 1 We have also uploaded the most recent player statistics from the Electronic Arts database. 2 Please see BCA Research Special Report, "The Most Important Of All Unimportant Forecasts: 2018 FIFA World Cup," dated May 23, 2018, available at gps.bcaresearch.com. 3 We went on to say that, "in another twenty years of unfulfilled promises, fans will look back at its past success the way we think of Uruguay's two World Cups, won in 1930 and 1950." 4 Remember that the marginal effect represents the impact of a 1-unit change in the rating variable on the probability of winning. This is why we need to be careful when comparing both stages' marginal effect. A 1-unit change in the rating variable is less frequent, but extremely important in the knockout stage, hence the higher coefficient. 5 In 2006, Italy had 10 players form either Juventus or AC Milan; in 2010, Spain had 12 players from either F.C. Barcelona or Real Madrid; and in 2014, Germany had 11 players from either Bayern Munich or Borussia Dortmund. 6 Please see M. Clemente et al, "Midfielder as the prominent participant in the building attack: A network analysis of national teams in FIFA World Cup 2014," International Journal of Performance Analysis in Sport 15:2 (2015), 704-722. 7 Please see F. M. Clemente et al, "Using Network Metrics in Soccer: A Macro-Analysis," Journal of Human Kinetics 45 (2015), 123-134. 8 Think of Spain's first goal at this World Cup: a long pass to Diego Costa who then bullies his way against five defenders to a score. 9 In which case, someone should check that Zlatan is ok. 10 This would not be the first time that the third-place game steals the spotlight. Going back to 1978, the third-place game has outscored the final by a considerable margin. Teams usually enter the game with no pressure and therefore commit to a flowing, attacking style of play. Some of the most exciting games in World Cup history were played for third place: think Germany's 3-2 win over Uruguay in 2010, or Turkey's thrilling 3-2 win against South Korea.
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The Most Important Of All Unimportant Forecasts: 2018 FIFA World Cup
"Amongst all unimportant subjects, football is by far the most important." - Pope John Paul II From June 14 to July 15, billions of people will tune into the 2018 FIFA World Cup, with untold loss of productivity, working hours, and quality family time as a consequence. At BCA Research, we decided to stop pretending that we are indifferent to the quadrennial sporting pilgrimage - or to our staff hogging bandwidth by live-streaming games during business hours - and instead harness the best young minds of the company to deliver this most eminently unimportant forecast. To our clients who may worry that their hard-earned dollars are subsidizing fleeting research pursuits, we want to assure you that the research herein was produced "off the clock." In our firm's 70-year history, the principal question driving all analysis has been "so what?" Each and every piece of analysis produced at BCA Research is intended to conclude with an investment angle that makes sense of the noise produced by the cacophony of data. We do not intend to evolve out of that genetic material. At the same time, we are passionate about research. Even though this report does not have obvious investment implications, it is an excellent example of our research fundamentals.1 We develop a macro framework through qualitative analysis, enrich it with data manipulated in novel ways, and articulate it through empirical testing. Just as we produced this report "off the clock," we hope that our clients consume it in their down time. The following pages are a respite from President Trump's tweets, elevated equity valuations, prospects of tepid returns, renewed confrontation in the Middle East, and trade wars. It is also the first in a series of in-depth, multi-disciplinary reports that we intend to produce. Stay tuned. This BCA Special Report presents a unique two-step empirical approach to predict the outcome of each World Cup match. Our approach includes micro (player level) and macro (team level) factors to forecast game matches. We present this model in Section I. Section II then introduces several interesting qualitative narratives, focusing on specific teams attending this year's competition. Section III builds on the existing academic literature and our own unique framework to establish whether the World Cup has any market and economic implications. I. Two-Step Model: Forecasting The 2018 FIFA World Cup In this section we introduce a two-step simulation of the upcoming World Cup. Building on academic literature that has shown that teams respond differently to the various stages of the tournament, we develop two separate models for the group and knockout stages of the competition (Box 1).2 Box 1: The World Cup: A Quick Overview The quadrennial World Cup finals will take place in Russia over a period of one month. The tournament is referred to as the "finals" because the actual competition to select the 32 teams began in 2015. The qualification tournament whittled down the 209 FIFA member states (minus the already qualified host, Russia) over the course of three years via continental qualification tournaments. The 32 teams competing in the finals are separated into eight groups. Each team will play one game against each of their group opponents. The top two performers advance to the knockout stage of the competition. In this stage, the World Cup resembles the NCAA March Madness tournament in that teams face immediate elimination. The 2018 FIFA World Cup is the 21st edition of the competition that goes back to 1930. In the history of the competition, only eight nations have won the cup. Brazil has won five times, Germany and Italy four, Argentina and Uruguay twice, and France, England, and Spain once each. We are not the first to attempt to predict the World Cup. In a recent innovative approach, Clemente et al. (2015) use parameters from network analysis to analyze the tournament's matches. More traditional models rely on the FIFA World Ranking, which ranks teams based on past performance.3 Other conventional models draw on economic fundamentals to explain the success and failure of national teams. A literature overview from 2004 of both quantitative and qualitative models found that a simulator running a commercially produced computer game offered the most successful prediction of the World Cup.4 This should not come as a surprise. The computer gaming industry has overtaken Hollywood in terms of total revenue, while production costs of some computer games are running higher than those of blockbuster movies.5 Given that realism is an important feature of sport simulation, it should follow that computer games have a better forecasting track record than humans. In this report, we combine macro and micro variables to develop a unique two-step model. Our micro factors are based on an extensive database consisting of individual player statistics. Inspired by the 2004 study above, we rely on the computer gaming industry for player ranking, modifying it with our own collective soccertise. The list of potential explanatory variables that we considered including in our model is available in Table 1. Table 1Variables Considered And Used For The Models By relying on individual player attributes we believe that we have avoided the pitfalls of more "macro"-oriented models, such as those relying on overall team rankings. Overall team rankings are established on the basis of team performance over a multi-year period of time. We find that this approach overstates team performance over team quality in present time. These models also fail to incorporate tactical analysis into the model. We introduce these macro and qualitative factors - such as reputation and long-term historical performance - in the qualitative part of our evaluation, while letting objective, player- and team-specific data, dominate our model. Data To determine which variables from Table 1 had the highest predictive power we relied on the 192 matches that occurred during the 2006, 2010 and 2014 FIFA World Cups. There are two reasons we focused only on the last three tournaments. The first is data availability. The second is that football has undergone dramatic evolution in strategy in the twenty-first century. Among the 192 matches, 48 took place in the knockout stage of the competition, while the remaining 144 games occurred during the group stages. We rely on the database of player statistics used in Electronic Arts (EA) Sports FIFA computer simulation. The database includes player statistics from August 2004 to present. At the time of the publication of this report, not all 32 teams had made official their final list of 23 players (the lists will be published on June 4th by the FIFA). Therefore, we relied on the most recent World Cup qualifiers, as well as all the friendly matches played year-to-date to come up with the most likely line-ups for these teams. Step One: The Group Stage Model To simulate the 2018 group stage matches, we developed an Ordered Probit (OP) model estimated on past World Cups group stage games. Ordered Probit models are powerful when modeling an ordinal outcome (i.e. the response value has a strictly increasing ordering known prior to the estimation). Football matches can end in either a loss, a draw, or a win, with a well-defined order from loss to win. The Ordered Probit model therefore allows us to use this information, increasing the predictive ability of the model.6 The Ordered Probit model selected is represented using a continuous latent variable yi* that is linearly determined by a set of explanatory variables χι: Where φ is the cumulative normal distribution function and ϒ are arbitrary thresholds selected via log-likelihood maximization.7 Based on our sample of group-stage matches from the past three World Cups, we found that the best explanatory variables are: Team Average Player Rating Average Age - Forwards Average Number of Caps - Defenders Speed Positions Average Rating Group Stage Explanatory Variables Team Average Rating "Talent wins games, but teamwork and intelligence wins championships." Thus said six-time NBA champion Michael Jordan. Our model confirms that the insight from the basketball legend applies to football as well, as average team talent - based on the mean of individual player overall attributes taken from the EA Sports database - is the most significant predictor of game success in both stages of the competition. However, this variable becomes less important in the knockout stages, as the ability to play as a team ("teamwork"), as well as particular tactical matchups ("intelligence"), become paramount in winning the tournament. This is because, in the late stages of the competition, the talent differential between teams narrows substantively. Average Age - Forwards Teams with younger forwards tend to perform better than teams with older forwards due to the highly physical demands of the position. Forwards perform the highest amount of high-intensity efforts (sprinting and sudden changes of direction) and experience the most amount of physical contact among all positions in football.8 Considering that these abilities tend to peak in the early to mid-20's for most professional athletes, it is no surprise that our model gives a premium to youth in this position.9 Moreover, the annals of World Cup history are chock-full of tales of youthful forwards making a name for themselves when it matters.10 Figure 1Position Definitions Average Number Of Caps - Defenders Teams with more experienced defenders will tend to do better than teams with less experienced defenders. The physical demands on defenders tend to be less strenuous relative to other positions, given that they dish out the pain. This means that defenders tend to peak later than any other field position in football and are able to maintain peak performance sometimes well into their 30's. What defenders lack in athleticism they must make up in game IQ, as anticipation, composure, and tactical awareness are all acquired skills that improve with experience. Speed Positions Average Rating Teams with superior talent in their speed positions (full backs and wingers) will perform better in group stages (Figure 1). Academic research has shown that counterattacking football is the most effective tactic against unbalanced defenses.11 Wingers and full backs are crucial for both developing and defending against a counterattack as they cover the least congested part of the pitch, where there is generally the most space to run. Interestingly, this variable becomes less important in the knockout stages. This is most likely due to the fact that teams with skilled and fast wingers can easily exploit the space conceded by the tactically disorganized defenses of easier opponents that populate the early stages of the competition. In the later stages, teams are generally more tactically disciplined. Modeling Group Stage Games For each game, our model uses the spread between Team 1 and Team 2 of each explanatory variable to determine the probability of Team 1 winning the game. Table 2 lists all 32 teams and their descriptive statistics on the four explanatory variables. Table 3 presents how the 32 teams are ranked based on their probability of passing to the next stage inferred by these explanatory variables. Table 2Descriptive Statistics: Group Stage Table 3Group Stage Ranking Our predictive variables were selected based on the results of the 2006, 2010 and 2014 World Cups. The estimated coefficients are then used to produce 1,000 simulations of each game in order to obtain a distribution of the outcome. Table 4Marginal Effect Of Selected##BR##Variables: Group Stage The team average ratings are the core variables in our group stage model. However, due to the high level of multicollinearity in the disaggregated player rating variables, we could not capture the entire set of information from these individual variables. As a result, our final probabilities are derived from the weighted average of two separate estimations, Model 1 and Model 2. This allows our model to capture the importance of the speed positions average rating in predicting the outcome of the group stage matches, which displays the highest marginal impact on the winning probability (Table 4). Therefore, our final model for the probability of winning a game is: Where: Model 1 (M1)=ƒ (Team Average Player Rating, Forward Average Age, Defenders Average Caps) and, Model 2 (M2)= ƒ(Speed Positions Average Rating, Forward Average Age, Defenders Average Caps), and α and (1- α) are the weights given to each models.12 The ultimate product of our modeling is a coefficient we have termed E(points). As a reminder, teams are awarded three points for a win, one point for a draw, and zero points for a loss. The maximum amount of points a team can gain is nine, given that there are three matches (Box 2). BOX 2: E(points) Calculation E(points) allows us to determine which teams have the highest probability of passing to the knockout stages. We caution readers from reading too much into E(points) in terms of which teams move on to the knockout rounds as the competition in each group greatly determines the value. For example, Denmark has a higher E(points) coefficient than Serbia, but that is a function of its relatively easy group (it faces weaker competition). Group Stage: Results Group A Group A was one of the most challenging to forecast (Table 5). First, Uruguay is probably one of the weakest of the group favorites in the competition.13 Second, host Russia and Egypt are separated by few points in terms of overall quality. Table 5Group A Summary Results To make our lives easier, we decided to attribute a significant home advantage bonus to Russia.14 History tells us that hosting the World Cup provides a clear advantage to almost any team (Table 6). One out of every three hosts has won the competition, going back to the first tournament in 1930. A whopping 65% of all hosts have made it all the way to the semi-finals. It pains us to see the "Egyptian King," Liverpool F.C. superstar Mohamed Salah, exit at the group stage. However, history is arrayed against his squad. Russia would have to be only the second host team ever - aside from South Africa in 2010 - to fail to capitalize on its home court in the group stage. And, as history teaches us, you just don't beat Russians on Russian soil. Group B Group B was, by far, the easiest to forecast (Table 7). The two Iberian giants will make it through, a high-conviction view. Portugal will try to become the fourth team to win the European Championship and the World Cup consecutively, joining such great teams as West Germany (Euro 1972, World Cup 1974), France (World Cup 1998, Euro 2000), and Spain (Euro 2008, World Cup 2010, Euro 2012). Our knockout stage model likes Portugal, giving it the fifth-best probability of winning the entire competition. Its performance in the group stage will go far in validating our confidence in the team. Table 6Home Advantage Is Real Table 7Group B Summary Results Group C A pre-tournament favorite, France will look to avenge its stunning loss to Portugal sans Cristiano Ronaldo in the finals of the 2016 Euro. France starts its competition off in one of the weakest groups (Table 8). Group C lacks real competition, with Denmark having only a 25% probability of beating France. This is the lowest probability of success for any second-ranked team in the group stage of the competition. Anything less than 9 points for France would be a concern for the fans of Les Bleus. Table 8Group C Summary Results Group D Argentina and Croatia are the favorites to go through in Group D, but our model likes Nigeria's and Iceland's chances (Table 9). Iceland keeps turning forecasters into fools. As we discuss in Section II, its success in international football is empirical evidence of the divine. Its run in the 2016 Euro Cup, and win against England, may be the greatest upset in any major sporting competition. However, the element of surprise is gone. Table 9Group D Summary Results Nigeria, on the other hand, could be a dark horse. Our model likes their chances, with 31% probability that they advance to the next stage. They have also won only one of their last 12 World Cup matches, which suggests that they may be overlooked coming into the tournament. Group E Brazil is likely to dominate Group E, but the fight for second place, and thus qualification into the knockout round, will be vicious. Switzerland and Serbia represent a real challenge to our model. Their values in the four explanatory factors are tantalizingly close (Chart 1). Serbia gets the narrowest of pushes on three out of the four, but our model assigns identical probabilities of winning (39%) to each team when they face each other head-to-head (Table 10). The model gives the slightest of chances to Switzerland, mainly due to its higher probability of stealing points in its game against Brazil (48% compared to 46% for Serbia). It is a stunning revelation backed by history. Serbia has no luck against non-European competition in the tournament. Other than its impressive win against the eventual finalist Germany in 2010, it has lost to Argentina (by 6-0!), Ivory Coast, Ghana, and Australia. Furthermore, momentum is not on the side of the Orlovi, given that they backed their way into the World Cup with a 3-2 loss to Austria and a nail-biter against Georgia. These results prompted the Serbian federation to replace the head coach months ahead of the World Cup, not a reassuring sign. Chart 1Serbia Vs. Switzerland Table 10Group E Summary Results Group F Germany, the 2014 World Cup winner, will find very little opposition in Group F and should easily avoid the fate of the past two reigning champions who were eliminated early (Table 11). Die Mannschaft was the only team in Europe that won all its qualification games, ending the qualifying tournament with an otherworldly +39 goal difference. Our model likes Mexico over Sweden. This makes sense given that El Tri have progressed past the group stage in the previous six World Cups (only to be promptly eliminated in the first game of the knockout stage every time). Table 11Group F Summary Results Group G Our model finds Group G exceedingly easy to predict. Belgium and England will go through (Table 12). Both teams have a lot in common, starting with quality squads that have failed to make a mark in recent international competitions. Belgium comes to the 2018 World Cup with top quality players in many positions on the field (Table 13). The two squads will find no real competition in this group, but the pressure will be immense on both young squads. How they handle lowly Tunisia and Panama will determine their mental readiness for the knockout stage of the competition. Table 12Group G Summary Results Table 13Top Players In Every Position On The Pitch Group H Group H is by far the most difficult to forecast (Table 14), with all four teams clustered around a similar E(points) value (Chart 2). Poland has the best player - Bayern Münich superstar Robert Lewandowski - and Colombia the best team. However, both Senegal and Japan could surprise. The forecasting error in Group H should have little bearing on further results given the relatively low ranking of all four teams (for example, both Switzerland and Serbia from Group E are ranked as superior teams). However, the top two teams from this group will "cross" against Belgium and England, the two chronic underachievers. As such, winning the group carries considerable upside as the winner would face the young, untested, and skittish England. This means that Colombia, Poland, or perhaps even Senegal and Japan, could end up stunning the world and finishing at least in the top eight. Table 14Group H Summary Results Chart 2Probability Of Proceeding To The Knockout Stage Group Stage Results Table 15 illustrates group stage results. We assign points based on the highest probability outcomes (win, draw, loss) of each game. Table 15Group Stage Results How confident are we of the results? Other than groups E and H, we are highly confident. Box 3 goes over our three most likely "Dark Horses" to go through to the second round. BOX 3: BCA's "Dark Horses" Serbia The Serbian national football team has faced many challenges over the past two decades. Despite these hurdles, Serbia has produced top-class footballers that are integral parts of several European super teams. An experienced defense and aggressive midfield - headlined by one of the world's premier defensive midfielder Nemanja Matic of Manchester United - makes Serbia a hard team to play against. There is little of the Balkan flair on this team that defined Yugoslav football in the 1980s. But perhaps that is a good thing, given that World Cup games are tight, nervous, and often devolve into a defensive slog. Senegal It has been 16 years since Les Lions de la Teranga last appeared in a World Cup - and what a memorable appearance that was. In 2002, Senegal reached the quarter finals, the second African team in history to make it that far in the competition. The 2018 squad shows similar potential. The Lions' forwards pose the kind of threat to opponents' defenses that many of their World Cup rivals would envy. Keep in mind some of these names: Sadio Mané (Liverpool F.C.), Ismaila Sarr (Rennes), and Keita Balde (A.S. Monaco). Peru Peru is our choice for a long shot at this year's tournament. The Peruvian national football team is unbeaten since November 2016, winning eight matches and drawing four, with many coming against elite opposition. Although we do not take overall team rankings into consideration when making forecasts, it is notable that Peru is ranked 11th in the world, according to the ELO index. Peru's path to Russia took it through the South American qualifying tournament, known for being the most competitive in the world. Teams have to play 18 games, many at high altitude or in unforgiving climates, against some of the world's most talented squads. While it is true that they were the last team to qualify, having to beat New Zealand in the intercontinental playoffs, Peru came ahead of Copa America champions Chile and just one and two points behind Colombia and Argentina, respectively. While our model does not believe in the relatively young and unproven Peruvian team, placing it last in the group, the team's excellent coaching and fearless play make it a potential candidate to come out of Group C along with France, especially given that our model may be overstating Denmark's potential. Step Two: The Knockout Stage Model The knockout stage is somewhat easier to model given that the set of possible outcomes is reduced to only {loss; win}. This difference with the group stage is not only relevant for the math behind our model. It is also relevant for the strategy teams employ during the games. Therefore, we simulated this part of our analysis using a probit model estimated on a sample of only knockout stage games from the 2006, 2010 and 2014 World Cups. The binary choice probability of observing a specific outcome becomes: In this stage of the competition, we found the following factors to be the most important: Team Average Player Rating Club Level Synergy Player GINI Coefficient Average Rating - Midfielders Knockout Stage Explanatory Variables Team Average Rating As with the group stage, the overall rating of the team - based on the average of individual rankings from the EA Sports database - is the most powerful explanatory variable. Despite the higher marginal effect of the rating variables in the knockout stage sample, the standard deviation and average of these variables are significantly smaller than in the group stage.15 In other words, the gap in player quality between teams in the group stage is often vast. However, the knockout stage culls the minnows, narrowing the gap in overall player quality between teams. At this stage of the competition, our model has to be supplemented with variables that test for teamwork and synergy. Club Level Synergy Teams with more players playing in the same club tend to perform better in the knockout stages. This is evident from all the World Cup winners in our sample.16 Given the limited practice time that national teams have ahead of the tournament, the year-round experience of playing with teammates in club competition can provide a huge advantage. Especially for football teams from countries with major leagues - such as Germany, Spain and Italy. Their players are more likely to cluster on the major clubs in those leagues, whereas players from smaller footballing nations have to ply their trade in dispersed leagues and teams across the globe. Great Man Theory (Player GINI coefficient) Teams win games, but heroes win World Cups. To test whether superstars are relevant to winning games, we designed a player quality GINI measure. We find that teams with a higher GINI coefficient outperform those with a lower measure. It seems that having a superstar, or two or three, surrounded with role players is a superior strategy to having balanced talent across all positions. This variable only becomes significant in the knockout stages, where the overall talent level between teams narrows. While more skilled teams tend to be more balanced (Chart 3), once we normalize for skill, a higher GINI becomes a predictor of success. Chart 3The Great Man Theory Intuitively we agree with this finding. When the stress and tension of knockout stages peak and the weight of one's entire nation begins to crush a lesser player's shoulders, the Great Man shines through. Exceptional players have the skill, stamina, and otherworldly confidence to unlock the highly disciplined and tactically sound defensive schemes found in the latter stages of the competition. This should be good news for Belgium, Portugal, and Argentina, but really bad news for England. Average Rating - Midfielders Once we decompose the different positions in the field, we find that the midfield is more important to success than other positions in the knockout matches. Research has shown that midfielders, particularly those forming the "spine" of the team, are the most involved in a team's passing play, regardless of the tactics or strategy used.17 Precise and creative passing is key in knockout matches where tactically disciplined defenses are difficult to unlock. Defensive prowess in the midfield is also paramount to prevent the opposition from developing their attack.18 As with the group stage model, the final probabilities for the knockout stage games were derived from the average of two models in order to maximize the information contained in the average midfield player rating variable (Table 16). Table 16Marginal Effect Of Selected Variables: Knockout Stage Therefore, our final probability is: Where: Model 1 (M1) = ƒ(Team Average Player Rating, Club Level Synergy, Player GINI Coefficient) and, Model 2 (M2) = ƒ(Midfielders Average Rating, Club Level Synergy, Player GINI Coefficient), and a and (1 - α) are the weights given to each models.19 Table 17 summarizes the descriptive statistics of each team according to the four variables used to model their performance. Table 17Descriptive Statistics: Knockout Stage Knockout Stage: Results The Round of 16 There were no surprises in the round of 16 (Table 18). The two matches worth paying attention to are England vs. Colombia and Portugal vs. Uruguay. Our model gives the two European teams a 60% chance of winning their respective games. We see the "Great Man Theory" carrying Portugal forward to the quarter-finals. We are essentially willing to bet that Ronaldo is at least worth a quarter-finals berth at the World Cup. Table 18Round Of 16 Summary Results The England-Colombia matchup is essentially a coin toss. The young and untested Three Lions will face a tough challenge in Colombia. However, it is safer to carry England over to the next round as their "conditional probability" of progressing to the quarter-finals is significantly higher than that of Colombia (53% to 17%) (Chart 4). Why the difference? Conditional probability takes into account the original probability of passing the group stage. Given England's easy group, and Colombia's challenging competition, it is mathematically safer to bet on England. Chart 4Probability Of Advancing To The Quarter-Finals Quarter-Finals Making it into the quarter-finals of the World Cup is an extraordinary success reserved for only eight footballing nations. At this point, teams have played four intense and decisive games over three weeks. Fatigue sets in, especially given that the superstars are playing at the end of a grueling club season in what is normally their off-season. Our model bets strongly on the previous two World Cup winners (Table 19), while Brazil and France struggle against their opponents. Belgium and Portugal are left to wonder what might have been, although for Belgium the pain will be greater. Not only will they yet again fail to meet expectations, but also they will waste the highest conditional probability of advancing to the next stage of the four teams that do not advance (Chart 5). Table 19Quarter-Finals Summary Results Chart 5Probability Of Advancing To The Semis France Vs. Portugal: Setting The Record Straight The loss to Portugal in the final of the 2016 Euro, on home soil no less, still stings for France. The loss was particularly painful given that Portugal's superstar, Real Madrid's Cristiano Ronaldo, had to leave the game due to an injury and spent the majority of the game hopping on one leg, yelling instructions to his teammates from the sidelines. Our model gives France a 66% probability of winning the game. The French team is superior in every facet of the game, other than in the speed positions (Diagram 1). France also sports two of the game's best defensive midfielders, Chelsea's N'Golo Kanté and Juventus's Blaise Matuidi, to whom it will fall on to neutralize Portugal's Great Man. French coach Didier Deschamps has also benefited from the overall improvement in the French Ligue 1, calling upon players that play together in the local league. Diagram 1Les Bleus Vs. A Selecao das Quinas Diagram 2A Selecao Vs. The Red Devils We expect a tight match, with intense man-on-man coverage of Ronaldo. France will dominate the ball, slowly building chances against Portugal's defense. In 2016, a young and inexperienced French team wasted a plethora of chances against Portugal's version of the Maginot Line. We do not see history repeating itself. Brazil Vs. Belgium: Red Devils Don't Dance Samba The second tight matchup predicted by our model pits Brazil against Belgium. As with the France-Portugal matchup, the underdog has a solid one-in-three chance of winning the game. What makes Belgium so dangerous is their overall midfielder rating, which we identified as one of the four most relevant factors for winning the game. The problem for Belgium is that it trails Brazil by a lot in other facets of the game (Diagram 2). Its defense is particularly suspect. Belgium has no players ranked in the top five of their defensive position, whereas Brazil sports a fifth of all the best defensive players in the entire tournament. Spain Vs. Argentina: Don't Cry For Me Lionel Our model has no time for La Albiceleste, giving Argentina a paltry 10% chance of defeating Spain. As a reminder, our model is completely ignorant of head-to-head matchups between teams, but it has essentially predicted the 6-1 drubbing that La Roja gave Argentina in a friendly in late March. Granted, Argentina's superstar, and F.C. Barcelona icon, Lionel Messi watched the spanking from the bench. But unless Messi can play defense at the same high level at which he finishes attacks, Argentina is in trouble. Argentina's 2018 squad is essentially the stereotype of every team we have watched from the nation in the last half-century. Its forwards are world class, perhaps the best in the tournament (Diagram 3). Four Argentines are amongst the 15 best forwards in our sample, an extraordinary number (see Table 13). Nevertheless, the rest of the team is subpar relative to other favorites, and particularly against Spain. Germany Vs. England: Hard Brexit Defending champions rarely meet expectations at the World Cup. The tournament is simply too grueling, the pressure too great, and the chasm of time between tournaments too wide to bridge within a single generation. However, Germany faces a young, untested English team in our bracket. Getting to the quarter finals would be seen as a success for England, one upon which to build a winning generation for the 2022 tournament in Qatar. Germany tops England in all facets of the game and across the pitch (Diagram 4). Our model gives England little chance against Die Mannschaft. England has greater chances of extracting a soft Brexit from Berlin than of penetrating Germany's clinical press. Diagram 3La Furia Roja Vs. A Albiceleste Diagram 4Die Mannschaft Vs. The Three Lions Semi-Finals Our model gives Belgium and Portugal decent odds for advancing to the semis, leaving a door open for surprises in the quarter-final round. In the semi-finals, however, the model tightens the odds, snuffing out the chances for an aging Germany and an inexperienced Brazil (Table 20). Brazil's and Germany's chances fall to just 15% and 11%, respectively (Chart 6). Table 20Semi-Finals Summary Results Chart 6Conditional Probability Of##BR##Advancing To The Finals Spain's conditional probability of reaching the finals hovers at an extraordinarily high 54%. France remains at a respectable, and yet uncertain, 41%. France Vs. Brazil: Painful Memories We are not surprised that our model assigns Brazil just a 27% probability against France. France practically coasted to the finals of the Euro 2016, defeating Germany. In terms of quality, the two teams are even on forwards. Brazil takes a big advantage in speed positions and defenders, but France wins where it matters: midfield (Diagram 5). For many years now, Brazil has been known to produce some of the best forwards and defenders, but apart from Ballon d'Or winner Kaka, who retired a couple of years ago, it is difficult to name an outstanding Brazilian midfielder in recent years. Diagram 5Les Bleus Vs. A Selecao The French squad also displays better results on the club synergy variable, the second-best reading for the teams in the knockout stage behind Spain. This is the result of improvements to its domestic league. Meanwhile, Brazil's top players continue to be dispersed across a number of different top clubs. Brazil will avenge its disastrous result from 2014 with a solid showing in Russia. Its pride will be reestablished and memories of the 7-1 drubbing softened. However, it will fail yet again against a European power. Spain Vs. Germany: The Battle Of Champions The other semi-final game will feature the 2010 champion (La Furia Roja) against the 2014 champion (Die Mannschaft). You have to go back all the way to the 1990 World Cup to see the two previous World Cup winners face each other in the semi-finals. Our model is indifferent to Germany's more recent success, giving Spain an overwhelming 85% probability of winning. In 2018, Spain has superior quality across the pitch (Diagram 6). Diagram 6 La Furia Roja Vs. Die Mannschaft In 2010, the year of Spain's last title, the team relied heavily on what made F.C. Barcelona unbeatable in Europe: heavy possession of the ball and gameplay built on crisp passes. This still holds true today, as tiki-taka has become part of Spain's footballing DNA. However, after underperforming in the 2014 World Cup and at the 2016 Euro, new coach Julen Lopetegui has slowly improved overall play. This has particularly involved raising the quality of the Spanish attack. As Spain discovered in the last two major competitions, it is not enough to have possession for 80% of the game if one cannot do anything with the ball. The Finals: Spain Vs. France BCA's Two-Step World Cup model predicts that, on July 15, 2018, the world will see Spain dispatch France in the finals of the world's sporting pilgrimage (Diagram 7). The two teams have the highest conditional probability of traveling down the grueling camino a la gloria eterna, from the group stages to the final (Chart 7). Intriguingly, of the teams knocked out in the quarter-finals, Portugal shows up with a slight conditional probability of winning the tournament. The England-Colombia matchup is essentially a coin toss. Diagram 7Road Map Of The World's Sporting Pilgrimage Chart 7Conditional Probability Of Entering Elysium Our model gives Spain a 59% probability of beating France (Chart 8), large enough to give us confidence, but not an overwhelming figure. It is undeniable that Spain has superior quality across the pitch (Diagram 8). Chart 8Final Matchup Probabilities Diagram 8La Furia Roja Vs. Les Bleus Moreover, Spain clearly excels over France in its defense - it conceded just three goals in its ten qualifier matches - and in its club synergy value, where it scores the highest mark. Five players sampled in our data play for F.C. Barcelona and five play for Real Madrid. What of the game for third place? Surprisingly, it may be the game of the tournament.20 Sure, third place means little. However, this game will mean a lot. If our model is correct, Brazil will face nemesis Germany in a revenge game. The young Brazilian team, completely revamped after the 7-1 Blitzkrieg on home soil, will be playing for the future, for revenge, and for national pride. Our model gives Brazil only a slight edge over Germany (Table 21). This is unsurprising, given that Brazil is, by far, superior in defense, forward, and speed positions, even though it is considerably inferior where it matters: the midfield (Diagram 9). Table 21Third Place Match Summary Results How does our forecast compare with current betting odds? Chart 9 shows that our model gives Spain an extraordinarily high probability of winning the tournament. Spain's 32% odds are double what the bookies' favorites, Brazil and Germany, command. Overall, we think that the betting market is underestimating the odds of a Mediterranean champion, while overstating the odds of both Germany and Brazil. Diagram 9A Selecao Vs. Die Mannschaft Chart 9We Do Not Condone Betting!##BR##(But If You Were Wondering...) II. Teams And Narratives To Watch In Russia: A Qualitative Assessment The World Cup is not just about winning. It is the most watched event - sporting or non-sporting - in the world because it weaves so many narratives and themes together. In this section, we explore some of these narratives and themes. Some are investment relevant, some are geopolitically relevant. Our qualitative assessments are ordered from the lowest-ranked teams to the highest-ranked. South Korea - A New Era Dawns, With The Same Football Results Coming from a country that has imprisoned every former president, including the one it just impeached, it should come as no surprise that South Korea's national team lacks stable leadership. The Koreans had a remarkable coach - the German sweeper Uli Stielike - who had dedicated three years to preparing them for this tournament. They fired him last year, however, due to a handful of losses. He has been replaced with a native son - a known advantage in World Cup football - Shin Tae-yong. Shin Tae-yong threw a special winter training camp for the team in order to establish himself as coach and get to know the squad given such a short time remaining before the tournament. Activities consisted of drinking tiger's blood and hiking up to the Unicorn Lair of Kiringul where, rumor has it, former North Korean dictator Kim Jong Il was conceived. South Korea made it to fourth place when it co-hosted the World Cup in 2002. While it had a lot to do with the Flying Dutchman coach, Guus Hiddink, he was not playing on the field. Rather, it was the insatiable Korean thirst to perform better than their co-host and erstwhile colonial overlord, Japan.21 In 2018, South Korea has a good defense: they seldom have let the ball in the net in recent tournaments. The only problem is that they do not know how to score goals. Young star player Son Heung-min, of Tottenham Hotspurs fame, has shown that he can score multiple goals late in the game - but only when playing against Uzbekistan. Of course, South Korea does have a tremendously compelling national story this year: the war with North Korea is finally over! President Moon Jae-in and his North Korean counterpart, dictator Kim Jong Un, held the third Inter-Korean summit on April 27, and declared for the first time since 1952 that they would stop trying to kill each other, at least formally. Peace is the word of the day. Can the optimism of an era free of war, with potential Korean reunification on the horizon, translate to a morale booster that helps Korean athletes? Probably not. Our model assigns Korea only a 3% chance of making it out of the group stage. The 2018 Winter Olympics were held in South Korea - they even entered the opening ceremony jointly with their communist neighbors. But while the South Koreans did well, winning several golden medals, they did not set a new record. Unlike the South Korean women's hockey team, the South Korean men's football team won't receive an infusion of North Koreans. Nor will they host a North Korean art troupe. Although we doubt that either would help their odds in Russia. Egypt, Morocco, Tunisia, And Saudi Arabia - Renaissance Or Regression? It is now eight long and turbulent years since the Arab Spring ignited with protests in Tunisia. Since then, stagnant regimes have been toppled, hundreds of thousands of people killed in civil wars, and an Islamic State has been created and crushed. Tunisia and Morocco stand out as clear outliers in terms of geopolitics. Since the 2014 parliamentary elections, Tunisia has begun paving the way towards becoming the first country in the Arab world with a functional democracy. Morocco is far from a democracy, but has remained stable over the past decade in stark contrast to the region. King Mohammed VI has enacted a number of reforms that have forestalled, for now, expression of grievances from the public. Saudi leadership has decided to follow the Moroccan example and preempt social unrest by enacting wide ranging reforms from the top. The 33-year old Crown Prince Mohammad Bin Salman has not only pledged to reform the economy, but also to fundamentally change conservative Saudi society. Women have been given the right to drive, the religious police has been regulated into irrelevance, and there is even talk of eliminating public gender segregation. BCA believes that these reforms are genuine and that they will be executed with vigor.22 Saudi leadership is reacting to the reality that the majority of the population is under 30 years of age (Chart 10). Mohammad Bin Salman therefore did not "come out of nowhere," as many commentators claim. He is the regime's response to the socio-economic realities of Saudi Arabia. Chart 10Saudis Are Catering To The Youth In contrast with these three countries, Egypt has stagnated in terms of governance and political reforms. In many ways, the country has regressed back to the military-backed rule that preceded the Arab Spring protests. However, President Abdel Fattah el-Sisi has launched and followed through on some private-sector and macro reforms which should result in marginal improvements for the economy.23 If football is a reflection of socio-economic conditions, then the participation of these four states at the World Cup is a harbinger of a brighter future. In Russia, Arab countries will have the highest number of representatives ever in the World Cup. Given that three of the four countries qualified in the highly competitive African continental qualification tournament, the result is impressive. Our quantitative model gives Morocco, Saudi Arabia, and Tunisia little chance to reach the knockout rounds. Egypt, on the other hand, is only eliminated because we have decided to give Russia a host premium. Since 1930, as a host, only South Africa failed to qualify for the round of 16 in 2010. Egypt has a real chance to be one of the dark horses in this year's tournament. It has the requisite footballing tradition to be able to withstand the pressure of a major tournament. Egypt has won seven African Cup of Nations, the most among its continental peers, and nearly half of its likely squad play in major international leagues. The most important among these is Mohamed Salah, "The Egyptian King," of Liverpool F.C. Salah may be the best forward in the world at the moment and will certainly wreak havoc in the group stage against Russia and Saudi Arabia. These four Arab states have already accomplished a lot by qualifying. But if one of them progresses to the knockout stage, it would be notable. BCA Emerging Markets Strategy research has shown that genuine structural reforms that improve the quality of governance are required for long-term productivity growth, and thus, asset performance.24 But a change in attitude comes first. Confidence is an important part of that change, and seeing Mo Salah and Egypt take on the world's best could light the spark for a Middle East Renaissance. Iceland - A Footballing Black Swan Iceland's football team success is a great reminder to investors that the probability of unexpected events is often greater than the consensus expectation. Iceland has a population of 330,000, just slightly larger than Swansea, Wales' second-largest city and home of "the Swans," the perennial bottom-feeders of the English Premiership League. If one eliminates Iceland's female population, the infirm, and the too old and too young, the pool of available humans for the country's football team is about 40,000. Iceland's qualification for the World Cup is extraordinary. Its success at the Euro 2016, where the country advanced to the last eight teams after defeating England, is nothing short of evidence of the divine. It may be the greatest upset in sports. Ever. Consider that in order to even participate at the Euro 2016, Iceland had to survive a qualification group that included the Netherlands (which failed to qualify!), Czech Republic, Turkey, Kazakhstan, and Latvia.25 Iceland finished second in the group and thus qualified directly for the event. Then, to get to the final eight at the Euro, Iceland had to survive a group made up of Hungary, Portugal, and Austria (where it finished ahead of the eventual Euro champion Portugal!).26 It defeated England in the round of 16 by a score of 2 to 1, only to finally be vanquished by the host nation France.27 What makes Iceland's success so astonishing is statistics, specifically the concept of conditional probability. Because qualification for a major event, such as the Euro, requires successive results, the conditional probability of Iceland getting through to the quarter-finals eventually is close to zero.28 Especially when one considers that there is no element of surprise for a country like Iceland once it shocks the world by qualifying. This is not college basketball, where the knockout nature of the March Madness tournament - and lack of scouting of small universities - creates the potential for upsets. This is international football, played by grown men getting paid millions of dollars to do their job (i.e., not lose to Iceland). What is the secret behind the success of Strákarnir okkar (Our Boys)? Several theories have been advanced: investment in coaching, heated football pitches, "Nordic mentality," "The Breath of Odin," etc.29 To us, all of this smells of the hindsight rationalization that Nassim Taleb identified as the hallmark of Black Swan events.30 Icelandic footballing success is a shock, a rift in the space-time continuum, and unlikely to be replicated. Our model gives Iceland little chance against Argentina, Croatia, and Nigeria. Of course, the whole point of a Black Swan event is that it is impossible to model. So, sit back, relax, and enjoy the Viking War chant!31 Japan - Bad Timing For New Leadership Japan is a nation in ascendancy, having emerged from its "Lost Decades" in recent years to reclaim a leading position among the nations of the world. What stirred the giant from its slumber? A global financial crisis, earthquakes, tsunamis, nuclear meltdowns, debt-deflation, and the revival of its ancient Chinese foe. A new era is dawning. That is fortunate, as it means that Japan's failures in the World Cup will fall under the final year of the outgoing emperor's reign. The problem, once again, is the lack of stable leadership. Just as factions in the ruling Liberal Democratic Party are busy trying to remove the hugely successful Prime Minister Shinzo Abe before a critical party leadership vote, so factions within the Japan Football Association have removed the head coach, Vahid Halilhodzic, just two months ahead of the tournament. Unlike his Korean counterpart, Akira Nishino has not held a winter camp to familiarize himself with the team. Instead, he will rely on the rock-solid supposition that the Japanese would think it ignoble to be led into battle by a foreigner. There is a basis for believing that teams do better under the leadership of a coach who is a national. But there is only so far that ethnic solidarity can go. After all, this is a team that wrestled Haiti and Mali to a draw. To throw its coach under the bus at the last minute is to ensure that Japan's squad remains, in the words of William Durant, "inclined to picturesque suicide". Croatia & Serbia - Strength In Numbers Extrapolating into the future from their vantage point in 1990, leaders of Yugoslav federal republics Slovenia and Croatia made an understandable forecast. First, communism was dead, and it was time for economic and political reforms. Second, "economies of scale" no longer mattered. The future was in global trade and open borders. Therefore, membership in a still-communist federal Yugoslavia dominated by semi-authoritarian Serbia was suboptimal. Looking back at the decision today, it is hard to argue with the results. Slovenia is in the Euro Area with a GDP per capita of $21,304 (2016), while Croatia is close behind, in the EU with a GDP per capita of $12,090 (2016). Meanwhile, their neighbor and aggressive "big brother" Serbia, which fought a war against both to keep them in Yugoslavia, is on the outside looking in. Its GDP per capita ($5,348 in 2016) has only recently recovered to the 1989 Yugoslav levels! There is no argument that Croatia and Slovenia made the right choice, at the time, by choosing secession. But the question is whether they would have still done it knowing everything we know about the present. For one thing, we cannot extrapolate globalization into the future. We are, in fact, at its apex.32 Strength in numbers will matter in a de-globalized, multipolar world of the twenty-first century. And while Croatia and Slovenia are part of a bigger whole - the EU - their size relative to the EU population and economy is laughable relative to their importance in Yugoslavia (Chart 11). Chart 11Small Parts Of A Bigger Whole And then, of course, there is sport. Both Serbia and Croatia are present in Russia. Our model ranks them 14th and 15th respectively. If we combine their rosters into 23 top-ranked players, their ranking jumps to eight, high enough that a semi-final berth becomes a possibility given good luck. This is not the best team that former Yugoslavia could have featured. In 1998, Croatia came third in France with an over-the-hill squad. But in 1994, Serbia and Montenegro (still called Yugoslavia at the time) were banned from competing while that same Croatia was unprepared to compete in the qualifications, which began just after the country's independence. That 1994 team would have featured in-prime Croatian stars33 - who came within two Lilian Thuram goals of the 1998 finals - and a team of Serbian,34 Montenegrin,35 and Macedonian36 players who took Red Star Belgrade to its Champions League title in 1991. Given the relatively weak competition in 1994 (Bulgaria and Sweden made the semi-finals), Yugoslavia could have been crowned World Cup champion in 1994. Of course, if pigs had wings, they would fly. On the other hand, the fact is that Slovenia and Croatia are among the two most Euroskeptic countries in the EU. Clearly, there is some buyers' remorse in both. Perhaps as part of a reformed, democratic, and federal Yugoslavia, both would have enjoyed greater clout in Brussels and thus, greater say in what kind of policies the EU imposed on them. And if that did not work, at least looking at the shiny 1994 FIFA World Cup Trophy would have helped put everything else into perspective. Russia - The World Cup As The Ultimate Lagging Indicator Expectations are low for the Russian national team at the 2018 World Cup. Despite its size, population, relative wealth, and strong tradition of government support for sports, Russia is just not a footballing nation. Its best result at the World Cup was way back in 1966 (fourth place), although it did win a European title in 1960. That was more than half a century ago! As a host, we would expect Russia to get a bump out of its woefully easy group. But from there, the focus will shift away from the Sbornaya to the organization of the tournament. This is the second time Russia is hosting a major international competition, following the 2014 Sochi Winter Olympics, and all eyes will be on the updated infrastructure and tight security measures. The World Cup presents a much greater challenge than the Sochi Olympics because there are 11 venues spread out over a geography the size of Western Europe. Three of the venues - Volgograd, Rostov-on-Don, and Sochi - are also close to the Caucasus region. Russian security forces essentially encircled Sochi in 2014, severely limiting movement into and out of the Black Sea resort town.37 This is unfeasible to do for the country's 11 largest cities. Chart 12Russia - The World Cup As##BR##The Ultimate Lagging Indicator There is an additional problem of limiting hooligan violence. We assume that Russian law enforcement will be much better at limiting the influx of troublemakers than its European neighbors. However, Russia has plenty of domestic hooligans to create violence, which was on clear display at the Euro 2016 clash between English and Russian "fans." All of this brings up the question: Why is Russia organizing the World Cup in the first place? Especially given its semi-pariah status following a spate of controversial geopolitical events thus far in 2018? The answer is that major sporting events are the ultimate lagging indicator of a country's economy, its geopolitics, and market performance. The Sochi selection was made in 2007, amidst an epic commodity bull market and at the peak of the "BRICS are taking over" narrative. The World Cup selection was made in 2010, well before Crimea was annexed, Ukraine was destabilized, and Russia decided to play "peacemaker" in Syria (Chart 12). Just like Brazil in 2014, the World Cup therefore arrives to Russia at an odd time, with the market, economy, and the country's relations with the West hitting rock bottom. Of course, the 2014 World Cup was the bottom for Brazil, with a spate of seismic economic and political changes following. Brazilian equities are up nearly 50% from the closing ceremony of the World Cup to today. Can the same happen in Russia? Mexico - Will Anything Change? Mexican voters will go to the polls on July 1 as its national football team competes in Russia. The election has been dubbed the "biggest election in Mexican history" by the country's National Electoral Institute. We agree. For the first time in Mexico's history, a left-wing, anti-establishment movement has a chance to win (Chart 13). Chart 13The "Biggest Election In Mexican History"? Will Mexico's football team also break with tradition? For the past six World Cups, Mexico has emerged from the group stage only to be promptly eliminated in the knockout stage every time. In 2018, El Tri again have a great chance to emerge from the group. While Germany is a formidable foe, the other European nation in the group, Sweden, barely qualified and is playing without its only top-class footballer, Zlatan Ibrahimovic. As such, Mexico should accomplish the usual feat relatively easily. The question is whether it can do more. Unfortunately, second-place finish in its group will pair it, baring a major surprise, with Brazil. This is where its road will most certainly end. Will politics mirror football? Is Andres Manuel Lopez Obrador (AMLO) just more of the same? We are hopeful that Mexico's left-wing answer to President Donald Trump could actually make some changes for the better. First, the Mexican Congress is unlikely to give AMLO free rein in governing the country. Second, AMLO has moderated his campaign, purposefully hiring centrists and technocrats to signal moderation. Third, AMLO has the charisma and the gravitas to sit down with President Trump and negotiate face-to-face, unlike his predecessor, Enrique Peña Nieto, who never quite got used to Trump's rhetoric and aggressive style. In the end, if AMLO fails to make serious inroads with economic reforms, ongoing drug-related crime, and negotiations with President Trump, at least Mexicans will have one major success to take from 2018. Mexico qualified for the 2018 World Cup, whereas its eternal football rival the U.S. did not! Belgium & Switzerland - The Upside Of Immigration Let us state the facts. Without footballers of immigrant descent, we would not be writing an analysis on the Belgian and Swiss football teams today. Of the 23 call-ups for the international friendlies ahead of the World Cup, 13 were of immigrant background for the Swiss team and 12 for the Belgian. This includes the majority of the stars of both teams, such as Granit Xhaka (Albanian) and Ricardo Rodriguez (Spanish-Chilean) for Switzerland, and Vincent Kompany (Congolese-Belgian), Marouane Fellaini (Moroccan), and Romelu Lukaku (Congolese) for Belgium. In large part, this is a tired topic already well covered by the Belgian and Swiss media. It also draws on the main narrative following the 1998 French World Cup win. Half of the legendary Les Bleus team was made up of players with immigrant backgrounds, including essentially all of its stars. Of the 14 goals scored by the French team, nine came from its multicultural stars Zinedine Zidane, Youri Djorkaeff, Thierry Henry, Lilian Thuram, and David Trezeguet. What separates the 1998 French team from the Belgian and Swiss teams today, however, is the geopolitical context. The 2015 migration crisis in Europe - when the influx of illegal immigrants reached a peak of 220,000 per month in October of that year - still dominates politics on the continent (Chart 14). Although the crisis is now definitively over - the monthly influx figure is below 3,000 - both anti-establishment and establishment parties have swung hard against immigration. Chart 14What Migration Crisis? But wait, are these players really immigrants to begin with? The answer is an obvious and definitive no. Only six Swiss and none of the Belgian players were born outside the country. Even the 1998 French team had only two players who were actually born outside of France (and an additional two were from overseas French territories). This reflects one of the greatest misunderstandings in the political narratives regarding European immigration. There essentially is no longer any non-European immigration to Europe. At least not via legal channels. Players who are visible minorities on these teams are almost universally the children and grandchildren of the post-World War II immigrants from the former colonies (and three of the six foreign-born Swiss players are not visible minorities at all, given that they are from the former Yugoslavia). Several European countries undoubtedly have a problem integrating non-European immigrants. Our colleague Peter Berezin has made a connection between a generous social welfare state and lack of successful integration, with Belgium and Sweden as prominent examples of the connection.38 However, few commentators understand that there is no ongoing large-scale influx of immigrants to Europe, aside from occasional migration crises prompted by wars. The migrations of the 1950s and 1960s, from former colonies, was followed in the 1960s and 1970s by "guest worker" migration. Since then, Europe has progressively tightened its migration policies to all but internal migration from EU member states. What does this mean for Europe's national football teams? Nothing. Football is a sport played by the middle and lower classes almost universally.39 The high proportion of visible minorities on Europe's football rosters is simply a reflection of the fact that many immigrants and their kids grow up in precisely such communities. Eventually, they become French, Belgian, or Swiss. After all, nobody would today doubt Michel Platini's Frenchness. But he is as much a product of immigration as Zinedine Zidane or Zlatan Ibrahimovic. England - A Football Brexit It is well known that the English national team is cursed in World Cup football. If not for the home team advantage, they never would have won their single trophy in 1966. Many commentators in England lament the strength of the English Premier League. Best teams are collections of superstars from other countries who receive the highest wages in football, yet naturally return every four years to play for their mother country. In other words, the English fight wars with mercenaries hired from abroad whose loyalties lie elsewhere. Imagine that! The English national team has chronically underperformed despite having one of the most expensive, and productive, leagues in the world. Like many other U.K. industries, English football leverages the high productivity of extraordinary immigrants. Indeed, the percentage of foreign players in the English Premier League is the highest in the world (Chart 15).40 Chart 15The Most Globalized Labor Market? The immigrant free-for-all, however, almost ended. Just as concerns over immigration prompted Brexit, concerns that English football was being dominated by the non-English almost led to changes to the domestic league Homegrown Player Rule. A proposal to put more stringent rules on foreign players in order to fix the talent pipeline in English football almost took hold under the previous FA chairman, Greg Dyke. Fortunately, the worst effects of the Brexit vote have already passed: The team suffered their worst upset in 66 years at the hands of Iceland in the 2016 Euro Cup, just days after the referendum was held. Remember, there are fewer people in Iceland than there are Sikhs in the United Kingdom. This devastating upset was the first material instance of "Bremorse" in the wake of the referendum. The team is unlikely to suffer such an upset again. Instead, it will perform just like it did in 1066: defeating the likes of the King of Norway and Iceland only to be invaded and enslaved by the King of France. But unfortunately for England, it does not get a rematch with Iceland in group play. Rather, its group of four affords an occasion for an even greater humiliation, perhaps even the crowning humiliation of the entire Brexit saga: a loss to Brussels. Such a loss is likely if only because the signal lesson of British history teaches that Europeans can never successfully invade the island unless it happens to be suffering from deep internal divisions. And with Jeremy Corbyn and a second Brexit referendum on the horizon, such "intestine" divisions are utterly assured. Given all of the above, does it seem likely that this is the year in which England will break a half-century-long curse? No. But our model gives the young team great odds of reaching the knockout stage. Argentina - Promise Vs. Performance Every investor knows the old adage that at the turn of the twentieth century, Argentina was "one of the ten richest countries in the world," ahead of European heavyweights France, Germany, and Italy. And that in 1950, Argentina's GDP-per-capita was six times greater than the likes of South Korea. After half a century of Argentine economic mismanagement and unfulfilled promises, South Korea has today doubled Argentina's national wealth (Chart 16). Chart 16Argentina - Promise Vs. Performance At probably the height of the country's economic and political mismanagement - during the nearly decade-long military rule between 1976 and 1983 - Argentina's football team won two World Cups: 1978 and 1986. Since then, however, it has left behind a legacy of unfulfilled promises and lost opportunities that largely mirror its last thirty years of economic performance. Since the 1990 World Cup in Italy, Argentina has entered every World Cup as one of the favorites. Its fans consider the team one of the world's five greatest footballing nations. To its credit, it has made the finals twice, in 1990 and 2014, and the quarter-finals three other times in that span. But its status as a perennial superpower is under threat. We would argue that Argentina is, in fact, the greatest underperformer in the last three decades of international football. Despite being the fourth highest-ranked team over the past two decades - according to Elo scores, which we interpret to represent the consensus view - the country has failed to lift the World Cup. The greatest threat to Argentina's legacy as a footballing superpower is that, in another twenty years of unfulfilled promises, fans will look back at its past success the way we think of Uruguay's two World Cups, won in 1930 and 1950. One could argue, for example, that its two titles are a product of a single, golden generation, not of eternal status as a superpower. Since Diego Maradona stopped playing, Argentina has only advanced past the quarterfinals once. Coming into the 2018 World Cup, the expectations are once again high. Argentina still has one of the world's top-two players in Lionel Messi. And Elo again ranks it as the fourth-best team, with expectations of at least a semi-final appearance. Our model is more skeptical, dropping it to a sixth-best ranking and predicting yet another quarter-final exit. If Argentina wastes its "Messi generation," the chances that its unfulfilled football promises mirror that of its economy will grow. Portugal - The "Great Man" Theory The "Great Man Theory" posits that a large portion of human history can be explained by the impact of "Great Men" (and women) on global events. Popular from the Greek and Roman classics through the nineteenth century, the theory has been contradicted by post-modern philosophers, sociologists, and historians. BCA's Geopolitical Strategy largely rejects the idea in its methodology. We focus on the constraints to "Great People," rather than their preferences. After all, preferences are optional and subject to constraints, whereas constraints are neither optional nor subject to preferences. Enter Cristiano Ronaldo dos Santos Aveiro. Perhaps the greatest footballer ever, Ronaldo is indeed a Great Man. He has willed his teams (whether at club level or internationally) to extraordinary feats. Even in injury, his defeat on the battlefield inspired his teammates to play incredible football in the Euro 2016 final against a superior France. Ronaldo lacks mortal constraints on the football pitch. He has scored 308 goals in 289 appearances for Real Madrid (since 2009), an incredible per-game ratio (Chart 17). In the 2017-2018 season, at the age of 33, he has scored 41 goals in 38 appearances, maintaining a per-goal average of his entire career at the Spanish club. His game appearance total this season is lower than at any other time since 2009-2010, suggesting that he will come into the World Cup fresh and rested. Chart 17The Ronaldo Effect Football, however, is a game played on a wide pitch by 11 players. How can one man, even one as great as Ronaldo, make a difference? Gravity. Ronaldo is such a dangerous player with the ball that defensive midfielders and defenders have to constantly gravitate towards his presence on the pitch. This opens up lanes for his Portuguese teammates to counterattack. And Ronaldo's teammates are not as bad as the consensus thinks. Our quantitative model ranks Portugal seventh, just a few points below Brazil. They are also fortunate to be in a relatively easy group. While the matchup with Spain will be a tense affair, Portugal will easily dispatch Iran and Morocco. And if they come second in the group, they will face the easiest group winner of the next round, Group A's Uruguay. While we do not subscribe to the Great Man theory as a methodology, we respect it. Over the long term, and over a great number of iterations, focusing on great individuals is folly. But when faced with specific events, there is definitely value in thinking about how extraordinary human effort matters. Portugal's path to the quarter finals is easy. Once there, games will become tighter, the pressure unbearable, the stage infinitely larger. It is in these moments that legends play like Great Men, while lesser footballers play like mere mortals. Brazil - Redemption? As host of the last World Cup in 2014, Brazil didn't so much hit rock bottom as descend to the ninth circle of hell. Its merciless 7-1 obliteration by Germany in the semifinals - the sharpest rebuke to home-team self-confidence in history - would have scarred the national psyche even if the country had not proceeded into the worst economic recession in a hundred years. At that point the country's politics became a Shakespearean tragedy in which a handful of corrupt aristocrats slaughtered each other on stage, for all the world to see. Chart 18No Neymar Home "Brazil is back," say the fans - just as the bulls in the financial markets. The argument goes like this: The crisis has proven that the country has resilient institutions. Inflation (read: hubris) has collapsed to the lowest point in years, while the country has tightened its belt (both financially and figuratively), in a long-overdue act of self-discipline. The only difference is that the football comeback, unlike the economic one, is built on firm foundations. The Brazilian squad has made an impeccable run since Dunga stepped down as coach in 2016. It was the first team to qualify for this year's World Cup, going undefeated for quite a stretch of time. Today, the team is coached by Tite, a former player. The least we can say is that he reinvented the way Brazil plays. Brazil's lamentable disappointment under coach Luiz Felipe Scolari ultimately comes down to the need for a new football identity and a new crop of players. That's what they have today. They are a very good team, and freshly humbled. We expect them to go far, though not all the way. It is not certain that all of Brazil's demons have been purged. By way of illustration, the leading presidential candidate is an advocate of military dictatorship, with no pro-market candidate in sight (Chart 18). France - Marchons, Marchons! In 2016, France lost to Portugal in the final of the Euro Cup on home court. This was not the first gut-wrenching loss in the final of a major tournament. In 2006, its aging 1998 generation lost a bitterly fought final against Italy. In Russia, France comes as one of the favorites. Its team is celebrating the 20-year anniversary of its epic 1998 run. Meanwhile, at home, France is marching in lockstep to President Emmanuel Macron's reforms. The economy is booming, cantankerous unions are either defeated or capitulating, and even equity market performance is leaving traditional competitors in the dust (Chart 19). Chart 19France - Marchons, Marchons! Our model sees France reaching the final of the World Cup. However, it also predicts that France will lose this final, a repeat of the 2016 and 2006 performances. Les Bleus will come close, but not light the victory cigar. Football in France is embedded in the cultural fabric; its team is portrayed by the media as a reflection of the contemporary socio-economic narratives. When France won in 1998, for example, the team's multicultural heritage was touted as a model of integration and as a symbol of open-minded, post-colonial France. The 2010 debacle in South Africa, on the other hand, where French players literally went on strike following an altercation with their coach, was presented as a symbol of declining French relevance and growing national impotence. Since 2014, however, positive momentum has been building both on the football pitch and in real life. A young team managed to qualify for the 2014 World Cup, losing to the eventual champion Germany in a closely contested quarter-final game. Two years later, that same team defeated World Champion Germany in a semi-final of the Euro tournament. On the political front, 39-year old Emmanuel Macron swept aside populists and left-wing firebrands, stunning the world by campaigning from a staunchly centrist perspective. The question for France in 2018 is whether it will fall short of victory, yet again. We ask the question both in terms of the performance on the football pitch and in politics. The youthful, energetic, president mirrors the youthful, energetic, squad. But a lot is at stake and second place may not be good enough for either. We remain optimistic that genuine reforms are coming to France.41 And despite our model's preference for Spain in the finals of the World Cup, France has a great chance of repeating the glory from twenty years ago. Spain - Divided It Stands, And Wins On October 1, 2017, 92% of Catalan voters decided that Catalonia should secede from Spain in a referendum deemed illegal by Madrid.42 Soon after, images of old ladies and students being beat up by riot police flooded the internet, as Mariano Rajoy's government signaled its refusal to compromise on the question of independence. Chart 20Catalan Separatism: Overstated Risk Intriguingly, Spain's most independent-minded regions have often produced some of its best footballers. Cesc Fàbregas, Gerard Piqué, Carles Puyol, Xavi Hernandez, and Sergio Busquets are all of Catalan descent and have dutifully defended the Spanish colors in several successful Euro and World Cup campaigns. Meanwhile, the bitter Barcelona-Real Madrid rivalry has been at the heart of Spanish football and deeply embedded in the country's political and socioeconomic history for generations. In other countries, such divisions and rivalries would let politics get in the way. In Yugoslavia, the civil war is famously said to have begun with fan rioting at a 1991 Dinamo Zagreb vs. Crvena Zvezda match. But Spain, somehow, channels the chaos into beautiful, and effective, football. Pro-independence sentiment has begun to waver in Catalonia, as BCA's Geopolitical Strategy predicted (Chart 20).43 This is bullish for the Spanish economy and assets, but also for its football team. Spain conquered the world of football at the height of its economic crisis, in 2010. Will it do so again, on the heels of its political crisis? Our model predicts yes. And we agree. It would seem that Spain's greatest attribute as a nation is to produce diamonds under pressure. III. Investment Implications: Does The World Cup Matter? The FIFA World Cup is the most widely watched sporting event in the world by far (Chart 21). Does all that passion and emotion translate into any economic or market implications? Chart 21World Cup Is The Most Important Unimportant Event In The World Academic literature on the topic is, at best, inconclusive. International football, as an industry, is largely inconsequential. For instance, the wealthiest football club in the world - Manchester United - generates less than 8% of the revenue of the 500th company in the Fortune 500 index. To assess whether the World Cup matters, we take two approaches. First, we explore the implications of hosting the event on the economy of the host nation. Second, we examine the implications of the World Cup on equity markets. Hosting The World Cup Despite the size and the reach of the World Cup, we find little evidence that hosting the event is beneficial to the host's economy. There appears to be little to no effect on either a short or long-term horizon. We found no "World Cup effect" on any of the economic variables one would assume may be impacted. Nonetheless, some patterns are worth highlighting (Table 22). Table 22Is It Worth It? We chose to look at the behavior of each economic variable one year before and after the World Cup, with the exception of core consumer price inflation and the unemployment rate, which we observed on a three-year horizon around the event. The rationale behind this is that the labor market tends to react slowly to changes in underlying economic activity, due to factors such as the rigidity of employment contracts and stickiness of wages. The study starts with the 1990 World Cup hosted by Italy. Interestingly, some patterns are apparent. Out of all the variables we analyzed, inward FDI tends to consistently increase in the host country following the World Cup. Our suspicion is that hosting the event demonstrates, on the margin, that the country meets suitable conditions (governance, return on capital, etc.) to attract foreign capital. On the other hand, we may be capturing a trend already underway, which itself was revealed by the fact that the country was selected to host the World Cup in the first place. As Table 23 illustrates, the selection process lags the actual event, as with any major sporting event (such as the Olympics). Intriguingly, the time-lag is, on average, six years, almost precisely the length of an economic cycle. As such, the decision to award the hosting of the event to a particular country may already take into account the bullish macroeconomic cycle. By the time the event is hosted, the cycle is in full swing and may actually be peaking. Table 23Soccernomic Cycles? Consistently, capital expenditures also tend to increase following the Word Cup. As more foreign capital flows in the country, more investment takes place. Currencies, however, on a one-year horizon, do not react to these FDI flows since the short-term gyrations are dictated by more volatile short-term portfolio flows. As FDI flows in, the unemployment rate falls and tends to continue falling after a World Cup. However, some caution is advised in interpreting these conclusions. Macroeconomic business cycles, commodity prices, and other structural factors are still dominating factors in determining the trend and health of economies. As we indicated in our analysis of Russia in the qualitative section above, the World Cup itself can be considered a lagging indicator of the economy. This certainly appears to be the case with the three members of the BRICS who have hosted the event: South Africa, Brazil, and Russia. As such, hosting the World Cup may signal the top of the bullish cycle, as it certainly did for Brazil. This warrants a few key observations: Brazil did not see a rise in capital expenditure after hosting the World Cup in 2014. In fact, it suffered one of the deepest recessions in the last century. Consistently, unemployment did not fall as it did for other countries as commodities entered a bear market in 2015 and weighed heavily on the economy. Although South Africa did see its unemployment rate fall before the World Cup, the trend did not continue following the event. In the few years leading up to the global financial crisis, the world economy was in the midst of a period of stellar growth. Therefore, it makes sense that Germany was experiencing rising FDI, capital expenditure, and inflationary pressures prior to hosting the event in 2006. In addition, the implementation of the Hartz IV reforms in the early part of the decade put an end to the long-term structural uptrend in the unemployment rate, which has since declined by more than 7%. The year 2002 was an important one for Japan, as the turn of the millennium marked the end of the "lost decade". Subsequently, Japan experienced a falling unemployment rate and rising GDP growth. However, the end of the "lost decade" also saw the beginning of the self-feeding deflationary expectations which have anchored expected inflation levels near zero. As such, consumer prices fell before and after the event. France went through a period of intense reforms in the late 1990s. Prior and subsequent to 1998, growth rates were falling simply because 1998 recorded a higher growth rate of 3.3%, compared to 1.6% in 1997 and 3.1% in 1999. The lowering of the VAT rate, income, and corporate tax by the Chirac government led to real capital expenditure and real household consumption increases during the late 1990s. Furthermore, substantial labor market reforms helped to decrease the unemployment rate. The 1990s were the longest period of economic expansion in U.S. history. In fact, 1994 was the year where the number of jobs created was one of the largest on record, at 3.85 million. As such, real GDP growth and business investment expenditures were high, and the unemployment rate was falling. The prospects of high growth also brought in increased foreign direct investment in the same period in which the World Cup coincided. However, emerging markets were seeing an equally stellar period of growth, which was supported by high capital inflows and appreciating EM currencies, thus leading to a lower U.S. dollar. Although the Federal Reserve began hiking interest rates in 1994, the effect on the dollar was not registered until the beginning of 1995, which also marked the beginning of a dollar bull market. In the 1990s, the Italian government was heavily liberalizing the economy, leading to its eventual inclusion in the Euro Area at the end of the decade. Italian growth during the late '80s and early '90s was high enough for it to surpass Britain and France in terms of GDP growth, consumption and investment growth in 1990 were high. However, the 1990s oil price shock depressed consumer and business activity. Bottom Line: In line with the academic literature, the results of our assessment are at best inconclusive. However, the data does suggest that hosting of the World Cup coincides with some positive macroeconomic developments, particularly in terms of FDI inflows. This, however, may reflect the fact that the decision to host the event is usually made at the beginning of a bullish upcycle, which means that the actual event marks the peak, or top, of the cycle. Equity Market Implications The World Cup may be most relevant, not as a catalyst for market action, but rather as a distraction. The European Central Bank, for example, concluded in a 2012 study that trading volumes dropped considerably during match times.44 The World Cup in Russia could be particularly distracting. Because of Russia's time zone, most matches will be played between 8:00 am and 2:00 pm in New York, and 1:00 pm and 7:00 pm in London. As opposed to the economic impact, there seems to be a general consensus in the academic literature regarding the equity market implications of World Cup matches. For instance, a cross-sectional analysis of 39 countries looking at World Cup and relevant qualifying matches between 1973 and 2004 (that represents 1,162 matches!) concludes that losses have an economically and statistically significant negative effect on the losing country's stock market.45 Furthermore, the study finds that this effect is stronger in small caps, which are disproportionately held by local investors and therefore are more strongly affected by sentiment following a football match. Another study found that being short NYSE and long Treasuries during World Cups would produce a higher return from 1950 to 2007.46 This is due to the decisions taken by foreign investors in U.S. bond and equity markets. During the World Cup, these investors would withdraw capital to invest in their local markets, which would put downward pressures on NYSE prices. Table 24 presents the daily stock return deviation from what one would expect outside of World Cups for all the matches in the past seven World Cups, starting with the quarter-finals (for the period from 1990 to 2014). We report the local equity market movement of the teams playing up to three days after a match took place. Table 24Do World Cup Matches Impact The Local Stock Returns Of The Teams Playing? Several observations can be made: We observe positive "abnormal" returns, i.e., deviations from trend, in the day following the matches, for any of the teams playing, and larger "abnormal" returns when it comes to the winning team. While we observe positive abnormal returns for the winners at t+1, it appears that more than 70% of the daily returns used to compute this average turn out to be negative - implying that, on average, the winners' local equity markets experience small negative returns and, in a few instances, large abnormal positive returns. In line with the literature, we observe negative abnormal returns on t+1 for the losers, regardless of how we define our benchmark. A high number of abnormal daily returns, up to three days after the match, appear to be negative (this is also the case regardless of whether we compare it to the past average, median, or non-World Cup daily returns). Bottom Line: We do not recommend that investors "play" the World Cup. Generally speaking, equity markets react, on average, positively to wins and negatively to losses. However, this is not always the case. 1 There are, however, some less obvious investment implications ... but we do not encourage gambling on sporting events! 2 C. Cotta, A. M. Mora, and J. J. Merelo, "A Network Analysis of the 2010 FIFA World Cup Champion Team Play," Journal of Systems Science 26:1 (2013), 21-42. 3 For instance, please see Gregory T. Papanikos, "Economic, population and political determinants of the 2014 World Cup match results," Soccer & Society 18:4 (2017), 516-532; and Fabian Wunderlich and Daniel Memmert, "Analysis of the predictive qualities of betting odds and FIFA World Ranking: evidence from the 2006, 2010 and 2014 Football World Cups," Journal of Sports Sciences 34:24 (2016), 20176-20184. 4 Please see O'Donoghue et al, "An evaluation of quantitative and qualitative methods of predicting the 2002 FIFA World Cup. Part II: Game activity and analysis," Journal of Sports Sciences 22:6 (2004), 513-514 5 Please see, The Economist, "Why video games are so expensive to develop," September 25, 2014, available at www.economist.com. 6 The OP model makes two critical assumptions: (1) it assumes that the (χ'ι, β, γ) function has the form of a continuous probability distribution function which is the standard normal distribution function of a linear combination of our explanatory variables; (2) it assumes proportional odds between each category in the dependent variable. Assumption (2) was confirmed using the proportional odds Brant test, confirming that the ordered probit is the best suited model for our purpose. Please see Alexander, Carol, Market Risk Analysis: Practical Financial Econometrics (John Wiley & Sons) 2008, 426 pages. 7 Please see EViews 8.1 User's Guide II, pp.259-284. 8 Please see J. Bloomfield, R. Polman, and P. O'Donoghue, "Physical Demands of Different Positions in FA Premier League Soccer," Journal of Sports Science & Medicine 6:1 (2007), 63-70. 9 Please see Seife Dendir, "When do soccer players peak? A note," Journal of Sports Analytics 2 (2016), 89-105. 10 Think 22-year old Mario Götze's stunning game-winner four years ago. 11 Please see H. Sarmento et al, "Match analysis in football: a systematic review," Journal of Sports Sciences 32:20 (2014), 1831-1843. 12 In order to favor our core model (M1), which uses the team average player rating variable, we assigned a weight α = 0.66. 13 We are sure that this is a pure coincidence. Being paired with the host Russia had nothing to do with this. Nothing. 14 A "Novichok bonus" perhaps? 15 Remember that the marginal effect represents the impact of a 1-unit change in the rating variable on the probability of winning. This is why we need to be careful when comparing both stages' marginal effect. A 1-unit change in the rating variable is less frequent, but extremely important in the knockout stage, hence the higher coefficient. 16 In 2006, Italy had 10 players from either Juventus or AC Milan; in 2010, Spain had 12 players from either F.C. Barcelona or Real Madrid; and in 2014, Germany had 11 players from either Bayern Munich or Borussia Dortmund. 17 Please see M. Clemente et al, "Midfielder as the prominent participant in the building attack: A network analysis of national teams in FIFA World Cup 2014," International Journal of Performance Analysis in Sport 15:2 (2015), 704-722. 18 For instance, please see F. M. Clemente et al, "Using Network Metrics in Soccer: A Macro-Analysis," Journal of Human Kinetics 45 (2015), 123-134. 19 In order to favor our core model (M1), which uses the team average player rating variable, we assigned a weight α = 0.66. 20 This would not be the first time that the third place game steals the spotlight. Going back to 1978, the third place game has outscored the final by a considerable margin. Teams usually enter the game with no pressure and therefore commit to a flowing, attacking style of play. Some of the most exciting games in World Cup history were played for third place: think Germany's 3-2 win over Uruguay in 2010, or Turkey's thrilling 3-2 win against South Korea. 21 As well as ... yes, atrocious refereeing. 22 Please see BCA Geopolitical Strategy Special Report, "The Middle East: Separating The Signal From The Noise," dated November 15, 2017, available from gps.bcaresearch.com. 23 Please see BCA Frontier Market Strategy Special Report, "Egypt: Giving Benefit Of Doubt," dated February 6, 2018, available at fms.bcaresearch.com. 24 Please see BCA Emerging Markets Strategy and Geopolitical Strategy Special Report, "Ranking EM Countries Based On Structural Variables," dated August 2, 2017, available at ems.bcaresearch.com. 25 The Netherlands has a population 50 times greater than Iceland and a GDP 35 times greater. 26 Portugal has a population 30 times greater than Iceland and a GDP 10 times greater. 27 England has a population 200 times greater than Iceland and a GDP 110 times greater. 28 Just in case any of our Icelandic clients take offense to our premise, we want to point out that the country has competed in a number of Games of the Small States of Europe. Participants at this biannual event includes such sporting powerhouses as Andorra, Cyprus, Liechtenstein, Luxembourg, Malta, Monaco, Montenegro, and San Marino. Iceland actually trails Cyprus in the total tally of medals collected since 1985. 29 Please see Frode Telseth and Vidar Halldorsson, "The success of Nordic football: the cases of the national men's teams of Norway in the 1990s and Iceland in the 2010s," Sport In Society, November 1, 2017. 30 Please see Taleb, Nassim, Fooled By Randomness (New York: Random House), 316 pages. 31 Unless you are a U.S. soccer fan. The U.S. has a population 1,000 times greater than Iceland and a GDP 800 times greater. Please light yourself on fire responsibly. 32 Please see BCA Geopolitical Strategy Special Report, "The Apex Of Globalization - All Downhill From Here," dated November 14, 2014, available at gps.bcaresearch.com. 33 Robert Prosinecki would have been 25-years old, and at the time one of the highest paid players in the world. In 1998, due to a number of injuries, he was playing for Croatia and largely an afterthought in the team. Davor Šuker and Zvonimir Boban would have also been 25 in 1994 and both at the peak of their careers. 34 Vladimir Jugovic and Sinisa Mihajlovic, were both in their prime in 1994, and both were stars in Italy. 35 The eventual Real Madrid legend Predrag Mijatovic would have been in-prime 25 years of age in 1994 (and unlikely to make the starting 11 of the combined Yugoslav team!), while, by then, the three-time Champions League winner Dejan Savicevic would have already been A.C. Milan's best player. 36 Shout out to Darko Pancev, the 1991 European Golden Boot award winner! 37 For example, for the duration of the 2014 Winter Olympics, only vehicles registered in Sochi, or those with special permission, were allowed through security checkpoints set a 100 kilometers outside the city. 38 Please see BCA Global Investment Strategy Weekly Report, "The End Of Europe's Welfare State," dated June 26, 2015, available at gis.bcaresearch.com. 39 Except in the U.S., which is maybe why it continues to underperform in global competitions. 40 Contrary to most leagues, the Premier League does not have a cap on the number of foreign players a team can have. It just requires eight players to be home grown (three years with an English team before the age of 21). 41 Please see BCA Geopolitical Strategy Special Report, "The French Revolution," dated February 3, 2017, available at gps.bcaresearch.com. 42 The turnout of the referendum was a woeful 43%, however. 43 Please see BCA Geopolitical Strategy Weekly Report, "Why So Serious?" dated October 11, 2017, available at gps.bcaresearch.com. 44 Ehrmann, M. and Jansen D., "The Pitch Rather Than The Pit: Investor Inattention During FIFA World Cup Matches," European Central Bank, Working Paper 1424, February 2012. 45 Please see Edmans, A., Garcia, D., & Norli, O. "Sports Sentiment and Stock Returns," The Journal of Finance 62:4 (2007), 1967-1998. 46 G. Kaplanski, and H. Levy, "Exploitable Predictable Irrationality: the FIFA World Cup effect on the U.S. Stock Market," Journal of Financial and Quantitative Analysis 45:2 (2010), 535-553. References Alexander, Carol, Market Risk Analysis: Practical Financial Econometrics (John Wiley & Sons) 2008, 426 pages. J. K. Ashton, B. Gerrard, and R. Hudson (2011), "Do national soccer results really impact on the stock market?" Applied Economics, 43:26, 3709-3717. M. H. Berument, and N. B. Ceylan (2012), "Effects of soccer on stock markets: the return-volatility relationship," The Social Science Journal 49, 368-374. J. Bloomfield, R. Polman, and P. O'Donoghue (2007), "Physical Demands of Different Positions in FA Premier League Soccer," Journal of Sports Science & Medicine, 6(1): 63-70. F. M. Clemente, M. S. Couceiro, F. Martins, and R. Mendes (2015), "Using Network Metrics in Soccer: A Macro-Analysis," Journal of Human Kinetics 45/2015, 123-134. M. Clemente et al. (2015), "Midfielder as the prominent participant in the building attack: A network analysis of national teams in FIFA World Cup 2014," International Journal of Performance Analysis in Sport 15(2): 704-722. C. Cotta, A. M. Mora, and J. J. Merelo (2013) "A Network Analysis of the 2010 FIFA World Cup Champion Team Play," Journal of Systems Science 26(1): 21-42. Seife Dendir (2016), "When do soccer players peak? A note," Journal of Sports Analytics, 2: 89-105. A. Edmans, D. Garcia, and O. Norli (2007), "Sports Sentiment and Stock Returns," The Journal of Finance, 62 (4), 1967-1998. J. Geyer-Klingeberg, M. Hang, M. Walter, and A. Rathgeber (2018), "Do stock markets react to soccer games? A meta-regression analysis," Applied Economics, 50:19, 2171-2189. G. Kaplanski, and H. Levy (2010), "Exploitable Predictable Irrationality: the FIFA World Cup effect on the U.S. Stock Market," Journal of Financial and Quantitative Analysis, 45(2): 535-553. Jorge Knijnik (2014), "Playing for freedom: Sócrates, futebol-arte and democratic struggle in Brazil," Soccer & Society, 15:5, 635-654. Christian Koller (2017), "Le football suisse: Des pionniers aux professionnels, " Soccer & Society, 18:4, 597-598 Lindsay Sarah Krasnoff (2017), "Devolution of Les Bleus as a symbol of a multicultural French future," Soccer & Society, 18:2-3, 311-319 S. Kuper, and S. Szymanski (2009), "Soccernomics: Why England Loses, Why Germany and Brazil Win, and Why the U.S., Japan, Australia, Turkey - and Even Iraq - Are Destined To Become the Kings of the World's Most Popular Sport". H. Liu, M.A. Gomez, C. Lago-Peñas, and J. Sampaio (2015), "Match statistics related to winning in the group stage of 2014 Brazil FIFA World Cup," Journal of Sports Sciences, 33:12, 1205-1213. R. Mackenzie, and C. Cushion (2013), "Performance Analysis in Football: A Critical Review and Implications for Future Research", Journal of Sports Sciences 31(6). J.A. Mangan, Hyun-Duck Kim, A. Cruz, and Gi-Heun Kang (2013), "Rivalries: China, Japan and South Korea - Memory, Modernity, Politics, Geopolitics - and Sport," The International Journal of the History of Sport, 30:10, 1130-1152. M. Martiniello, and G. W Boucher (2017), "The colours of Belgium: red devils and the representation of diversity," Visual Studies, 32:3, 224-235. Brank Milanovic (2010), "The World at Play: Soccer Takes on Globalization," YaleGlobal Online. Richard Mills (2009), "'It All Ended in an Unsporting Way': Serbian Football and the Disintegration of Yugoslavia, 1989-2006," The International Journal of the History of Sport, 26:9, 1187-1217. Shakya Mitra (2014), "Spanish football: from underachievers to world beaters," Soccer & Society, 15:5, 709-719. O'Donoghue et al. (2004), "An evaluation of quantitative and qualitative methods of predicting the 2002 FIFA World Cup. Part II: Game activity and analysis," Journal of Sports Sciences 22(6):513-514. Gregory T. Papanikos (2017), "Economic, population and political determinants of the 2014 World Cup match results," Soccer & Society, 18:4, 516-532. Guy Podoler (2008), "Nation, State and Football: The Korean Case," The International Journal of the History of Sport, 25:1, 1-17. Alejandro Quiroga (2017), "Spanish football and social change: sociological investigations," Soccer & Society, 18:1, 160-162. H. Sarmento et al. (2014), "Match analysis in football: a systematic review," Journal of Sports Sciences, 32:20, 1831-1843. B. Scholtens, and W. Peenstra (2009), "Scoring on the stock exchange? The effect of football matches on stock market returns: an event study," Applied Economics, 41:25, 3231-3237. Stefan Szymanski (2010), "The Economic Impact Of The World Cup," Football Economics and Policy 226-235. Taleb, Nassim, Fooled By Randomness (New York: Random House), 316 pages. F. Telseth, and V. Halldorsson (2017), "The success culture of Nordic football: the cases of the national men's teams of Norway in the 1990s and Iceland in the 2010s," Sport in Society. Dag Tuastad (2014), "From football riot to revolution. The political role of football in the Arab world," Soccer & Society, 15:3, 376-388. Scott Waalkes (2017), "Does soccer explain the world or does the world explain soccer?" Soccer and globalization, Soccer & Society, 18:2-3, 166-180. D. Wong, and S. Chadwick (2017), "Risk and (in)security of FIFA football World Cups - outlook for Russia 2018," Sport in Society, 20:5-6, 583-598. F. Wunderlich, and D. Memmert (2016), "Analysis of the predictive qualities of betting odds and FIFA World Ranking: evidence from the 2006, 2010 and 2014 Football World Cups," Journal of Sports Sciences, 34:24, 20176-20184. D. Zec, and M. Paunovic (2015), "Football's positive influence on integration in diverse societies: the case study of Yugoslavia," Soccer & Society, 16:2-3, 232-244.
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Temporary Short-Term Risks
Highlights A growing list of indicators is pointing to a potential slowdown to the strong global growth. However, the key deflationary anchors in the global economy - U.S. deleveraging, Europe's crisis, and Chinese excess capacity - have been mostly slayed. Any slowdown is likely to be brief and shallow, generating a buying opportunity in risk assets. In the meantime, commodity currencies, especially the AUD, could suffer. EUR/JPY is also at risk. Buy CAD/SEK. Feature Chart 1-1Global Growth Has Boomed Global growth has continued to fire on all cylinders, and global industrial activity is at its strongest in 13 years (Chart I-1). However, five weeks ago, we highlighted three yellow flags that we believe are pointing toward a period of cooling in the global economy.1 One month later, it is time to look at the data and evidences to see if these yellow flags are being followed by additional symptoms. We posit that yes, a temporary and mild slowdown will materialize. But the global economy remains fundamentally sound. Yet, this cooling of growth could have implications for commodity currencies and EM assets. The Original Worries The key original worry that we highlighted in early October was that global money growth had been decelerating, which has historically presaged a slowdown in global industrial production, global trade and commodities prices (Chart I-2). This deceleration in money growth has only deepened since, adding further saliency to our original concern. Moreover, Chinese monetary and fiscal conditions are being tightened. The Chinese economy continues to hum at a healthy pace, and deflation has been vanquished as producer prices are expanding at a nearly 7% pace and core CPI continues to accelerate to its highest levels since 2010. This is giving Chinese policymakers an opportunity to tighten policy. Chinese monetary condition indices (MCI) are becoming less supportive of industrial activity and fiscal spending has decelerated. These policy moves potentially explain the recent rollover in the Keqiang index - which approximates industrial growth -- and the contraction in new capex projects (Chart I-3). Chart I-2Money Growth Points To A Pause Chart I-3China Is Tightening Policy Bottom Line: Global money growth continues to decelerate, and Chinese monetary and fiscal conditions are tightening. This could create a dent in global industrial activity. The Additional Worries Some other key growth indicators are also raising the alarm bell: The average of Korean and Taiwanese exports growth decelerated sharply. After having hit a peak of 32% in September, they have now decelerated to 5%. Additionally, Swedish and Australian manufacturing PMIs have also rolled over (Chart I-4). Korean and Taiwanese exports as well as Swedish and Australian PMIs are highly sensitive to global trade and the global industrial cycle. Our global growth indicator has rolled over. This indicator did forecast the rebound in industrial production in 2016 and 2017. It is now pointing toward a slowdown in global activity (Chart I-5). Likewise, our boom/bust indicator has rolled over, further highlighting the risks to global industrial production (Chart I-6). Chart I-4Key Barometers Have Turned Significantly Lower Chart I-5One Growth Indicator Slowing... Chart I-6...And Another One Too BCA's German industrial production model has turned down (Chart I-7). Germany is at the forefront of the global industrial cycle, and its own industrial production is highly geared to global trade. This is because manufacturing represents 23% of Germany's output and Germany's exports account for 38% of GDP. Furthermore, 30% of German exports are destined to EM economies, the epicenter of the global secondary sector. Thus, if German IP weakens, it will reflect an ebbing in the global industrial cycle. The global yield curve has continue to flatten in recent weeks (Chart I-8). This could be a reflection of the deceleration in global money growth. The weakness of banks across the world in recent days suggests the message from the yield curve should not be ignored. Chart I-7Manufacturing-Sensitive Germany Set To Slow Chart I-8Global Yield Curve Still Flattening Bottom Line: Beyond the slowdown in global money growth and tightening in Chinese policy, additional signs of softness have begun to emerge. Korea and Taiwanese exports as well as Swedish and Australian PMIs have weakened, our global growth indicator has rolled over, our boom/bust indicator is also softening. Likewise, our German IP model is pointing south and the global yield curve is flattening. A deceleration in global activity is likely in the cards. Reading Market Tea Leaves A few market developments are likely to be reflecting some of the underlying shifts in growth pinpointed by the set of worries highlighted above. First, commodity currencies have begun to soften, which normally herald a period of softening growth (Chart I-9). What is very interesting is the context in which this currency weakness has begun to emerge: The Australian dollar has weakened despite strengthening metals prices (Chart I-10); Chart I-9The Message From Commodity Currencies Chart I-10Why Is The AUD Weak? The Canadian dollar has weakened despite Brent breaking out above US$60/bbl; The Norwegian krone has weakened against the euro despite the same rise in oil prices and despite a 12% surge in industrial production. Chart I-11Global High Yield Experiencing Weakness Second, the breadth of EM equities has rolled over and is falling below the zero line, indicating that more stocks within EM have begun weakening than appreciating, pointing toward a very narrow participation in the current rally. Third, junk bond prices have started to fall in the U.S., with the JNK ETF breaking significantly below its 200-day moving average, the first time since September 2014. EM high yield bond prices have also broken below their moving average, and have further punched below a key upward sloping trend line that had been in place since the beginning of 2016 (Chart I-11). The EM bond ETF (EMB) is also testing its 200-day moving average. The last point bears particular significance. If EM bonds continue to weaken, this will represent a significant tightening in EM financial conditions. EM financial conditions have eased since 2016, which was a key factor underpinning the improvement in global IP. If EM financial conditions begin deteriorating now, a crucial support to the global economy will dissipate. Moreover, falling EM bond prices tend to be synonymous with falling EM exchange rates. In fact, the Russian ruble, the Turkish lira, the South African rand, the Brazilian real and the Mexican peso have all been weakening since the end of the summer. This suggests outflows out of these markets have begun. As investors pull money out of these markets, liquidity conditions in these economies will tighten, which will hurt their economic activity. This could be the mechanism that catalyzes the softening in global industrial activity highlighted above. All these developments are also emerging at a time when new, untested leadership will soon take hold of the Federal Reserve. Now that U.S. President Donald Trump has selected Jay Powell to helm the Fed, he still has three seats to fill on the board. Historically, transition periods at the Fed can be associated with market volatility. This time around may not be an exception. Bottom Line: Commodity currencies are weakening, market breadth in EM equities is deteriorating rapidly and junk bonds as well as various EM fixed income products are experiencing weakness. Not only do these developments tend to foreshadow ebbing global industrial activity, the weakness in EM bonds could in of itself tighten financial and liquidity conditions. The latter has been a key driver of the global industrial cycle. This represents a potentially dangerous environment. How Dangerous Exactly? Chart I-12Global Utilization Not##br## Deflationary Anymore All of this sounds very dire, but the reality is more nuanced. This softness in economic activity is unlikely to be very pronounced. As we argued last week, the three key factors that have created a strong deflationary anchor in the global economy seem to have been vanquished: U.S. deleveraging is over, the euro area has healed as banks have been cleaned up, and Chinese excess capacity has been purged.2 As a result of these developments, global capacity utilization is in a much better spot than it was in 2015 (Chart I-12). This means the deflationary impulse likely to emerge out of the dynamics described above should be much more muted than it was two years ago. Moreover, commodities markets are not as oversupplied as they once were; in fact, oil inventories are falling as the OPEC 2.0 setup is proving stable. This implies that commodities prices are unlikely to weaken as much as they did back then. This obviously corroborates the idea that the deflationary impact of this slowdown is likely to be smaller and also suggests that the impact on global capex should be more muted. Thus, since growth and inflation are likely to prove more resilient than in 2015, the impact on asset prices of the slowdown is likely to be short lived. If anything, it is likely to provide a buying opportunity in risk assets. Some markets are more out of line with fundamentals than others, which implies that they will suffer more. Below, we discuss key tactics that could be used to navigate this environment. Bottom Line: Because the U.S. deleveraging is over, the euro area has healed and because Chinese excess capacity has been curtailed, the global economy is less prone to deflationary tendencies than two years ago. This means that any growth slowdown will be shallow and brief. Thus, only in the assets most mispriced or most exposed to the risks above will there be playable moves that we will seek to exploit. The relevant currency market implications are explored below. Investment Implications The most mispriced asset in the face of this potential slowdown in global growth seems to be EM equities. EM stocks are very sensitive to the global industrial cycle and EM financial conditions. Both are set to deteriorate. Moreover, since 2008, EM stocks have traded closely with junk bonds, but currently EM equity prices seem very pricey relative to U.S. high yield bonds (Chart I-13). Weakening EM stock prices continue to be a negative for commodity currencies, as it implies a slowdown in global industrial activity. Moreover, commodity currencies remain over-owned. As Chart I-14 illustrates, speculators are very long "risky currencies" versus "safe currencies," implying that a slowdown in global growth, however minute it may be, is likely to be a negative shock for these investors. When these relative net speculative positions roll over, it tends to be associated with violent weakness in commodity currencies. Thus, the recent bout of weakness could only be the first innings. We think the AUD is the worst-placed commodity currency right now. Not only are speculators very long the Aussie, but as we have shown in recent weeks, the AUD is expensive against the USD, the NZD and the CAD. Its premium is so pronounced relative to other commodity currencies that, at current levels, valuations alone warrant shorting the AUD against the CAD or NZD. We are already short these crosses. It therefore follows that if we anticipate commodity currencies in general to weaken, AUD/USD also has downside. Chart I-15 makes this case. Australian equities relative to U.S. equities have historically led AUD/USD. Nearly half of the Australian equity market is financials, and Australian equities have been underperforming. This suggests investors continue to foresee a negative output gap in Australia both in absolute terms and relative to the U.S. - and thus a dovish Reserve Bank of Australia relative to the Fed, which hurts AUD/USD. Moreover, AUD/USD has overshot the mark implied by relative equity prices. Additionally, AUD/USD is expensive relative to interest rate differentials at both the short- and long-end of the yield curve. Chart I-13EM Stocks Offer##br## No Cushion Chart I-14Speculators In Commodity ##br##Currencies Are Not Ready Chart I-15AUD Is Most ##br##Vulnerable The euro could also experience some weakness. We have argued that as European financial conditions tighten relative to the U.S., this will hurt euro area inflation relative to the U.S., pointing to an environment where investors will likely once again price in monetary divergences in favor of the USD.3 Growth dynamics between Europe and the U.S. could also be affected by the tightening in China. As Chart I-16A and Chart 16B illustrates, tightening Chinese MCI or slowing Chinese M1 relative to M2 - which proxies a faster growth in savings deposits than checking deposits, and thus a rising marginal propensity to save tends to translate into slowing PMIs and industrial production in the euro area relative to the U.S. This is because Europe has a larger manufacturing sector and export sector as a share of GDP than the U.S. German exports, Europe's growth locomotive, are also highly geared to the Chinese industrial sector. Thus, when Chinese investment slows, Europe feels it more acutely than the U.S. With investors still very long the euro relative to the USD, a negative relative growth surprise on top of a negative relative inflation surprise will hurt EUR/USD. Chart I-16AEuro Area Versus U.S. Growth: ##br##Don't Ignore China (I) Chart I-16BEuro Area Versus U.S. Growth: ##br##Don't Ignore China (II) The picture for the yen is more complex. Falling EM assets and a temporary growth slowdown are positive for the yen. But bond yield differentials remain the key driver of USD/JPY. Since we anticipate the global growth slowdown to be shallow and brief, any weakness in U.S. bond yields will also be shallow and brief. Since we expect U.S. bond yields to regain vigor fast, and we doubt the global slowdown will affect the Fed's path much, the effect on USD/JPY will also be quick. Thus, we are keeping our cyclical long bet on USD/JPY. In fact, a positive U.S. inflation surprise is a growing risk that could cause bonds to sell off, hurting global liquidity conditions in the process. Chart I-17EUR/JPY: Ripe For A Correction Instead, we will hedge our long USD/JPY exposure by tactically shorting EUR/JPY. Japan will also suffer from a slowdown in global industrial activity, especially as 43% of its exports are shipped to emerging markets. Moreover, Japan has a very large manufacturing sector. However, Japanese yields have no downside from here. This means the deflationary impact of a global growth slowdown, however small it may be, will weigh on Japanese inflation expectations more than it will hurt nominal rates, resulting in higher Japanese real rates.4 This support for the JPY is likely to get magnified in EUR/JPY. Currently, speculators have been massive buyers of the euro against the yen, betting on growing monetary divergence between Europe and Japan. This has pushed net speculative positions in the euro versus the yen to levels historically associated with a reversal in this cross (Chart I-17). This pair is thus a coiled spring in the face of the risk that Japanese real rates rise against European ones, especially if investors begin pushing back expectations surrounding the first ECB rate hike. Investors have already given up hope of any tightening of policy in Japan in the foreseeable future, implying a very minimal chance of them pricing in any easing by the Bank of Japan in response to a temporary global growth slowdown. The last factor supporting shorting EUR/JPY is that Japan has a net international investment position of 60% of GDP, while Europe's NIIP stands at -3% of GDP. Also, Japanese investors have been aggressive buyers of European assets, especially since Emanuel Macron secured the French presidency, causing a positive reassessment of European political risk. In an environment where global volatility increases, Japanese investors are likely to retreat to their home market, accentuating EUR/JPY selling. Finally, CAD/SEK is likely to benefit in this environment as well, as Sweden is more exposed to EM conditions than Canada is. We are buying this cross this week, but we'll explore the reasoning behind it in greater detail next week. Bottom Line: Commodity currencies are likely to be the main casualty of the slowdown we expect to occur over the next 3 to 6 months. The AUD seems particularly vulnerable as it is expensive and investors are still very long this currency. USD/JPY could experience some downside, but we do not anticipate the growth slowdown to be strong enough to permanently knock Treasury yields off their course toward 3%. Instead, we will short EUR/JPY to protect our gains in our long USD/JPY. CAD/SEK has upside. Mathieu Savary, Vice President Foreign Exchange Strategy mathieu@bcaresearch.com Melanie Kermadjian, Senior Analyst melanie@bcaresearch.com 1 Please see Foreign Exchange Strategy Weekly Report, titled "The Best Of Possible Worlds?" dated October 6, 2017, available at fes.bcaresearch.com 2 Please see Foreign Exchange Strategy Weekly Report, titled "Reverse Alchemy: How To Transform Gold Into Lead" dated November 3, 2017, available at fes.bcaresearch.com 3 Please see Foreign Exchange Strategy Weekly Report, "All About Credit" dated October 20, 2017, available at fes.bcaresearch.com and Foreign Exchange Strategy Weekly Report, "Are Central Banks Behind the Curve Or Ahead of It?," dated July 21, 2017, available at fes.bcaresearch.com 4 For a more detailed discussion of the interplay between growth and the yen, please see Foreign Exchange Strategy Weekly Report, titled "Down The Rabbit Hole" dated April 15, 2016, available at fes.bcaresearch.com Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 U.S. data was mixed: Initial and continuing jobless claims underperformed expectations coming in at 1.901 mn and 239,000 respectively; JOLTS job openings climbed to 6.093 mn, beating expectations of 6.091 mn, and more than the previous 6.09 mn openings; Consumer credit increased to USD 20.83 bn from USD 13.14 bn, also beating expectations of USD 18 bn. The DXY enjoyed an up week, but a large spike in German Bund yields on Thursday caused the DXY to weaken. This is most likely a temporary event prompted by the unwinding of dovish ECB trades. We expect the greenback to continue its climb alongside stronger U.S. data. Report Links: It's Not My Cross To Bear - October 27, 2017 Currency Hedging: Dynamic Or Static? - A Practical Guide For Global Investors - September 29, 2017 Updating Our Long-Term Fair Value Models - September 15, 2017 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 European data has generally been upbeat: The German trade balance and current account improved to EUR 21.8 bn and EUR 25.4 bn, but this first and foremost reflected a 1% contraction in imports; French trade balance also improved to EUR -4.668 bn, beating expectations of EUR -4.8 bn; European retail sales increased by 3.7% on a yearly basis, and 0.7% monthly; However, German industrial production growth slowed to 3.6%. This allowed the euro to regain some of its lost value. However, we believe that euro area inflation will disappoint going forward - especially relative to the U.S. This will limit any appreciation in the euro as investors will begin pricing in a tightening of the Fed's policy relative to the ECB. Report Links: Market Update - October 27, 2017 Currency Hedging: Dynamic Or Static? - A Practical Guide For Global Investors - September 29, 2017 Updating Our Long-Term Fair Value Models - September 15, 2017 The Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent Japanese data has surprised to the downside: Core machinery orders massively underperformed expectations, as they contracted by 8.1% on a month-on-month basis and by 3.5% on an annual basis. Moreover, bank lending yearly growth also underperformed, coming in at 2.8%, and declining from last month's reading. Moreover, the leading economic indicator came below expectations, at 106.7. It also declined from last month's number. After 2 years into the recovery from the 2015 commodity/ EM carnage, global growth seems prime for some slowdown. Indeed, many indicators like high yield and EM bond yields have started to break down. This is could be positive for the yen, given its risk-off currency status. However we prefer to not play this strength though USD/JPY. Instead we are shorting EUR/JPY, a cross which cancels the exposure to the dollar. Report Links: Currency Hedging: Dynamic Or Static? - A Practical Guide For Global Investors - September 29, 2017 Updating Our Long-Term Fair Value Models - September 15, 2017 10 Charts For A Late-August Day -August 25, 2017 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the U.K. has been mixed Markit Services PMI outperformed expectations, coming at 55.6. It also increased from 53.6 last month. Halifax House Prices Month-on-Month growth also outperformed, coming in at 0.3%. However, the RICS Housing Price Balance underperformed expectations, coming in at 1%. The pound has been relatively flat after plunging following the "dovish" hike by the Bank of England. Overall, we see very little upside from here on for cable, as the BoE has little incentive to hike beyond what is priced into the SONIA curve, as both consumer confidence and real retail sales yearly growth are near 3-year lows. Meanwhile, the Fed will likely surprise the market by following its projected path. This will increase rate differentials between these two countries, and put downward pressure on GBP/USD. Report Links: Reverse Alchemy: How To Transform Gold Into Lead - November 3, 2017 Currency Hedging: Dynamic Or Static? - A Practical Guide For Global Investors - September 29, 2017 Updating Our Long-Term Fair Value Models - September 15, 2017 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 It has been quite an uneventful week for the AUD, as it has stayed flat relative to the USD. The following data came out: TD Securities Inflation increased to 2.6% from 2.5% on a yearly basis, and 0.3% on a monthly basis; ANZ Job Advertisements increased by 1.4% in September; AiG Performance of Construction Index declined to 53.2 from 54.7; Home loans contracted b 2.3%. The RBA rate decision and statement were in line with expectations, and the AUD saw little to no movement. Governor Lowe identified several capacity issues with the economy, noting that "In underlying terms, inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures", and that inflation is only being boosted by tobacco and electricity. Report Links: Currency Hedging: Dynamic Or Static? - A Practical Guide For Global Investors - September 29, 2017 Updating Our Long-Term Fair Value Models - September 15, 2017 10 Charts For A Late-August Day - August 25, 2017 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 On Wednesday, New Zealand decided to keep its reference rate unchanged at 1.75%. The kiwi rose after the announcement, as the Reserve Bank of New Zealand brought forward their expectations for a hike from the third quarter of 2019 to the second quarter of 2019. Furthermore, the RNZ now expects inflation to hit the mid-point of its target range by the second quarter of 2018, nine months sooner than before. The RBNZ also toned down its rhetoric on the currency as governor Grant Spencer stated that "the exchange rate has eased since the August statement, and if sustained, will increase tradable inflation and promote more balance growth". Overall we expect the NZD to outperform the AUD. Report Links: Reverse Alchemy: How To Transform Gold Into Lead - November 3, 2017 Updating Our Long-Term Fair Value Models - September 15, 2017 Balance Of Payments Across The G10 - August 4, 2017 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Data in Canada has been positive: Ivey PMI moved up to 63.8 from 59.6, also outperforming the expected 60.2; Housing Starts increased by 222,800 annually, beating expectations of 210,000; Building permits also increased by 3.8% on a monthly basis; The most recent Business Outlook Survey report indicates that more than 40% of the surveyed businesses believe the shortage of labor has become worse, which is usually a reliable indicator of wage growth. This will allow the BoC to continue on its hiking path next year, which will mean that CAD will outperform other G10 currencies. NAFTA negotiations remain the greatest risk to the BoC view and the CAD. Report Links: Market Update - October 27, 2017 Currency Hedging: Dynamic Or Static? - A Practical Guide For Global Investors - September 29, 2017 Updating Our Long-Term Fair Value Models - September 15, 2017 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland has been mixed: Headline inflation underperformed expectations, coming in at 0.7%. It stayed constant from last month's number. Meanwhile, unemployment was unchanged from last month at 3.1%. This number was in line with expectations. After peaking in late October, EUR/CHF has depreciated slightly, mainly due to the weakness in the euro. However, betting for CHF strength still means fighting against the SNB. Inflation in Switzerland is still too tepid for the SNB to stop their interventions in currency markets. Meanwhile, real retail sales yearly growth is still in negative territory. Thus, until we see a significant improvement in economic activity in the alpine country, we are reluctant to bet against the SNB. Report Links: Updating Our Long-Term Fair Value Models - September 15, 2017 Balance Of Payments Across The G10 - August 4, 2017 Who Hikes Next? - June 30, 2017 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway has been mixed: Registered unemployment declined from 2.5% in September to 2.4% in October However, industrial production surged to more than 12% on an annual basis Since the Norges Bank policy statement at the end of October, USD/NOK has been flat. This has been because this cross has been squeezed between two conflicting forces: On one hand, oil has gone up nearly 5% just this month. On the other hand, the rise in the dollar has counteracted any downside that rising oil prices could provide to USD/NOK. Although we continue to be bullish on oil, we are bullish on USD/NOK, as this cross is more correlated to real rate differentials than it is to oil. Report Links: Updating Our Long-Term Fair Value Models - September 15, 2017 10 Charts For A Late-August Day - August 25, 2017 Balance Of Payments Across The G10 - August 4, 2017 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Swedish data was positive this week: Industrial production's monthly growth increased to 2.2% from a 1.6% contraction; the yearly measure is growing at a 4.5% pace, albeit less than the previous 7.5%; New orders are increasing at a very high 11.2% annual pace, a good forward-looking indicator for industrial production. While the Swedish economy remains robust, the SEK will see some downside against the USD and the EUR due to the Riksbank's dovishness. Also, the recent dip in EM high yield bonds could be a risk for the Swedish economy. We are therefore opening a long CAD/SEK trade. Report Links: Updating Our Long-Term Fair Value Models - September 15, 2017 Balance Of Payments Across The G10 - August 4, 2017 Who Hikes Next? - June 30, 2017 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Closed Trades