In memory of Dr. Andreas Höfert

Some reflections on the world's favorite pastime

| Tags: Andreas Höfert

A record 3.2 billion people watched at least one minute of live World Cup action in 2010. Next Friday the event kicks off again and the record will likely be broken. Billions of people will thrill, suffer and cheer when Lionel Messi, Cristiano Ronaldo, Neymar da Silva and their like perform their football magic.

One might argue that such triviality shouldn't concern us bank economists, at least not in our official function. But there are two reasons it does. The first is due to the ample demand for our musings from clients and colleagues.

Having forecast the outcomes of the 2006 and 2010 World Cups with good results (in 2006 we even picked the non-consensus winner, Italy), why shouldn't we at UBS run our model again?

The second reason is that I recently discussed the issue of Brazil hosting the Cup with my colleague Jorge Mariscal, CIO Emerging Markets at UBS Wealth Management. He pointed out that, whether the "Seleção" prevails or not, the role of Brazil as host could affect its political future and, thus, its economy and markets.

Surprisingly for a country where football passion runs deep, Brazilian popular support for hosting the Cup is unprecedentedly low. This lack of support underscores the frustration felt by large segments of society at the country's poor infrastructure, declining public safety, high levels of corruption, and over-reaching government. In addition, if the World Cup is a failure, short-term socioeconomic sentiment will be bleak, which could spell the end for incumbent president Dilma Rousseff, who is struggling to gather enough votes for reelection.

Paradoxically, short-term economic pain and anti-Dilma sentiment could fuel financial markets. Brazilian stocks have rallied in recent months as prospects for more market-friendly candidates have improved and those of Rousseff declined. Investors should be aware that World Cup disappointment may boost Brazilian markets, and vice versa.

So how will Brazil fare on the playing field? The model, I use to compute a team's chances, is roughly based on three factors: an objective measure of team strength, the so-called Elo rating; past World Cup performance; and whether the team is the host nation. Brazil scores high in all three measures. It is the top Elo-rated team ever to play in a World Cup; it has won the Cup five times; and obviously it is the host. Its odds of hoisting the hardware are over 30%, more than twice that of the second favorite, its football archenemy Argentina.

Though we shouldn't forget that, aside from Germany in 1974, the top Elo-rated team has never won the Cup. Moreover, while Brazil has an easy first-round group, the second round won't be a walk in the park. It is likely to face the Netherlands for a place in the final eight, Italy in the quarter finals, and Germany in the semis before meeting either Spain or Argentina for the title.

If Uruguay finishes second in its group or France downs Germany in the quarters, the situation would change. Brazil would face two of its historical nemeses before even reaching the final. Though the story is now 64 years old, every Brazilian football fan still mourns the "Maracanaço," when Uruguay beat Brazil on the latter's home turf to win its second World Cup in 1950. And France has defeated Brazil the last three times the sides met in World Cup action – 1986, 1998 (in the final) and 2006.

So while Brazil is the clear favorite to win its own World Cup, it won't be an easy task. And with that, let the tournament begin!